EU plans upfront levy on lenders

Preview and reports of a Communication from the European Commission adopted on the 26 May 2010 discussing Options for Bank Resolution Funds.

The Commission's Communication argues in favour of establishing of a harmonised network of ex ante resolution funds, funded by a bank contribution. The resolution funds should be used for the financing of orderly resolution of banks in difficulties and would be one tool of a broader set of measures for crisis prevention and management.

A second Communication due in October 2010 would set out the complete set of tools foreseen in this context. The key objective is to allow banks to fail without destabilising the entire financial system and ensuring that tax payers' money are not the first line of defence.

The Commission wished to set out its views ahead of the June 2010 ECOFIN Council and G20 Ministerial meetings. It will be important to develop a common approach in order to avoid possible competitive distortions and to enhance cross-border crisis management capacity.

Internal Market and Services Commissioner Michel Barnier said: 'It is not acceptable that taxpayers should continue to bear the heavy cost of rescuing the banking sector. They should not be in the front line. I believe in the 'polluter pays' principle. We need to build a system which ensures that the financial sector will pay the cost of banking crises in the future. That is why I believe that banks should be asked to contribute to a fund designed to manage bank failure, protect financial stability and limit contagion – but which is not a bail-out fund. Europe must take a lead in developing common approaches and providing a model for cooperation which could be applied globally.'

George Osborne, the UK Chancellor (Finance Minister), ruled out creating a dedicated fund in the UK to pay for the winding up of failing banks, putting Britain at odds with the new proposals from the European Commission. France also expressed reservations.

EurActiv, 25.5.10: EU plans tax on bank capital http://www.euractiv.com/en/financial-services/eu-plans-tax-bank-capital-news-494482

Institute of International Finance (IIF): Press Release, 24.5.10: Global Financial Industry Makes Detailed Proposals to Address Key Issues of 'Too Big to Fail' and to Curb Burdens on the Taxpayer http://www.iif.com/press/press+148.php

Institute of International Finance (IIF): A Global Approach to Resolving Failing Financial Firms: An Industry Perspective, May 2010 http://www.iif.com/download.php?id=Oq+9y23X4Us=

Association for Financial Markets in Europe (AFME): Press Release, 24.5.10: Response to IMF's paper on Bank Taxes http://www.afme.eu/document.aspx?id=3850

ESO: Background information: IMF bank levy plans will not catch hedge funds, say critics http://www.europeansources.info/record/imf-bank-levy-plans-will-not-catch-hedge-funds-say-critics/

EurActiv, 26.5.10: EU proposes 'preventive' bank levy http://www.euractiv.com/en/financial-services/eu-proposes-preventive-bank-levy-news-494501

European Commission: Press Release: IP/10/610: Commission sets out vision for bank resolution funds http://europa.eu/rapid/pressReleasesAction.do?reference=IP/10/610&format=HTML&aged=0&language=EN&guiLanguage=en

European Commission: DG Internal Market and Services: Banking: Crisis management http://ec.europa.eu/internal_market/bank/crisis_management/index_en.htm

BBC News, 26.5.10: Europe seeks new levy on banks to create crisis funds http://news.bbc.co.uk/1/hi/business/10159631.stm

Deutsche Welle, 26.5.10: EU proposes bank insurance levy to combat future financial crises http://www.dw-world.de/dw/article/0,,5609113,00.html

France24, 26.5.10: EU Commission wants bank levy to pay for future crises http://www.france24.com/en/20100526-eu-commission-unveil-european-wide-bank-levy-tax-insurance-fund

ESO: Background information: Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee, the European Court of Justice and the European Central Bank - An EU Framework for Cross-Border Crisis Management in the Banking Sector http://www.europeansources.info/record/communication-from-the-commission-to-the-european-parliament-the-council-the-european-economic-and-social-committee-the-european-court-of-justice-and-the-european-central-bank-an-eu-framework-for/

IMF Survey, 24.4.10: Prevent institutions becoming too important to fail, says IMF http://www.imf.org/external/pubs/ft/survey/so/2010/POL042410A.htm

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