European Plan to Reform Bank Bailout Rules

 The European Union (EU) revealed a new plan of measures to protect taxpayers from bailing out struggling banks, following recent disruptions in the banking sector in both the United States and Europe.

The proposed text, to be negotiated by EU member States and members of the European Parliament, aims at encouraging struggling banks (medium and small) to use banking sector funds instead of public funds, as announced by the European Commission, the bloc's executive arm.

The EU faced pressure to move quickly following the bankruptcy of 3 US banks last month, and Swiss giant Credit Suisse merged with its regional rival UBS.

"The recent failures of some U.S. and Swiss banks, and the resulting crisis in the international banking sector, are only a reminder of our need for a robust and effective system for dealing with all banks, whatever their size when they face problems," Commission Vice President Valdis Dombrovskis said during a press conference in Strasbourg.

Taxpayers' money:

The EU seeks to prevent its members from pumping taxpayers' money into medium-sized banks and forcing banks to form their own reserves.

Previously, medium-sized banks had difficulty accessing banking-financed solution programmes, which was a blow to deposit holders over and above those guaranteed by deposit insurance programmes.

Under the proposed text, such banks could use funds from national deposit programmes to serve as a "bridge" to reach the levels necessary to launch solutions programmes, thereby reducing the risk of panic and cheating on banks.

"Let me stress that the first and main line of defence in a similar crisis must be the internal ability of banks to absorb losses," Dombrovskis said.

The European Parliament and the Union's 27 member States should approve these proposals, which are likely to meet strong opposition from States in the North, including Germany.

Berlin was concerned about the implications of the European Union's plans for the protection of lenders such as banking cooperatives.

Suspended Banking Union:

However, the actions announced Tuesday are not a direct response to recent banking disruptions, as part of the European Union's attempt to complete a banking union that has been halted for years since its establishment in 2014.

Brussels launched a radical reform of banking oversight after the 2008 financial crisis and the euro area's successive debt crisis.

During both crises, billions of euros of depositors' money were spent on bailing out banks.

Disagreement has arisen over the banking union's last pillar, an EU-wide deposit insurance scheme strongly opposed by Germany, Europe's largest economy.

The reform did not address the plan, and UNHCR stated that it was still pending.

Germany and other EU countries fear they will have to pay for the failures of member States' banks under such a plan.

Reforms will only be a new source of tension between Berlin and Brussels. Last month Germany - the leading car manufacturing sector - blocked a landmark agreement to ban sales of new fossil fuel vehicles from 2035, but gave the green light after further talks.