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Europe Touts ‘Polluter Pays’ for Future Bad Bank Fund
May 26, 2010

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Brussels. Europe on Wednesday unveiled plans to levy a new insolvency tax on banks but insisted the proceeds would remain within national borders and would not be used to bail out failed banks.

“The funds would only ensure that a bank’s failure is managed in an orderly way and does not destabilize the financial system,” a European Commission statement said.

Under the commission’s plan, which has still to be agreed by the 27 European Union member countries and the European Parliament, the proceeds could be used to make bridging loans to financial institutions deemed to be still viable.

The funds could also be used to help banks get rid of bad assets and offer legal and administrative help to banks that have to close down.

European Commission chief Jose Manuel Barroso said the fund should be obligatory.

EU Financial Services Commissioner Michel Barnier said in a statement: “It is not acceptable that taxpayers should continue to bear the heavy cost of rescuing the banking sector.”

Barnier said a “polluter pays” principle was needed “to build a system which ensures that the financial sector will pay the cost of banking crises in the future.”

He said the funds would “manage bank failure, protect financial stability and limit contagion,” but stressed there would be no bailouts.

Meanwhile, European Central Bank policy makers said on Wednesday that the financial markets should not get used to central bank support and it remained an exceptional measure.

Two weeks after the ECB abandoned resistance to buying government bonds to shore up malfunctioning markets, central bankers denied the move weakened the ECB’s focus on preserving price stability or its independence, saying price pressures remained low.

Christian Noyer, French central bank governor, said central banks needed financial markets to work properly for interest-rate changes to have an impact on the economy. But they were not interested in intervention for intervention’s sake and support for markets must not become the norm, he said in a Paris speech.

AFP, Reuters