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EU Commssion Michel Barnier on Bank Resolution Funds - bank tax to prevent bailouts

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Plans for a Europe-wide levy on banks have been set out today as the EU attempts to create a single fund to cope with future financial failures. National governments will collect and oversee the cash from banks at first but Brussels wants eventually to take control of the fund. The money will not be used to bail out banks but to organise the orderly break-up of any institutions in deep financial trouble and to save taxpayers from having to rescue them.

"The European Commission is today proposing that the European Union establishes an EU network of bank resolution funds to ensure that future bank failures are not at the cost of the taxpayer or destabilise the financial system. Following discussion at the forthcoming European Council, the European Commission will present these ideas at the G-20 Summit in Toronto on 26-27 June 2010. Such funds would form part of a broader framework aimed at preventing a future financial crisis and strengthening the financial system. The Commission believes that a way to achieve this is by introducing requirement for Member States to establish funds according to common rules into which banks are required to pay a levy. The funds would not be used for bailing out or rescuing banks, but only to ensure that a bank's failure is managed in an orderly way and does not destabilise the financial system." - said Michel Barnier, the EU Commissioner for Internal Market and Services.

Mr Barnier has not yet decided whether banks will be charged on the basis of their assets, liabilities or profits. A similar scheme introduced by Sweden and based on bank liabilities is targeted to reach 2.5 per cent of GDP. EU leaders will be asked to agree the main principles at their next summit on June 17, before discussions at the G20, and that firm proposals will be established in October.

To prevent countries to use this vehicle to reduce their public deficit the Commission advises that bank resolution funds should remain separate from the national budget and dedicated only to resolution costs.

George Osborne, chancellor, today ruled out creating a dedicated fund in the UK to pay for the winding up of failing banks, putting Britain at odds with new proposals from Brussels. Speaking after meeting Tim Geithner, US treasury secretary, in Downing Street, Mr Osborne said: “The purpose of the bank levy is to raise money for general expenditure purposes.” The chancellor believes that setting up dedicated funds to protect against bank failures would create “moral hazard” and that banks paying a levy might think of the tax as an insurance fee, buying them cover in an emergency. Mr Osborne has other plans to introduce new levies on British banks, raising funds to pay down Britain’s £156bn defict.

Britain and France would like to focus on more regulations and increased capital in banks, instead of setting up a vehicle like this. While the Commission will press for that this proposal could be pushed through EU's Single Market rules (requiring 'only' a qualified majority supporting this plan), the Brisish officials will consider this plan to be nothing but a tax issue and therefore as a fiscal issue the proposed plan has to be agreed unanimously by all member states.

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