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Protecting citizens from bank failures - 06/06/2012

Part of a building with the word “bank” above the door © istock/ilbusca

Plan for a coordinated EU approach would establish common rules for intervening when a bank is in financial trouble – and help make taxpayer-funded bailouts unnecessary.

The global financial crisis has demonstrated that a problem with one bank can quickly spread to the rest of the economy and to other countries. It has also become clear that EU countries don't have the right rules in place to properly manage failing banks.

In many cases EU governments have had to spend taxpayers’ money to shore up some of the bigger banks and prevent harm to millions of customers and the financial system.

To fill in the gap, the Commission is proposing a common framework of rules to help EU countries and national regulators respond quickly and effectively to a banking crisis.

The measures would also help reduce the impact a bank failure could have on the stability of the financial markets, and limit the cost to taxpayers if a bailout became necessary.

They would shift the burden of restructuring costs and responsibility to the bank's shareholders, creditors and any employees responsible for mismanagement. The measures would also:

  • give public authorities broad powers to prevent a bank from failing, allow them to intervene earlier and to fix problems
  • require all major banks to have recovery plans – public authorities would also have to outline the steps they would take when intervening and managing a bank in crisis
  • trigger an early response when a bank's capital reserves fall below a set level – the bank would have to take steps to restore its finances, make key reforms, and restructure its debt if necessary
  • allow national authorities to assume control of a failing bank if early intervention fails – enabling them to sell off all or part of the bank, for example
  • help national authorities cooperate more effectively when dealing with a cross-border bank in trouble – the European Banking Authority would have a key role.

The measures are part of a series of reforms the EU has been introducing to improve the regulation of its financial markets and to protect depositors.

More on crisis management in the banking sector

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