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News Article

Can future bank bail-outs be avoided?

Published 7 June 2012 by

The financial crisis forced governments to inject public money into banks. In fact, between October 2008 and October 2011, the European Commission approved state aid measures to financial institutions worth a total of 4.5 trillion Euros.

Although this avoided economic disruption and massive banking failure, it has put huge costs onto taxpayers - and it hasn't settled the question of how to deal with troubled international banks.

So the 'European Commission for EU-wide rules for bank recovery and resolution' has issued new proposals. Michael Barnier, Internal Market Commissioner, said: "The financial crisis has cost taxpayers a lot of money."

He continued: "We must equip public authorities so that they can deal adequately with future bank crises. Otherwise citizens will once again be left to pay the bill, while the rescued banks continue as before knowing that they will be bailed out again."

So how does the European Commission plan to avoid future bailouts? They have proposed changes in certain key areas, from prevention and early intervention to resolution.

Prevention involves banks setting out measures that would kick in if they get into trouble; they would basically need to have a recovery plan in place.

Importantly, if an 'authority' sees an obstacle that would get in the way of the recovery process, the bank could be required to change its operational or legal structure - to make sure it can be 'resolved' without threatening financial stability, compromising critical functions, or costing the taxpayer money. It has also been suggested that financial institutions should work as part of a group, so if a member of this group gets into difficulties, the other members would be able to provide support.

Early intervention means serious problems should be addressed as soon as they come up. To make this happen, authorities could insist that the bank:

  • Carries out parts of its recovery plan.
  • Draws up a plan of action and a timetable for those actions.
  • Calls its shareholders together to make urgent decisions.
  • Draws up a plan of how it'll 'restructure' its debts to its lenders.

Resolution would be needed if the above measures fail to keep the bank from failing (or being 'likely to fail').

National authorities in Member States would have a common 'roadmap' and 'toolkit' that they could use to manage failing banks. If an authority decides that a bank cannot avoid failure through alternative action, it could take control of the institution.

There are a few steps that could be taken to resolve a failing bank. For example, part (or all) of the bank could be sold to another bank. Alternatively, the 'good' or essential assets and functions of the bank could be separated from the 'bad' functions and assets - so the 'good' side could be sold and the 'bad' could be liquidated.

All these measures could prevent further international banking failures, but making them work will take cooperation among national authorities. It'll also need a certain amount of funding. President Barroso thinks that the proposal "will make the banking sector more responsible" and "contribute to stability and confidence in the EU in the future, as we work to strengthen and further integrate our interdependent economies."