EU needs power to stop banks failing, says Michel Barnier

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The EU's internal market commissioner, Michel Barnier, wrote his proposals in a letter to Spanish finance minister Elena Salgado.

He believes a non-binding framework would be inadequate to avoid a repeat of the crisis that required member states to use public funds equivalent to 13% of EU economic activity to shore up the banking system.

"The crisis has made it evident that a fundamental overhaul of the EU crisis management framework is now needed, and it is urgent. Bailing out or liquidating failed banks cannot be the only options. This requires a comprehensive set of tools and sufficient harmonisation at EU level," he said.

EU finance ministers meet in Madrid tomorrow to discuss how to deal with banks in trouble without having to tap public funds again.

A key element is a possible tax on banks to pay for bailouts, although many of the powers Barnier is seeking are aimed at intervening to avert a collapse. He proposed a range of harmonised tools for regulators to respond quickly when a bank is in difficulties.

Starting with more intensive supervisory powers, such as the ability to impose restrictive caps on leverage, they would also include requiring a bank to restructure unprofitable activities, cease practices, stop capital distribution and replace management.

"Such a power would be used when it appears that the whole management of an institution is not willing or not able to take the necessary measures to restore the financial situation of the credit institution," Barnier said in a statement.

"Measures and powers of this kind would clearly have an impact on the cost of funding for banks... but they would also help to reinforce market discipline by putting uninsured creditors at risk even in systemic situations and the Commission services believe that they merit further investigation."

Barnier said a legislative proposal was due next spring.

A new EU legal framework will also include how national authorities must work together to deal with a cross-border bank. This could be done initially through existing colleges of supervisors that oversee cross-border banks with a "possible joint decision process".