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15th Aug 2022

Brussels: 'Banks should pay for banks'

  • Dexia was bailed out using tax-payers' money (Photo: Valentina Pop)

The European Commission in Wednesday (6 June) unveiled proposals designed to change the too-big-to-fail rationale that has seen billions of euros of tax payers' money pumped into Europe's ailing banking sector.

"We are going to break the links between banks and the public sector," said financial services commissioner Michel Barnier announcing the draft legislation. "Banks must pay for banks."

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Under the proposal banks would be obliged to draw up recovery plans that would kick into place if their finances deteriorate and national authorities could appoint "special managers" to oversee weak institutions.

Each lender would also be obliged to set aside at least 1 percent of the deposits covered by their national guarantees for a special fund to help tide it over if it reaches failure stage.

The most headline-grabbing proposal is for senior bondholders to be made liable for the costs of bailing out a lender.

This is likely to attract much attention in Ireland - bailed out by the EU and International Monetary Fund in 2010 - where government attempts to make major bondholders pay were blocked by the European Central Bank for fear that markets would panic.

The €64 billion bank bill is currently being absorbed by the Irish tax payer.

The commission's new plans are both preventative and for the long-term.

"In both comedy and tragedy, timing is everything. The bulk of the crisis resolution is long overdue," said UK Liberal MEP Sharon Bowles, who heads up the parliament's economic affairs committee.

The bondholder clause would come into effect in 2018; the 1 percent deposit clause by 2024.

The commission aims to prevent tax payers being forced to foot the bill in the future, with the EU commission having approved €4.5 trillion (37 percent of EU GDP) in state aid measures to financial institutions between 2008 and 2011.

The proposed changes, which need to be agreed by member states and parliament, will not help Spain which urgently needs to recapitalise it banks which have an estimated credit shortfall of up to €100 billion.

Madrid has lately started to say its banks should be allowed to tap into the permanent eurozone bailout fund (ESM), due to be up and running at the beginning of July.

"I cannot say that this will affect the Spanish banks," said Barnier of Wednesday's plans.

On the ESM question, he said: "It's not possible, not today."

Wednesday's proposals are also a step towards the fully fledged banking union that high-ranking EU officials such as European Central Bank chief Mario Draghi suggest is needed to protect the eurozone.

A full union would include a single European bank regime rather than the new member-state-level rules proposed on Wednesday. It would also include a powerful EU banking supervisor and a European bank deposit guarantee scheme.

These ideas are set to be discussed at an EU leaders summit at the end of June.

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The US has joined ranks with EU officials exploring ways to pump eurozone money directly into Spain's troubled banks, with creation of a "banking union" now considered a matter of eurozone survival.

Banks should separate deposits from risky trading, group says

An expert group advising the EU commission has said banks in Europe need to separate their entities dealing with deposits from those trading with risky investments, in order to prevent a re-run of the 2008 financial crisis.

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Brazilian president Jair Bolsonaro is pitching his Latin American country as the answer to the world food crisis following the war in Ukraine. The traditional wheat importer has now exported three million tonnes of the grain so far in 2022.

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