13th Jun 2021

Bank rescue fund to rely on big lenders

  • Banks must set up their own bailout fund, according to new EU rules (Photo: Valentina Pop)

Europe's biggest banks will foot almost all of the bill for a new EU rescue fund for stricken lenders, according to a plan published on Tuesday (21 October).

The draft rules released by the European Commission put flesh on the bones of plans for banks to fund their own bailout fund in future crises.

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Under the deal struck by EU lawmakers in spring, banks in all 28 EU countries must set aside national resolution funds worth at least 1 percent of the total deposits. The EU estimates that banks hold deposits worth almost €7,000 billion across the bloc.

The national funds will then be gradually pooled into an EU fund worth €55 billion over the next 8 years.

Lawmakers are anxious to ensure there is no repeat of the taxpayer-funded bailouts seen during the 2008 and 2009 financial crisis.

The rules are part of new legislation on winding up banks if they become insolvent or get into difficulty.

Shareholders will be first in line to suffer losses, with banks then being able to tap national resolution funds. Only if this pot of money proves insufficient will governments be able to turn to taxpayer support.

Most of the burden will be borne by big banks, with small institutions required only to pay a lump sum based on their size provided that their deposits are worth less than €300 million and their assets less than €1 billion.

The EU executive says that large institutions representing 85 percent of total bank assets across the bloc are expected to contribute around 90 percent of the fund's value, while small banks representing 1 percent of total assets would pay around 0.3 percent of total contributions.

The UK and France are home to most of Europe's biggest lenders.

"The approach chosen is fair as each bank will contribute in proportion to its size and risk profile," said financial services commissioner Michel Barnier in a statement.

He added that the scheme was "proportionate as the smallest banks have their own adjusted regime of contributions."

However, the rules, which must be agreed by MEPs and ministers, were not universally welcomed.

Sven Giegold, Green group spokesman on finance, argued that basing risk analysis on banks' assets rather than their business model would "prop-up bigger, riskier banks, at the expense of smaller, more stable banks like savings banks and cooperatives, which contribute to the real economy."

Barnier had given "an additional gift to bigger banks by enabling the generous 'netting' of derivatives, rather than taking risky exposures fully into account," he added.

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