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UK and France Reject EU Bank Plan

George Parker, Financial Times
Thursday, 27 May 2010 | 6:34 AM ET

Britain and France were at odds with other European Union countries on Wednesday over plans to insure against future bank failures, in another sign of the problems in trying to forge a common response to the bloc’s economic woes.

Michel Barnier, EU internal market commissioner, set out plans for member states to form national funds to help wind up or reorganise failing banks, funded by a levy on the financial sector.

London rejected the idea, arguing it would introduce “moral hazard” and encourage banks to think the levy was an insurance premium that entitled them to help if they got into trouble.

French officials said Paris had similar concerns. But German finance ministry officials said the package appeared to be “moving in the right direction”.

Wolfgang Schäuble, finance minister, wanted German banks to pay about €1billion per year into a separate fund to wind down troubled banks.

Mr Barnier’s proposals were an attempt by the European Commission to create a collective response to the banking crisis and show it is ready to deal with any second-round shocks.

The commissioner said he was conscious of the moral hazard argument but added: “It is not acceptable that taxpayers should continue to bear the heavy heavy cost of rescuing the banking sector – they should not be in the front line.”

His plan will be discussed by EU finance ministers and leaders next month.

Brussels hoped for sufficient endorsement to allow its representatives to push the “bank resolution fund” idea at the G20 meeting at the end of June. There was growing global agreement on the need for a bank levy.

But Tim Geithner, US treasury secretary, admitted in London that different countries were likely to implement it in different ways: “It’s not going to be perfectly uniform.”

George Osborne, Britain’s chancellor of the exchequer, insisted that his own proposed bank levy – which could be in his first Budget on June 22 – would simply go into the Treasury’s depleted coffers.

“The purpose of the bank levy is to raise money for general expenditure purposes,” he said.

A French finance ministry official said privately that Paris supported the principle of a tax but did not want to create a standalone “resolution” fund.

German government officials noted that Franco-British concerns about “moral hazard” issues around a bank resolution fund might have more to do with the fact that both countries needed the cash from a bank levy to ease their budgets.

Mr Barnier believed his plans could be agreed by qualified majority voting under the EU’s single market rules but Britain insisted his plan dealt directly with taxation and should be agreed by unanimity.

Germany’s private-sector banking association, the BDB, welcomed Mr Barnier’s proposals but warned against countries taking a “piecemeal approach” to the construction of a series of national funds.

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