European Commission Outlines Proposal For How To Wind Down Europe’s Troubled Banks In The Future

Consider it Europe’s attempt to address the too-big-to-fail phenomenon. As part of a larger agenda to bringing all euro zone banks under one regulatory umbrella, the European Commission outlined on Wednesday its proposal to establish a "single resolution mechanism" to reduce how much taxpayers have to chip in to rescue or wind down troubled banks.

“It should be banks themselves – and not European taxpayers – who should shoulder the burden of losses in the future,” European Commission President José Manuel Barroso said in a written statement announcing the deal on Wednesday.

The proposal would establish a board responsible for identifying banks facing “severe financial difficulties.” It would decide how a special fund set aside to wind down troubled banks, known as the European Resolution Fund, should be involved.

“It would have broad powers to analyze and define the approach for resolving a bank: which tools to use, and how the European Resolution Fund should be involved,” the EC said in its announcement. “National resolution authorities would be closely involved in this work.”

The proposal will likely face considerable opposition from Germany, the European Union’s largest economy, which says an over-arching bank regulation would require years-long process of establishing a new EU treaty.

Currently, dealing with a troubled bank is the responsibility of the individual EU state where it’s based.

Negotiations between the EC and the European Parliament over how to restructure bank recovery in the EU are about to begin. A final agreement on the Bank Recovery and Resolution Directive should be completed by the fall.