The British Bankers’ Association has hit out at the European Commission’s proposals to introduce a levy on all EU banks, saying it could cause a new financial crisis and increase moral hazard.
Last week, the EC proposed the creation of an EU-wide levy on banks in an effort to ensure that any future bank failures will not at the cost of the taxpayer and do not destabilise the financial system.
The EC says the funds would not be used for bailing out or rescuing banks but to ensure that a bank’s failure is orderly.
The money would be used to provide financing for bridge bank operations, total or partial transfer of assets and liabilities and financing a good bank/bad bank split.
The EC says it cannot yet provide details about how bank resolution funds would be expected to operate and how large contributions would be.
The commission will present its proposals for the levy to EU finance ministers, heads of state and the G20 during June and will publish more detailed proposals in October.
Internal Market and Servces Commissioner Michel Barnier says: “It is not acceptable that taxpayers should continue to bear the heavy cost of rescuing the banking sector. They should not be in the front line. I believe in the polluter pays principle. We need to build a system which ensures that the financial sector will pay the cost of banking crises in the future.
“That is why I believe banks should be asked to contribute to a fund designed to manage bank failure, protect financial stability and limit contagion – but which is not a bail-out fund. Europe must take a lead in developing common approaches and providing a model for cooperation which could be applied globally.”
But British Bankers’ Association chairman Angela Knight says while taxpayers should not be forced to foot the bill for banking failures, individual countries should have their own arrangements in place to deal with failures.
She says: “At the moment, we cannot support the idea of an EU-wide tax or levy to pay into a pan-European fund. It leaves too many important questions unanswered.
’Why should the banks in one country pay for the problems of banks in another? Each country must take its own actions and early’
“Why should the banks in one country pay for the problems of banks in another? As has been seen by the Greece crisis, what is essential is that each country must take its own actions and early. How could a large sum of money sitting dormant somewhere in Europe make economic sense? How would it do anything other than help facilitate the next crisis? It would surely increase moral hazard by curtailing the consequences of a bank failure.”
Knight says there are “more constructive” steps that the EU should be considering.
She says: “Each country should strengthen its regulation and supervision. Each country creates an intervention authority, in the UK this is the Bank of England. Each country needs to put in place arrangements so that if intervention is required, then this is paid for by the industry and depositors are protected.
“Crucially, more work is required on options such as that proposed by the Institute for International Finance earlier this week on bank recovery plans and resolution plans which would protect, even further, both economies and taxpayers.”
Faegre and Benson partner Donald Stewart says he does not believe that the levy will increase moral hazard.
He says: “I am not sure that is a viable argument. I suspect the levy is preferable to alternatives such as Vince Cable’s plan to break up the banks, separating investment and retail banking.
“However regulatory arbitrage has always been an issue and this is going to be an obvious complaint for EU banks that will argue they are being put at a disadvantage. We have to wait to see what the implications of the levy are for UK banks in particular.”