EU Commission wants taxpayers protected in bank bailouts

European officials proposed Wednesday a new system of financial regulation that aims to keep bank failures from costing taxpayers billions and bankrupting governments.

Because many European governments are already overburdened with debts, rescuing their failed banks risks bankrupting some of them. Ireland has had to ask for an international bailout for that reason and investors fear Spain may be next.

The banks, in turn, own huge amounts of their governments' bonds, which drop in value when investors lose confidence in the country's financial future. The result is that any fall in confidence in either the banks or the government tends to create a downward spiral requiring foreign financial aid.

Under the European Commission's proposal, banks that posed no systemic risk to the stability of financial markets would simply be allowed to fail.

Those whose failure did threaten to become unmanageable would be propped up in part by having unsecured creditors of the bank, such as bondholders and shareholders, take losses rather than having governments give them taxpayer money.

"We're going to break the link between banking crises and public budgets," said Michel Barnier, the European commissioner responsible for the internal market, as he outlined the measures in Brussels. "We don't want taxpayers to have to pay."

Measure would be too late for Spain

If he ever achieves that, however, it will be too late to alleviate the current banking crisis afflicting Europe and one of its biggest economies, Spain, where banks are sitting on huge losses that the government cannot afford to plug.

The Spanish government's borrowing rates are at painfully high levels around 6.25 per cent on fears it will go bankrupt saving the banks.

The commission's complex proposal is not scheduled to take effect fully until 2018. In any event, it also needs the approval of the European Council, composed of the leaders of the 27 EU countries, and the European Parliament, and may be significantly altered in the process of gaining approval.

At the moment in Europe, there is no central regulator with the power to step in and force weak banks to ask investors for more capital to strengthen finances, or to break them apart and restructure them. There is also no central deposit insurance backstop, making it more likely that a bank failure would exhaust one country's fund to compensate depositors.

Barnier was at pains to emphasize that he had been working on the proposals for years, and they were not a response to the banking crisis in Spain or other recent bank bailouts.

Germany opposes central banking authority

While Barnier said the new rules are necessary because so many banks operate across borders, he did not propose setting up a powerful central banking authority, as the commission had suggested a week earlier.

Many analysts say Europe needs such a central banking authority, which would have the financial power to bail out banks anywhere in the eurozone, bypassing national governments that are often reluctant to admit the extent of problems in their domestic financial systems. It would also spread the cost of bailouts across multiple countries.

Germany remains opposed to such a measure, however, fearing it will end up paying the bulk of bank rescues.

Barnier's proposal is more likely to be welcomed in Berlin. He said it would strengthen the ability of national authorities tohopefullyhead off bank failures before they happen and to deal with them decisively when they do.

"If we're going to avoid in the future banking crises, each member state has to be equipped with the appropriate tools to take action in time, not when it's too late," Barnier said.