The EU will unveil new plans for winding up failing banks, one of the pillars of the EU's drive towards an integrated euro zone "banking union."
The idea, according to a presentation seen by AFP, is to avoid taxpayer bailouts and to ensure that essential functions are maintained across national borders.
The latest response to the debt and banking crisis is to integrate the euro zone's national banking systems in a bid to avoid investor flight or runs on banks in one country, such as Spain, dragging down the entire system.
Since the global financial crisis bit in late 2008, a succession of banks - Lehman Brothers, Icelandic banks, Fortis, Anglo Irish Bank and Dexia - have crashed, at huge cost to massively stretched public purses.
Right now, banks in Spain, the euro zone's fourth largest economy, are struggling to find more than €80 billion to strengthen their capital buffers.
The European Central Bank and the International Monetary Fund each advocate a euro zone-wide banking union, although there are some differences as to what exactly this should integrate, and when.
The bank resolution plans are seen as a first step on that road, already forming part of commitments agreed by the leaders of the G20 group of major economies back in September 2009.
German Chancellor Angela Merkel sees a series of short, medium and longer-term questions within her vision of a deepening economic and political euro zone union. One of those points, she said last night after talks with Commission chief Jose Manuel Barroso, was "to what extent we have to place systemically-relevant banks under specific European supervision."
The resolution scheme, to be presented by EU markets commissioner Michel Barnier, aims to ensure "losses are borne by bank shareholders and creditors" and to "minimise costs for taxpayers." It would give EU authorities the power to force "restrictions on business activities and changes to legal or operational structures," and assume no public support "beyond central bank liquidity assistance."
Subsequent compensation for losses would be strictly determined "on the basis of liquidation value." Intended to facilitate early intervention when problems are bubbling up in one corner of the euro zone that could eventually threaten other parts or the whole currency area, salvageable assets and rotten liabilities should be divided into a "bridge bank" and a "bad bank."
A new "bail-in" tool will give resolution authorities "the power to write down the claims of unsecured creditors" among the very biggest financial institutions, considered systemically important. That means shareholders and creditors take the hit and not governments, although as is often the case in fundamental changes, this is not proposed to begin until 2018, "to allow markets to adapt," the slides say.
The London-based European Banking Authority, one of three cross-border EU financial services supevisors, would mediate under the plans. Resolution funding - to cover the issue of guarantees and cost of asset transfers - should run to at least 1% of covered deposits over 10 years, more for bigger entities, the Commission added.
Like a living will, the idea is that national funds filled by banks should pre-pay their own 'funeral expenses'. This would bring all but the very biggest - considered "too big to fail" as they could grind cash-machine networks to a halt - into line with any normal business going bust.
Ideally, resolution funds should be separate from existing deposit guarantees, which are themselves the object of a separate Barroso push for collective euro zone responsibility under his vision of banking union.
