European Union countries will be required to impose an upfront levy on banks, with the proceeds to be paid into national funds to insure against future financial failures, under proposals to be unveiled on Wednesday.
The scheme, which could raise billions once implemented, is designed to prevent future bank failures from destabilising the broader financial system.
The plan is due to be announced on Wednesday by Michel Barnier, EU internal market commissioner, with the aim of legislating by 2011.
The proposal is at a preliminary stage, and any legislation would have to be approved by EU member countries and the European parliament.
The proposal will be controversial, especially if it is not accompanied by similar moves in the US and elsewhere.
Commission officials are expected to stress the funds were not for bailing out banks but to ensure that failures and insolvencies were managed in an orderly way.
The funds could be used, for example, to provide bridge financing, guarantees or for the temporary purchase of bad assets, a method used during the recent crisis. Commission officials are expected to emphasise that any actions by the funds must be compliant with EU state aid rules.
The scale of the funds and whether levies should be imposed on bank assets, liabilities or profits, will be subjected to intense debate and Brussels is not expected to make firm recommendations at this stage.
The Commission will emphasise that funding must be up-front and that banks should not be allowed to pass the costs on to their customers. It is also likely to stress that funds should be kept ring-fenced from national budgets.
However, some countries are already moving to establish funds by imposing levies on banks. In Sweden, a “bank stability” fund is expected to raise about 2.5 per cent of gross domestic product within 15 years.
Mr Barnier’s proposal is likely to be discussed by EU leaders, and by G20 participants, in Toronto next month.
The Institute of International Finance, the global banking industry group, supports taxing the industry to pay the residual costs of winding up failing banks but it argued in a report on Monday that an after-the-fact levy would be preferable.
“The problem with [up-front] funding is that it increases the moral hazard ... once banks have paid and the fund exists, it becomes difficult to let a bank fail,” said Peter Sands, chief executive of Standard Chartered and chairman of the IIF committee on effective regulation.