IMF Proposes EU Banking 'Fire Brigade'
Wednesday, March 24, 2010

A pan-European authority to deal with failed banks is needed to strengthen the region’s post-crisis banking system, the head of the International Monetary Fund (IMF), Dominique Strauss-Kahn said in a speech on March 19.

Speaking to a European Commission conference in Brussels, Strauss-Kahn said existing schemes for dealing with failed cross-border banks have proved inadequate. As a result, national and cross-border bank failures have been difficult to handle effectively and have been costly for governments and taxpayers.

“Europe needs a fire brigade,” said Strauss-Kahn, “to extinguish banking problems when they erupt, and intervene when things get out of hand.”

Describing risk-taking as the essence of banking, Strauss-Kahn said the key is in designing a financial system that contains the risks while harnessing the benefits. To grow out of the global economic crisis, Europe will need financing for its businesses, and healthy financial institutions to provide the means for economic growth, he said.

Strauss-Kahn said the freedom of banks to operate across borders is essential for healthy competition, but this kind of integrated banking system also needs ways to prevent and resolve banking crises when they occur. Referring to the lessons from the global crisis, Strauss-Kahn said banks' home and host countries would gain from enhanced multilateral cooperation and control, as well as joint responsibility and accountability.

To this end, the creation of a ‘European Resolution Authority’ has been proposed to deal with failed banks in a "cost-effective way."

According to Strauss-Kahn, the Authority would ensure that losses are borne by shareholders and holders of equity, and by uninsured creditors. In addition, as much as is possible, the system should be pre-financed by the banking industry, including through deposit insurance fees and any levies on financial institutions.

“The crisis has hit ordinary people very hard,” said Strauss-Kahn. “Modest reforms that maintain a pretense of progress but continue business as usual are not sufficient.”