EU exec to present bank resolution scheme by mid-June

April 27, 2012, Friday/ 16:14:00/ REUTERS

The European Commission will present a long-term plan for winding up failing banks before a June 18-19 summit of leaders of the world’s 20 biggest economies in Mexico, Commission spokeswoman Chantal Hughes said on Friday.

“Our objective is to present the proposal on a bank crisis resolution scheme before the G20 summit in June,” Hughes said. She gave no further details, but another EU official said the proposal was expected on June 6.

The Commission preparations come amid growing concern about the Spanish banking sector, hit hard by a sharp drop in property prices and rising unease about the amount of new capital needed, especially if real estate prices fall further.

A third official, involved in work on the bank resolution scheme and speaking on condition of anonymity, said the proposal did not involve the euro zone’s permanent bailout fund - the European Stability mechanism (ESM) -- nor the temporary European Financial Stability Facility (EFSF).

Some policymakers in Europe would like either of the funds, or both, to be able to directly recapitalise weak banks, rather than lend to the government which would then pass the money on to the banks. Direct recapitalisation would help indebted governments avoid taking on new loans and thus also allow governments to avoid the political stigma of a bailout. But such direct dealings with individual banks, rather than governments, are not legally possible in Europe at present and no changes to the legal framework are planned.

The third official said the bank resolution mechanism would be funded by fees paid by banks, rather than by European taxpayers. That means that it will take time to build up and makes it difficult to see how it could play a role in dealing with the sector’s immediate problems.

The mechanism would include national resolution funds for banks as well as a “bail-in” mechanism so that banks’ bondholders could take a hit if a lender goes bust. “We are still discussing some issues, such as size, preference, percentage of the hit, but there is now an appetite for the scheme which did not exist in the past, in particular at the ECB,” the official said. European Central Bank officials called in the last two weeks for the European Union to come up with a European bank resolution mechanism and a European deposit guarantee scheme to better handle potential problems at pan-European financial institutions. The central bank, just like many eurozone policymakers, had been wary of tackling the issue of bank resolution before, fearing it would further scare markets already nervous about eurozone sovereigns and the financial sector.

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