Dipika Rangasami,

Editor (Business)

 

BRUSSELS — The EU is to consider a new proposal that calls for the euro zone to share obligations when faced with the prospect of closing failing banks in the region. Proposed by Lithuania, it marks a stark change from the current system that places all obligations of handling bank closures on the nation where the bank operates. This comes at a time when the EU is considering making changes to the procedures handling bank collapses. The proposal also adds fuel to the currently feasible notion within the EU of a ‘banking union’ of sorts.

Under the proposal, all euro zone countries will hold a fund wherein annual percentages of their total deposits (of their banks) for the year will be contributed. The percentages will rise each year by 0.1 per cent, marking a full one per cent of all the covered deposits in 10 years’ time.

Additionally, if a bank collapses within the first year of the proposal, the country whereupon it operates will still face all the responsibilities of its closure. But supposing the fund it has collected in a year is insufficient to cover the closure costs, other euro zone countries will be obliged to contribute 10 per cent of the amount from their funds.

By the second year, the home country is made responsible for paying 90 per cent of its fund for the closure while the rest of the euro zone incurs 20 per cent of the funding. The percentage of funding is proposed to rise by 10 per cent each year to allow for a whole equitable fund to be contained in a Single Resolution Fund by the end of 10 years.

The Single Resolution Fund will then bear the costs of any euro zone bank closures without partiality to any home country. The proposal suggests that the fund used will be regulated and authorised by a committee of members who will be delegates from the euro zone countries. Voting will be based on a majority and not unanimously.

The conditions within the dynamic proposal will be discussed on December 16 when senior EU officials will meet to consider it. Lithuania has suggested that a treaty will encompass the proposal, which is to be debated on by the EU countries until March 2014.

 

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