Pressure Mounts On EU To Create A System To Handle Failure Of Large Banks

The Wall Street Journal reports that the European Union (EU) is facing mounting pressure to create a system to handle failure of large banks. However, the complex nature of the issue and different opinions within the union poses a big challenge to implement such a system.

On Friday, the International Monetary Fund warned the EU that it needed to create a system, whereby it could deal with the failure of large banks. The IMF views such a system as necessary to prevent taxpayers’ money being used in bailing out financial institutions. Speaking at a European Commission conference, IMF managing director, Dominique Strauss-Kahn, said, “Politicians need to rise to the challenge. We do not have a lot of time to waste and this opportunity should not be squandered or deferred.”

The issue needs to be addressed sooner rather than later, especially after large financial institutions were bailed out with taxpayers’ money during the financial crisis. European Commission’s head of internal markets and services, Michel Barnier, said, “My personal conviction is that financial institutions should contribute to a European resolution fund.” However, such a solution could results in banks taking even more risks because they would know that there is a fund to bail them out, in case they were on verge of collapse.

Bank of England’s deputy governor for financial stability, Paul Tucker, said, “The fund would have to be truly ginormous--€1 trillion maybe--in order to solve this problem.” The financial crisis had exposed the shortcomings of European regulators in dealing with large financial institutions that were in trouble due to the crisis.