Bank wind-down fund idea gets cool reception in Europe

Fri May 25, 2012 6:24pm BST

* ECB calls for "banking union" after pushing for back-up scheme

* European Commission prepares to outline new draft law in June

* Bank wind-down fund off the table for now

By John O'Donnell and Valentina Za

BRUSSELS/ MILAN, May 25 (Reuters) - The European Commission will not propose a pan-EU fund to wind down stricken banks when it announces draft rules to cope with failing lenders, a setback for the European Central Bank which has championed the idea to stem financial contagion.

As banks' problems persist, the debate in Europe has intensified over how to reinforce them and countries are coming under increasing pressure from the ECB for a joint response to the problem, such as by setting up a fully-fledged bank wind-down fund.

But a senior EU official, speaking on condition of anonymity, has told Reuters that new rules to deal with failed banks, due to be outlined by the bloc's executive in early June, will suggest only a "framework" for national back-up schemes.

This would fall far short of a standalone resolution fund that could pool money, collected either from the industry or countries, to minimise any knock-on effects from the closure of a bank by reinforcing other lenders that are hit.

Opposition from countries such as Germany, however, has prevented the introduction of such a scheme, something that will disappoint ECB President Mario Draghi, who has urged countries to pull together in supporting banks.

Concerns about Europe's lenders continue to mount amid fears that Greece could leave the euro zone and that the funding difficulties of Spanish lenders will prompt the currency area's fourth-largest economy to seek aid. [ID:nL5E8GP3ZF]

Earlier this week, ECB policy maker Joerg Asmussen warned of the impact on countries from banks that are struggling, suggesting the creation of a European bank resolution authority and deposit insurance scheme.

On Friday, Peter Praet, a member of the European Central Bank's executive board, called for the creation of a "banking union", a term senior EU officials also use as they explore ways of strengthening Europe's economic and monetary union. [ID:nL5E8GP24E]

INVESTOR FEARS

Although proposals by the European Commission for a bank wind-down law would go some way towards achieving this, the urgent problems facing the sector mean that more immediate and far-reaching action may be required.

Any new European law, which first requires the backing of EU member states and the bloc's parliament, would likely take years to introduce. The full implementation could take half a decade.

On Friday, a European Commission official signalled that a centralised European approach to tackling failed lenders may be difficult to achieve, saying a national based structure was preferred.

"One of the proposals that we will make is the creation of a resolution authority in each country," Jonathan Faull told Reuters in Milan.

"It may be an existing authority given these new responsibilities but an authority in the member state concerned will obviously have a lead role in identifying problems, using the rules that we will have provided."

It is not clear, however, how countries would fund national resolution schemes.

The draft law will also propose powers to impose losses on a failed bank's bond holders, who were largely spared during the financial crisis while shareholders and governments bore the brunt of the cost.

It would also empower the authorities to change a bank's management, call shareholder meetings and push through aggressive measures to restructure a failing bank, such as the sale of part of the business or forced mergers.

Investors, however, are concerned about the extent of these proposed powers, and, in particular, the ability to force losses on bondholders.

Critics say the so-called bail-in rules, by laying the foundation for bondholder losses, would scare off the buyers of such debt, pushing up the cost of borrowing for banks and making them more reluctant to lend.

The European Commission, which writes the first draft of laws to regulate finance, has delayed the announcement of the draft law by several months.

The new rules for failed banks, seen by many experts as one of the central regulatory reforms needed to strengthen the financial system, will only apply from 2013 at the earliest, roughly six years after the banking crisis started in Europe.

(Reporting By John O'Donnell; additional reporting by Luke Baker; editing by Ron Askew)

((john.odonnell@thomsonreuters.com)(+32 2 287 68 17 or +32 475 69 15 89)(Reuters Messaging: john.odonnell.thomsonreuters.com@reuters.net)) Keywords: EU BANKS/

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