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EU unveils plan to protect taxpayers from failing banks

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EU unveils plan to protect taxpayers from failing banks

Proposals designed to stop taxpayers’ money being used to bail out failed banks will be unveiled by the European Commission later.

They aim to ensure losses are borne by bank shareholders and creditors and minimise costs for taxpayers.

It wants to prevent runs on banks in one country – such as Spain or Greece – pulling down the entire system.

A key goal is to make sure that essential everyday banking functions – such as cash machines – are kept going.

The global financial crisis has seen a succession of major banks fail, including Northern Rock, Lehman Brothers, leading Icelandic banks, the Belgian-Dutch giant Fortis and Franco-Belgian Dexia and the Republic of Ireland’s Anglo Irish Bank.

However, new legislation is unlikely to came into force before 2014 at the earliest. With speculation growing that Spanish banks, and possibly those in Cyprus, will need support, that would be too late to protect taxpayers from shouldering the burden.

Spain is trying to find more than 80bn euros (£65bn; $100bn) to strengthen its banks’ capital buffers.

On Tuesday, Spain’s finance minister said the credit markets were “effectively shut” to his country.

Cristobal Montoro told Spain’s Onda Cero radio “the door to markets is not open for Spain”.

A key test will come on Thursday, with Spain due to auction up to 2bn euros of bonds.

Meanwhile, on Wednesday Moody’s cut its risk rating for several German and Austrian banks, including Commerzbank.

‘Serious situation’

Stefaan de Rynck, a spokesman for Michel Barnier, the EU’s top regulatory official who will outline the banking plans later, acknowledged that the introduction of the changes were still some way off.

But he told the BBC: “We are faced with a serious situation today, but that does not stop us thinking about the future, and from us developing a vision about the future.

“Our proposal today puts a key element on the table.”

The bank resolution plan forms part of commitments agreed by the leaders of the G20 group of major economies in September 2009.

They would give EU authorities the power to intervene early.

A new mechanism will allow authorities to reduce the claims of unsecured creditors, meaning that shareholders and creditors bear the losses, not governments and the taxpayers that support them.

If it wins the backing of EU countries and the European parliament, the law would mark a step in the direction of the banking union supported by European Central Bank president Mario Draghi.

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