Q&A: How is the EU introducing a bank levy?

LONDON (BestGrowthStock) – The European Union’s executive European Commission unveiled outline plans on Wednesday for a network of national bank resolution funds based on a bank tax.

It would pay for winding up ailing banks so that taxpayers don’t foot the bill again in future.

The following looks at what the bloc’s financial services chief, Michel Barnier, is proposing and how it fits into global efforts to make banks less risky for the public purse.

WHAT IS BARNIER PROPOSING?

Banks would pay a levy into a dedicated national bank resolution fund which governments would then tap to wind up an ailing bank without destabilizing markets.

A draft EU law would be proposed in early 2011 to coordinate such funds for EU states and the European Parliament to approve.

The aim is not to build up enough funds to rescue or bail out a bank as the sums needed would be too vast. They would be part of a new crisis management framework to stop banks getting into trouble in the first place.

The fact that Barnier is looking at an EU network of funds is a clear signal that a more radical proposal of a single bloc-wide fund is a non-starter.

Countries like Britain don’t want to be in the position of having to help a euro zone bank.

Barnier is also holding back from saying how much the levy should be and what level the funds should reach to be effective. The International Monetary Fund has said that a national fund equivalent to 2-4 percent of the country’s gross domestic product would be sufficient for resolution purposes.

IS IT A DONE DEAL?

Far from it. This is just the continuation of a debate that has split EU states.

Barnier wants a pre-funded element even though banks, some central bankers and policymakers say this will create “moral hazard” as banks would have no incentive to curb risky behavior, knowing a rescue fund is at hand. Barnier says the funds must not be big enough to bail out a bank, simply to wind it up with minimum market disruption.

There is also a debate over where the levy should go.

France and Britain say it should go straight into national coffers and not into any special fund. Sweden has already set up a ringfenced fund and Germany has plans to do so.

Britain is also looking to introduce its own levy while the United States has proposed a levy on its banks but only to recoup taxpayer cash used to shore up banks so far.

A meeting of EU finance ministers in April gave up trying to reach a consensus for now but they agree there is a need to confront the issue as large cross-border banks like Deutsche Bank, HSBC, Santander and BNP Paribas dominate the sector so coordination among states is crucial.

WHAT ABOUT THE REST OF THE WORLD?

Barnier’s plans are not only about trying to get a common framework in Europe on bank levies but also about shaping the global debate where progress is also proving hard.

The G20 group of countries, which has taken on the mantle of global regulation coordinator, agreed last September that taxpayers should be shielded from future bailout costs.

But so far there is no consensus over what form a bank tax should take or whether there should be one at all as Canada is fiercely opposed, saying its banks needed no public aid.

The G20 meets again next month to review progress on a bank levy but no deal is expected before its summit in November.

The hope is that even if countries take differing approaches, the size of a levy will be similar so no distortions to competition emerge or loopholes for avoiding it.

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Q&A: How is the EU introducing a bank levy?