European Commission: Taxpayers to avoid bailing out banks in future

The European Commission has unveiled proposals to prevent taxpayers footing the bill when banks fail. But is it all too late?

The European Commission has come up with a series of proposals designed to prevent taxpayers footing the bill when banks fail in future.

Back in 2007, fears about the security of money kept within Northern Rock sparked a run on the bank, and its nationalisation. There are fears that similar runs will take place on other banks across the eurozone, particularly in Spain and Greece.

The nationalisation of Northern Rock cost UK taxpayers £1.4 billion. And while successive Governments argued that taxpayers would actually see a return on that cash, by the time the bank was sold to Virgin Money earlier this year, taxpayers were instead left looking at a bill of between £400 million and £650 million.

So what are the Commission’s bright ideas? They include:

• Regulators should be given powers to force losses onto bondholders of a bank, rather than taxpayers.
• Closer coordination between national back-up funds to make it easier to wind-up cross-border lenders. This is a step towards establishing a single resolution fund for closing or salvaging parts of struggling banks.
• Nations should prepare for a bank collapse by charging banks an annual levy, which could be used to provide emergency loans or guarantees.
• The introduction of an insolvency regime for banks in the EU.

These proposals are unlikely to become law before 2014, which leaves plenty of time for more banks, both here and abroad, to struggle. Indeed, today has seen six German and three Austrian banks downgraded by ratings agency Moody’s.

What do you think of the ideas? Are they sensible? Will they even make it into law? Should banks just be allowed to fail? Let us know your thoughts in the comment box below.

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