The European Union’s finance executive called on Friday for banks to pay into a fund that could be drawn upon in case of collapse, an effort to shield taxpayers from the fallout of future crises.
Officials are also calling for new ways to deal with insolvent financial groups that operate in multiple countries to avoid a repeat of the messy and expensive cross-border wrangling that followed the September 2008 collapse of U.S. investment bank Lehman Brothers.
EU financial services commissioner Michel Barnier, who can draft new EU rules, said taxpayers should not pay for “the excesses and inconsiderate risk-taking of financial institutions.”
He said environmental rules insist that the polluter pays and “in financial matters, I don’t see why it should be any different.” He didn’t promise to draft rules, saying he would first examine ways for sharing out the costs of bank failure.
The head of the International Monetary Fund, Dominique Strauss-Kahn also called on the European Union to come up with “a fire brigade” to deal with the collapse of banks that operate across several countries.
He told a banking conference organized by the European Commission that existing plans “have proven to be inadequate” making cross—border bank failures difficult to handle and more costly than necessary.
He suggested that a new European resolution authority should deal with insolvent banks that would force shareholders and uninsured creditors to bear the costs of failure.
The new agency should be funded as far as possible by levies on financial groups and deposit insurance fees, he said, and should have clear guidelines on rescuing or dissolving a bank that splits its business across different nations.
Mr. Strauss-Kahn said the difficulty of governments to agree on how to deal with a troubled bank saw Belgium, the Netherlands and Luxembourg decide a “costly break—up of Fortis along national lines” in September and October 2009, instead of keeping the bank whole.
The European Central Bank’s president Jean—Claude Trichet, said European governments need to set common rules on insolvency proceedings because national laws currently set up very different systems.