Better co-operation to safeguard big banks

Finance ministers to discuss regulation, as Greek debt crisis looks likely to loom large.

The European Union’s finance ministers will next week discuss how to improve co-operation between bank regulators so that, in future, large banks that get into financial difficulties need not be broken up along national lines.

Ministers are keen to prevent a repeat of the messy rescue of Fortis bank, which was carved up in October 2008 by the governments of Belgium, the Netherlands and Luxembourg in an emergency meeting one Sunday.

The European Commission and the International Monetary Fund have argued that this national approach to dealing with bank failures is overly expensive, and that it is better to find ‘group-wide’ solutions for failing banks.

Spain, which holds the rotating presidency of the Council of Ministers, has put the item on ministers’ agenda for their meeting in Madrid on 15-16 April, so that they can influence legislative proposals being prepared by the Commission and discussions in the G20 group of industrialised and emerging economies. The G20 agreed in September that countries should develop “tools and frameworks…to help mitigate the disruption of financial institution failures”.

An official in the office of Jean-Claude Juncker, Luxembourg’s prime minister, said: “We’ve been advocating ever since the financial crisis that there should be a much more systematic approach [to handling failing banks]”.

“It should not be that prime ministers or finance ministers have to meet on an ad hoc basis in the middle of the night to find a solution,” he said.

He said that Luxembourg was seeking the “strongest possible cross-border co-operation, the strongest possible contingency planning” for bank failure.

Michel Barnier, the European commissioner for the internal market, wants member states to agree on a “framework” for co-operation, including arrangements for sharing the burden of bank losses. He also wants to iron out differences in national law that get in the way of cross-border co-operation between governments and regulators.

Systemic risk

The work on improving cross-border co-operation is part of a broader effort in the EU and G20 to overcome the problem of a bank failure posing a systemic risk. Better co-operation would make it easier for governments to find alternatives to bailing out banks, such as winding down operations, or finding a buyer.

Ministers will also discuss the introduction of national bank levies, and whether these levies should be placed in dedicated funds to support financial institutions in crisis. While there is an emerging consensus in the EU on the value of levies, member states are split on whether to create dedicated funds. Germany and Sweden are supportive, but the UK, France and Austria are concerned that funds could create a moral hazard.

Diplomats said that ministers are likely to discuss the Greek debt crisis even though it is not formally on the agenda. Yields on Greek ten-year bonds this week reached their highest level since Greece joined the eurozone in 2001. On Wednesday, Greek bonds were trading with yields that were 400 basis points higher than benchmark German bonds.

The higher rates were fuelled both by a lack of market faith in the rescue plan for Greece agreed by EU leaders last month, and by a warning from the Greek government that its public sector deficit in 2009 was higher that the 12.7% of gross domestic product than it previously reported. The European Commission will publish a revised deficit figure for Greece on 22 April.

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