The European Commission outlined radical measures Wednesday to deal with banks that run into trouble with the key aim of making shareholders and creditors, not taxpayers, foot the bill.
It proposed that supervisors be allowed to suspend dividends, replace managers or force asset sales to spare governments a "terrible dilemma" of having to decide between letting a bank fail — at the risk of disrupting the entire financial system — or let taxpayers bail it out.
EU Internal Market Commissioner Michel Barnier proposed a pan-European system that would allow for the orderly winding down of a troubled bank and leave the cost with investors rather than the public.
He said a European approach was necessary to target banks operating in several countries.
At the height of the credit crisis in 2008, European governments scrambled to coordinate the bailouts of banks such as Netherlands-based Fortis and Belgium's Dexia.
"I call this the most pressing and important reform that we are involved in," Barnier said. "I am very concerned about the risk of another crisis."
The commission wants to propose specific legislation by the spring, but plans are likely to face stiff opposition from banks.
They will also require close coordination with efforts outside the EU, since many banks operating on the continent are based elsewhere.
Cross-country bank resolution and measures to avoid expensive government bailouts will be key issues at a meeting of the Group of 20 rich and developing nations next month in Seoul, South Korea.
Any proposed EU legislation would have to be passed by EU governments and the European Parliament.
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