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Europe bank reforms proposed by European Commission

The European Union executive arm proposes greater oversight and control of banks to protect taxpayers from financial crises.

June 06, 2012|By Henry Chu, Los Angeles Times
  • European Commissioner for Internal Market and Services Michel Barnier speaks to journalists about a proposed framework for bank recovery and resolution,at the European Commission headquarters in Brussels on June 6, 2012.
European Commissioner for Internal Market and Services Michel Barnier… (Yves Logghe, Associated…)

LONDON — European banks should come under greater central oversight and taxpayers should be shielded if the banks collapse, according to new proposals Wednesday that aim to prevent future financial crises in Europe but that do little to address its current one.

With weak banks in Greece and especially Spain setting off alarm bells, officials and investors are pushing for strong, coordinated European action to prop up the region's financial sector and head off devastating bank runs that could unleash pandemonium in global markets.

The proposals unveiled Wednesday by the European Commission, the executive arm of the European Union, suggest steps toward a common banking policy.

National banking authorities would have the power to step in when banks appear shaky and compel them to develop recovery plans.

In addition, financial institutions on the verge of failing would be allowed to do so, rather than be rescued by the state at taxpayer cost. Private investors in the banks would have to swallow their losses. This would help avoid the catastrophic experience of Ireland, whose government agreed to take on the bad debts of Irish banks and eventually found itself in the humiliating position of having to ask for international aid.

"We don't want taxpayers to have to pay," Michel Barnier, the commissioner in charge of the EU's internal market, told reporters in Brussels. "Banks should pay for banks. We're going to break the link between banking crises and public budgets."

But the proposals fall short of more radical measures being floated and wouldn't come into effect for several years.

"We're not dealing with the present crisis," Barnier said. "This is for the future."

Many analysts are calling for more drastic, and more rapid, action to deal with the current crisis, a "banking union" that would set up a powerful European banking authority and a region-wide deposit insurance scheme to convince customers that their money is as safe in a Greek bank as in a German bank.

Such ideas are due to be discussed at a summit of EU leaders at the end of the month, if the markets have not forced the issue before then.

Investors are concerned with the health of Spanish banks, which are sagging under the weight of billions of dollars of bad property loans left over from the country's real-estate boom-gone-bust. Madrid has scrambled to respond to the problem, whose scope it has consistently underestimated; independent auditors are to report this month on how dire the situation is.

Spanish Prime Minister Mariano Rajoy is lobbying European leaders to allow his country's banks to draw rescue funds directly from Europe's bailout program, without the aid being channeled through his government.

That would allow Spain to avoid the stigma of having to follow Greece, Ireland and Portugal in requesting a bailout and accepting the foreign-imposed conditions and obligations that come with it. But Germany, Europe's paymaster, has so far rejected the idea.

On Thursday, Madrid is to hold a crucial bond auction that will test investors' confidence in its ability to pay its debts. Borrowing costs for Spain have climbed to uncomfortably high levels, though they eased a bit Wednesday.

The ripple effect of the debt and banking problems plaguing countries such as Spain and Ireland has begun touching their financially sound neighbors. TheMoody'sratings agency downgraded the status of seven German banks late Tuesday, including Commerzbank, the country's second-largest.

henry.chu@latimes.com

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