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This week in Brussels, Internal Market Commissioner Michel Barnier introduced the plans for the introduction of an EU-wide network of Bank Resolution Funds. Thus, in case of future bank failures, 27 national funds shall prevent that taxpayers once again would have to foot the bill. The emphasis thereby lies on future. The proposal of the Commission leaves the banks off the hook with regard to the current crisis. The plans of individual states such as Austria to introduce a genuine bank levy in order to make banks contribute to the budget costs for the crisis they triggered would be made more difficult.

A resolution fund, which actually isn't one

In detail, the plan of the European Commission proposes that the Member States are obliged to set up funds in accordance with joint provisions, which have to be financed by the banks. According to Barnier, these funds should not be used to “rescue” failing banks, i.e. to rehabilitate them, but only to facilitate the safeguarding of core functions resp. to implement correct insolvency proceedings in case of individual banks. If a bank becomes insolvent at some time in the future, the Resolution Funds should be used to finance rescue instruments, such as a bridging bank, the division of the institute into a “Good Bank” and a “Bad Bank” or to maintain fundamental functions of the bank. The amount, which banks are supposed to pay into this fund, could be measured by assets, obligation, or profits and bonuses.

Who pays for the current crisis?

By adopting this procedure, the European Commission takes the wind out of the sails of those forces, which demand that the banks assume responsibility for the damage that has been caused by the current crisis. Although Commissioner Barnier fervently swears he would fight for the rights of those, who had to foot the bill for the consequences of the economic crisis, which was not their doing, his plans prevent the intention of individual states to introduce a Bank Levy, which should flow into public budgets that have been hit hard. Barnier only stated that the deficits of the states must not necessarily be connected with the financial crisis and that the banks therefore could not be made to contribute to any budget consolidation. Replying to the question of a journalist, who, in this case, would have to pay for the high public expenditure during the crisis, Barnier rejects any competence. “You have to ask Olli Rehn (Economic Affairs Commissioner).”

The Commission will submit the Communication to the European Council on 17th June and introduce the main points of the plans to the G20 at their Toronto Summit, which will take place from 26.-27 June. A legislative proposal will be presented at the beginning of 2011.

Further information

The Communication of the Commission

The press release of the Commission

Memo of the Commission: Frequently Asked Questions