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Emerging Markets

Fund warns EU over bank bailout rules

EU financial regulators must have legally binding powers to enforce common rules on bank bailout plans by member states, the IMF has warned.

“Authorities should have binding powers – and we think that a single rule book on this is necessary,” Marek Belka, head of the IMF’s European department, told Emerging Markets. His comments came as EU policymakers seek an historic revamp of the region’s regulatory system.

In September, the European Commission presented a new financial framework to supervise banks, identify systemic financial risks and harmonize laws – in a bid to avoid a repeat of last year’s banking crisis that battered the region.

But the EU’s executive body said it would use “moral pressure” instead of a regulatory crackdown on countries whose financial systems are posing a risk to the 27-member shared market. The EU will not have any power to propose rules that bear fiscal costs, such as bailing out a bank.

Belka identified that as a problem: the former Polish prime minister cited divergent views between countries on appropriate “burden-sharing” in the event of financial bailouts.

He argued that EU authorities should have the unilateral power to overrule member states on bank bailouts. The use of common criteria would help to produce financial stability, he suggested.

Last year, when the Fortis banking group was on the brink of collapse due to exposure to toxic assets, it received a swift injection of public money from Belgium, the Netherlands and Luxembourg.

But analysts argue that tortuous negotiations between sovereign states on financial burden-sharing in the event of a future collapse of a cross-border bank may imperil regional stability, while transparent and common criteria could mitigate such risks.

Asked whether he supported the creation of a contingent financial fund to cushion the fiscal cost of any financial intervention to prop up cross-border banking groups, Belka said: “Perhaps. We need some innovative ideas”.

Countries may disagree about the extent to which banks should be supported in a crisis, as support may encourage institutions to indulge in risky behaviour in full knowledge it will be seen as too big to fail and bailed out by the taxpayer – the so-called moral hazard problem.

This risk was echoed by Jaime Caruana, general manager of the Bank for International Settlements (BIS), who told Emerging Markets in Istanbul this weekend that an EU financial regulator “should never compel any country to bail out a bank because that may play into the too-big-to-fail concept”.

Furthermore, harmonization of banking regulations in the shared market is a prerequisite for giving an EU-led regulator the power to overrule member states.

Hans-Joerg Rudloff, chairman of Barclays Capital and of the International Capital Markets Association, told Emerging Markets: “It is impossible to make laws on this until commercial laws such as bankruptcy laws are harmonised in the Union. But without that, national sovereignty and political differences [between member states] will prevail.”

In other comments, Belka argued that EU-based banks require further capital buffers. “Banks in Europe have enough capital to survive, but we are not talking about survival anymore. We are talking about economic recovery ... and banks need more capital” to disburse credit once private sector demand increases. He said that in some cases it may be “necessary” for capitalization to be “above the [current] regulatory norms.”

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