Draghi Says EU Needs Common Fund To Handle Failing Banks

The European Union needs a common fund as part of the plan to establish a banking supervisor, European Central Bank President Mario Draghi said.

Draghi’s vision, outlined to European lawmakers in Brussels today, contrasts with EU Financial Services Commissioner Michel Barnier’s proposal to rely on national funds, rather than a central European resource, for a resolution authority agreed upon by EU leaders.

“Only a single resolution authority will ensure timely and impartial decision-making focused on the European dimension,” Draghi said in the European Parliament. “A single resolution authority would help to break the vicious bank-sovereign nexus.”

The EU is in the process of creating a single supervisory mechanism at the ECB and has pledged to begin work this year on a framework for restructuring failing banks. Under Draghi’s plan, investors would absorb costs ahead of taxpayers if a bank has to be shut down or restructured. The centralized system would aim to avoid coordination problems and national conflicts of interest, he said.

Draghi said a common fund with a public backstop will be required, augmented by industry fees collected in advance of any crisis. Even if European authorities ultimately recoup their costs from the financial industry, making the fund “fiscally neutral” over time, they need to be prepared to fund short-term needs from their own resources.

The single resolution authority “should therefore have a European resolution fund at its disposal, which should be financed by the private sector via risk-based ex-ante levies,” Draghi said. “The European resolution fund should be backed by a public backstop mechanism, the support of which would need to be recouped via special ex-post levies on the private sector.”

‘Operational Capacity’

The new resolution authority also will need “sufficient operational capacity” to be independent, and it will need to be held accountable in a way that provides some judicial protection against challenges to its decision-making after the fact, Draghi said.

As an interim measure, the EU needs to continue work on current proposals to spell out which creditors are in line to absorb losses when a bank runs into trouble, Draghi said. Barnier has said he aims to wrap up that legislation by June.

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