Julia Kollewe
guardian.co.uk, Friday 19 March 2010
IMF head Dominique Strauss-Kahn
has called for a new body to save taxpayers
the cost of bank failure.
Photograph: Jewel Samad/AFP/Getty Images
The International Monetary Fund has called for a European "fire brigade" funded by the finance industry to deal with the collapse of banks that operate in several countries.
Managing director Dominique Strauss-Kahn urged the European Union to create a European resolution authority to deal with insolvent banks that would force shareholders and uninsured creditors – rather than taxpayers –to bear the costs of failure. The authority would be funded by the financial industry from deposit insurance fees and levies on institutions, he said.
"What I think is needed is a European resolution authority, armed with the mandate and the tools to deal cost-effectively with failing cross-border banks – an ex-ante [before the event] solution to the problems that currently hamper co-operation in crisis situations, rather than an ex-post one," Strauss-Kahn told a conference in Brussels today.
"It should cover at least the major cross-border banking groups, as well as all banks running large-scale cross-border operations under the single passport."
Such a body could prevent a repeat of the debacle seen after Fortis collapsed in 2008. The Benelux lender had to be bailed out by the governments of Holland, Belgium and Luxembourg, at a total cost of €11.2bn (£9.99bn). The fiasco toppled the Belgian government.
"The difficulty of finding agreement across borders led to a likely costly break-up of Fortis along national lines," Strauss-Kahn said. "And taxpayers in many countries are paying the price for crisis management and resolution frameworks that insufficiently protected their interests."
Strauss-Kahn said existing plans "have proven to be inadequate" and make cross-border bank failures difficult to handle and more costly than necessary. He said the reform of the supervisory and regulatory framework currently before the European Parliament was important, but needed to be matched by an "integrated EU crisis management and resolution framework". Its main objective should be "cost-effectiveness, in a broad sense – minimising contagion, collateral damage to the economy, losses to depositors, and costs to government budgets".
The system would need access to a fiscal back-up mechanism, he said, with a mechanism of burden-sharing between governments.
The European Union has unveiled draft legislation to toughen the policing of financial institutions and avoid another banking meltdown. It plans to create a super-watchdog and a new European supervisory body that would warn of early signs of trouble.
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