U.K., Sweden Seek EU Budget Safeguards in Bank Resolution Plan

The U.K. and Sweden are seeking guarantees that a planned euro-area system for handling failing banks won’t be able to tap the European Union budget to cover legal costs.

The two countries are opposed to the EU budget being used to pay damages if the European Commission, the bloc’s executive arm, loses court challenges against decisions it has taken to shutter banks, according to a document obtained by Bloomberg News.

The draft law to set up the resolution mechanism should make it clear that “costs in connection with judicial proceedings concerning acts or omissions of the commission in the performance of its tasks” as the ultimate decision-maker in the resolution system “shall not engage the budgetary liability of the member states or the union,” according to the joint British-Swedish paper that was discussed last week by national officials in Brussels.

The Single Resolution Mechanism proposal is part of a euro-area effort to break the financial links between sovereigns and banks by centralizing oversight and crisis management of failing lenders. The blueprint, presented by EU financial-services chief Michel Barnier in July, has met with a barrage of complaints from governments, though nations have said that they will target a deal on the plans by year-end.

The plan involves the creation of a central board that would make day-to-day decisions, backed by the European Commission, which would determine whether crisis measures are needed at a stricken bank.

Bank Levy

Membership of the system would be compulsory for euro-area nations, with other EU countries free to opt in if they also accept European Central Bank oversight of their lenders.

While the draft law foresees that the resolution system’s running costs would be met by levies imposed on the banking industry, the text doesn’t make it sufficiently clear that this would also apply for legal penalties imposed on the commission, according to the paper.

“In the absence of express provision, the default position is that the costs and liabilities of the commission would need to be met from the union budget and so from taxpayer contributions,” according to the document. “This position seems anomalous and inconsistent” with the thrust of the plans, which seek to protect public funds.

The U.K. and Swedish government offices in Brussels didn’t have immediate comment on the paper.

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