UK battles EU proposal to bail out banks

 
Tim Wallace
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EXCLUSIVE

BRITAIN is fighting proposed EU rules which would allow governments to bail out banks, reviving the too big to fail problem and undoing much of the progress made in reforming the sector since the credit crunch, City A.M. has learned.

MEPs are pushing for changes to the planned rules governing failing banks which would allow lenders to be nationalised for short periods.

The proposal is being debated in the European Parliament and has split the European Council, where the UK is leading the opposition.

Swedish MEP Gunnar Hökmark proposed the bailout plan late last year, arguing: “This must be an available tool if financial crises are not to be exacerbated and to protect taxpayers’ money in the long run.”

But Britain and the industry fear that by allowing expectations of a bailout to remain investors would artificially see banks as lower risk, thus reducing the cost of raising funds and allowing the implicit subsidy to continue.

That could increase risk-taking and boost the chance of another crisis, as well as directly putting taxpayers on the hook for bank losses instead of shareholders and bondholders.

“Governments must be prepared to let banks die – the losses of failures must fall on investors, not on the taxpayer,” said Anthony Browne, head of the British Bankers’ Authority which is campaigning against the MEPs’ planned amendment. “A rule allowing banks to be taken into public ownership in certain circumstances could be abused in the heat of a crisis.”