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Tuesday, October 12, 2010

Another form of bail-out?

A new briefing note by the useful German think tank Centre for European Policy looks at the EU's proposed Deposit Guarantee Schemes Directive.

The directive is not just relevant as a test-case for the Lisbon Treaty's yellow card procedure (as we've discussed here), but potentially also constitutes another form of bailout (apart from these ones), effectively making taxpayers in one EU member state liable for the mistakes of foreign governments they can't democratically control.

That is because member states would have to transfer money to another member state's Deposit Guarantee Scheme (DGS), if that scheme runs out of money. The proposed directive states that "a mutual borrowing facility allows a DGS in need to borrow from all other DGSs in the EU" (with some conditions attached: see here, article 10).

The Swedish Riksdag, the first Parliament to vote to object to the proposal, already said this would create a moral hazard, as some countries could be tempted to under-fund their schemes, knowing that someone else would ultimately pick up the bill. So this could trigger large-scale money transfers accross member states, akin to outright bail-outs, again with the EU as facilitator.

The CEP comments that the possibility of such transfers,
facilitates domino effects and thus leads to higher risks. Moreover, the financial responsibility for solvency crises should remain at national level, since it is mainly there that banking supervision is carried out – also after the establishment of the [EU] banking supervision authority.
Also the FSA has warned that, in the interest of effectiveness, "Member States should be free to determine funding models".

The German, Swedish (and probably Austrian) Parliaments are stirring up trouble about this. Will the UK Parliament follow?

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