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Categorized | Financial

UK Treasury fears £9bn bank crisis fund

Posted on April 30, 2013

British Chancellor of the Exchequer George Osborne©Getty

George Osborne faces being forced to set aside up to £9bn for a standalone bank crisis fund, as the UK chancellor is once again cornered in Brussels over a flagship EU financial reform.

EU member states are approaching the final stages of talks on national rules to wind up troubled banks, with Britain isolated in opposing the creation of mandatory, pre-financed national funds to pay for bank resolution costs.

    The latest compromise under discussion in Brussels, seen by the Financial Times, would require Mr Osborne to tap industry for a resolution and deposit insurance fund matching at least 1 per cent of covered deposits.

    Given that Britain introduced a temporary “bank levy” on balance sheets, which raises at least £2.5bn a year and goes toward reducing the annual deficit, it is likely the money would need to be borrowed, or raised through an extra charge on lenders.

    The dispute over the fund will add to Britain’s long list of troubles in Brussels on financial regulation and comes on the heels of its defeat over bank bonuses, which saw Mr Osborne overruled by his counterparts.

    Diplomats say a compromise is still possible before a meeting of finance ministers in May, which could mean more flexibility or reduce the minimum amount of the fund.

    But London is facing headwinds: Germany and natural UK allies such as Sweden agree with the principle of establishing national resolution funds, or already have them in place. “The Brits are alone and no one is running to help,” said a diplomat involved.

    The fund is one element of a wider European Commission overhaul of bank governance, which establishes resolution authorities with summary powers to writedown creditors in failed banks, so the burden largely falls on private investors rather than taxpayers. Ambassadors discuss the reforms on Thursday.

    One outstanding issue is the level of flexibility national authorities are given to exempt certain creditors, such as uninsured deposit holders, when a so-called “bail-in” is triggered.

    Some countries, in the wake of the Cyprus bailout, are pressing for broad protection for even deposits over €100,000, which are unprotected by deposit guarantee schemes.

    As an alternative, Ireland, which holds the rotating presidency of the EU council, is suggesting a “depositor preference” arrangement. That means uninsured depositors can be written down in a crisis, but only as a last resort after other creditors absorb loses. The option is backed by the European Central Bank.

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    Under the Irish compromise on resolution funds, the minimum level of financing must be reached within the next 10 years, with half dedicated for bank resolution and the remainder to deposit insurance.

    The UK Treasury objects to pre-funding resolution schemes because the unused pot of money would act as a drag on growth, create moral hazard for banks and reduce the credibility of the bail-in tools.

    Britain is unconvinced the funds would prove worthwhile during a serious bank crisis, which would require interventions that far outstrip the levels of cash likely to be available in the resolution fund.

    As well as the bank levy paid to the Treasury, British lenders will pay £285m this year towards the Financial Services Compensation Scheme, which provides UK deposit insurance.

    Meeting EU targets for a standalone resolution and deposit fund would require a big increase in the levy – which the industry complains is already too onerous – or force the Treasury to divert revenues from the levy on bank balance sheets.

    The Irish papers preparing for the meeting of ambassadors do not even suggest there should be a discussion on the principle of pre-funding – a clear indication that the UK is heavily outnumbered.

    Some member states are even pushing for the fund target to be set as a proportion of total bank liabilities, which is a benchmark that would put a far greater burden on London.