The European Commission on Wednesday unveiled a new proposal that will protect taxpayers from banks that go bust. Under the new draft legislation, shareholders and creditors would be forced to accept losses of troubled-banks instead of using public-funded bailouts.
The new plan also allows member states to take control of crisis-hit banks and replace the management. Each institution would also have to create a special fund dedicated specifically for potential future crises.
The proposal is considered to be a step forward towards the so-called ‘banking union’ championed by ECB’s chief Mario Draghi. This would include setting up a single European fund to directly bailout banks. Until now, each country is responsible to rescue its own banks if needed.
The idea, however, hasn’t been well received in wealthy countries like Germany, as it could lead them having to bailout other banks.
The new legislation is unlikely to take effect before 2014 and with a bail-out looming over Cyprus and Spain, it might be a bit too late to avoid taxpayers from sharing the burden. In Spain, one of the largest banks needs over 19 billion euros of refinancing. The Spanish government has promised to deal with the problem, but it has yet to explain where the money will come from.