BRUSSELS—The European Commission on Wednesday proposed that each European Union government levy a tax on its banks and use the proceeds to create a fund dedicated to ensuring the "orderly failure" of troubled banks.
The proposal would create a European network of such funds that would follow the same rules, although the commission, the EU's executive arm, didn't provide details on how high the tax should be.
But the commission was adamant that the funds shouldn't be used to pump capital into banks or for other measures that could benefit bank shareholders and creditors, saying that otherwise banks might be encouraged to take bigger risks, knowing the funds are there to support them if they run into trouble.
The commission also wants to prevent the funds from being tapped for general public purposes, a provision that the U.K. and some other EU governments oppose.
Michel Barnier, the EU's commissioner for financial regulation, plans to discuss the idea with leaders at the Group of 20 industrial and developing nations meeting next month in Toronto. But other governments have their own ideas on bank crisis funds, and Canada opposes an additional tax on banks altogether.
The fund proposal will likely be included in legislation, expected early next year, to ensure that EU governments have the powers to "resolve" an ailing bank. This includes changing management, wiping out shareholders, imposing discounted asset values or "haircuts" on creditors, orchestrating bank mergers and paying for the whole process without relying on taxpayer money.
The idea is to maintain the crucial functions of a weak bank without governments being forced to choose between allowing a bank to go bankrupt, at great economic cost, or bailing out a bank through repeated recapitalizations using taxpayer money, as governments did throughout the financial crisis.
"Without these funds, what we will see is an uncontrolled falling apart of large financial institutions, which can have disastrous secondary effects," said Mr. Barnier. To read full Wall Street Journal story — Go Here Now.
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