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Pressure on financial sector is increasing

Published on , , Sofia

Great Britain announced the introduction of a new bank levy to be enforced from the next year. The measure is included in the draft budget for 2011 presented on Monday (21 June 2010) by the Chancellor of the Exchequer George Osborne.

According to the official statement, the levy will be based on total liabilities (i.e. both short and long-term liabilities) with some exceptions. The financial institutions and groups "will only be liable for the levy where their relevant aggregate liabilities, as set out below, amount to £20 billion or more”. The levy will be set at 0.07 per cent of liabilities. However, there will be a lower rate of 0.04 per cent in 2011. The levy is expected to raise over £2 billion annually.

The levy is intended to encourage banks to move to less risky funding profiles, the Finance Ministry has argued. And it has also noted, that “the regulatory reforms underway are aimed at ensuring that no firm is too big to fail and that all firms are resolvable”. In this sense, the levy should not be perceived as an insurance against failure or a fund for future resolution.

London’s decision was supported by France and Germany. In a joint statement the three countries have propose “to be introduced bank levies based on banks’ balance sheets”, which should be tailored to national circumstances. The statement reads, that France will present the details of its bank tax in the upcoming Budget. Germany has already announced that it had been working on a bill for a national bank levy, which is expected to be ready in the summer. “The specific design of each may differ to reflect our different domestic circumstances and tax systems, but the level of the levy will take into consideration the need to ensure a level playing field.”

This statement comes just a few days after the European Council's decision, Member States to introduce systems of levies and taxes on financial institutions as part of a network of resolution funds, proposed by the European Commission. The Commission's proposal, however, does not specify on what basis the levies should be calculated. At the same time, the European Parliament and Commission's President Jose Manuel Barroso himself have called for the introduction of a financial transaction tax. The Council did not adopt such a decision, but the EU will propose this possibility to be explored at the forthcoming meeting of the G20 in Canada (about G20 decisions see here).

Strong pressure for tighter regulation on financial sector has come from the European Parliament. On June 22nd the Economic Committee has adopted two separate resolutions - on the regulation of the remuneration in the financial services sector and on cross-border crisis management in the banking sector. Both called upon the Commission to draw up legislative proposals that go beyond the current model of recommendations and loose co-ordination.

With regard to remuneration in the financial sector, the MEPs want an obligatory disclosure of directors' payrolls in all companies being traded on stock exchanges and an implementation of bonus limits. “The resolution asks the Commission to adopt strong binding principles on remuneration policies in the financial sector, which would go further than what can be provided for through the capital requirements directives. Listed companies whose directors' remuneration policy does not comply with these principles would be required to explain their reasons.” According to MEPs, stronger shareholder control of salaries of directors in listed companies is needed.

Regarding crisis management, the Parliament has proposed an EU resolution and insolvency regime to be established. “It would grant more crisis management powers to supervisory authorities, including the powers to wind up a bank or impose a total or partial sale. Considerable coordination powers would be vested in the nascent European Banking Authority (EBA).” The Commission is expected to design a "Risk Dashboard", based on a set of indicators, with a view to rating risk levels of individual banks and providing early warning for possible instability.

Each bank would be required to have its own "resolution plan" which would include detailed steps should it run into difficulties, so as to avoid decisions being taken in a rush. Unlike the Commission's proposal for a ”harmonized network of national funds”, MEP's have proposed an EU financial stability fund “to preserve banking stability in difficult times, and also a resolution unit within the EBA in charge of restructuring cross-border systemic banks which run into difficulties”.

This is an essential difference, given the important question how the levies will be collected - at national or European level. The European Commission has warned that an important condition was the proposed national funds to be independent from governments, lest the latter be tempted to use the funds for other purposes. However, the Commission has insured, that it will propose a separate regulation for cross-border banking crises. Yet to be seen is how it will correspond to the recommendations of MEPs. And whether the ambition of Brussels' regulation in this area, to be completed by end of next year, will be realized.

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