* ECB calls for "banking union" after pushing for back-up
* European Commission prepares to outline new draft law in
* Bank wind-down fund off the table for now
By John O'Donnell and Valentina Za
BRUSSELS/ MILAN, May 25 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
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.
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
"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
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)
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