Baby steps to EU bank union come too late for crisis

Tue Jun 5, 2012 7:28am EDT
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By John O'Donnell

BRUSSELS (Reuters) - The European Commission will propose far-reaching powers for regulators to deal with failing banks on Wednesday, a step towards the banking union the European Central Bank has demanded to secure the euro's future.

But the proposal, which suggests closer coordination between countries and increased powers to force losses onto bondholders, is unlikely to take effect before 2014, too late for Spain, which could be forced to seek a Greek-style bailout if it cannot refinance its indebted lenders.

Even over the medium term there are many hurdles to the banking union championed by ECB President Mario Draghi - a three-pillar plan for central monitoring of banks, a fund to wind-down big lenders and a pan-European deposit guarantee.

Germany has balked at signing up to a single European scheme that could see it shoulder the costs of a bank collapse in another country, and Britain fiercely resists any attempt by Brussels to impose EU controls over financial services, which account for almost a tenth of its economy.

"Everybody's energy right now should be focused on the current crisis," said Nicolas Veron of Brussels think tank Bruegel. "I'm not sure we can afford the luxury of thinking about a permanent framework when the houses are burning."

Daniel Gros of the Centre for European Policy Studies think tank said while it was in everyone's interest to prevent a repeat of the chaos that followed the collapse of U.S. investment bank Lehman Brothers, action was needed now.

"We need immediate decisions", he said. "We have a crisis on our hands."

The Commission's 156-page draft legislation, seen by Reuters, will suggest giving supervisors powers to "bail in" or force losses onto bondholders of a failing bank so that taxpayers are kept off the hook, and forge closer links between national back-up funds to wind up cross-border lenders.   Continued...