Banks to Pay for Future Crises Under EU Taxation Plan

May 26, 2010 -- Lenders should face new taxes to avoid repeating the public bailouts of failed banks that cost billions of euros in the credit crunch, the European Union's Financial Services Commissioner Michel Barnier said.

Banks may be taxed on the size of their balance sheets, on how much they owe other institutions or on how much profit they make, Barnier said today. The money would be used to finance so- called resolution funds designed to manage future lender- failures and limit contagion.

"It is not acceptable that taxpayers should continue to bear the heavy cost of rescuing the banking sector," Barnier said in an e-mailed statement from the European Commission, the EU's Brussels-based executive. "They should not be in the front line. I believe in the polluter pays principle."

German Chancellor Angela Merkel has called for a tax on banks' financial transactions and EU finance ministers discussed Barnier's proposals at a meeting in Madrid last month. The financial crisis cost Europe about $5 trillion in bank bailouts and loan guarantees, more than Germany's annual gross domestic product.

The commission proposed using the tax revenue to finance the transfer of assets from a failing bank to a third party, cover legal fees and preserve "vital functions of the banks," such as payment systems.

The funds "would not be used for bailing out or rescuing banks, but only to ensure that a bank's failure is managed in an orderly way and does not destabilize the financial system," the commission said.


U.S. Banks

The funds would operate in a similar way to the Federal Deposit Insurance Corporation, the authority responsible for winding down banks in the U.S., Simon Gleeson, a financial regulatory specialist at Clifford Chance LLP in London, said in a telephone interview.

"Whereas the FDIC is a stabilizing force the EU proposal destabilizes banks because it reduces their resources and doesn't promise anything in return," Gleeson said.

The proposals would also force bank creditors to accept a reduced repayment if a lender fails and must be rescued with public funds.

Sweden, a member of the 27-nation EU, imposed a tax last year on financial firms amounting to 0.036 percent a year on all liabilities excluding equity capital and junior debt.

Sweden is in the "vanguard" of facing the consequences of the financial crisis, Barnier said today.

The commission has already proposed laws to overhaul financial regulation following the worst crisis since the Great Depression. These include plans to establish Europe-wide supervisors for banking, securities and insurance along with a European Systemic Risk Board to monitor threats to financial stability.

Draft laws need approval from EU governments and lawmakers in the the European Parliament before entering into force.