Overhaul aims to prevent banking break-ups and bail-outs

Finance ministers on 18 May will agree on an overhaul of how the EU deals with banking crises, in order to prevent a repeat of the messy break-up and renationalisation of Fortis Bank and the bank bail-outs that taxpayers had to fund  after Lehman Brothers collapsed in 2008.

The plan is to create ‘cross-border stability groups’ (CBSGs) by mid-2011 that will oversee all large banks in the EU, and intervene in the event of financial difficulties they experience. The groups will bring together national bank regulators, and they will organise ‘burden sharing’ to allocate the financial costs of intervention among member states.

Draft conclusions seen by European Voice commit ministers to “develop practical steps and procedures” for burden sharing by 2012. This is a sensitive issue for national governments, as it means national funds could be used to support bank branches or subsidiaries in other member states.

Financial institutions will also be required to draw up “recovery and resolution plans”, that will set out how they could be wound up in the event of insolvency without risk to the wider financial sector – a sort of living will for banks.

The expected agreement supports European Commission plans to harmonise the tools that regulators can use for failing banks, to ensure effective co-operation in the CBSGs. An ‘EU framework for asset transfers’ between different parts of a banking group is also envisaged.

Fortis’s problems

Governments are determined to prevent any repeat of the rescue of Fortis bank by the governments of Belgium, the Netherlands and Luxembourg in October 2009. The bank was carved up by the three governments because they lacked the mechanisms to carry out a cross-border rescue. Governments believe it would have been far cheaper if the bank could have been rescued as a single entity.

Resolution fund

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The draft conclusions state firmly that governments should aim to eliminate “the need for the use of public funds” to bail out banks, by making sure that “the financial sector bears the cost”. But this falls short of endorsing recent calls from Michel Barnier, the European commissioner for the internal market, for every member state to set up a bank-funded resolution fund to pay for bail-outs – an idea strongly supported by Germany and Sweden, and viewed with caution by other member states that see a risk of moral hazard. Barnier plans to present a policy paper on resolution funds in June. He will present draft legislation on managing cross-border bank failures in spring 2011.