[NYTr] EU drawing cross-border bank-bailout plans

[All the News That Doesn't Fit]

Reuters - Sep 15, 2007
http://www.reuters.com/article/ousiv/idUSL1529380120070915


European Union drawing cross-border bank-bailout plans

By Huw Jones

PORTO, Portugal -- European Union finance ministers and central bankers
agreed on Saturday to step up co-operation among themselves to improve
their handling of cross-border financial crises.

But a detailed solution to the tricky question of which country's
money would be used to bail out a cross-border bank remained to be
thrashed out.

"Growing market integration in the European Union constitutes a
factor for financial stability because a broader and more diversified
financial system is better able to absorb potential shocks and to
prevent them," Portuguese Finance Minister, Fernando Teixeira dos
Santos told reporters.

"Nonetheless, the growing number of institutions operating across
borders also face us with new financial stability challenges," said
Teixeira dos Santos, whose country holds the rotating EU presidency.

Ministers agreed to extend a memorandum of understanding they signed
in 2005 on cooperating in a cross-border financial market crisis
to include common principles for crisis management, a common framework
for assessing the fallout from a crisis and practical guidelines
on handling a crisis.

Groups of EU states are also encouraged to work together on specific
issues.

The move to deepen cooperation is part of a longstanding review
after a group of finance ministry and central bank officials said
the current cross-border crisis management system was not working
well enough.

A senior euro-zone source who asked not to be named said on Saturday
the European Union was not prepared to handle a failure of a
pan-European financial institution.

The issue is topical as the current credit squeeze due to problems
in the U.S. subprime mortgage market has claimed two casualties in
Germany, IKB and SachsenLB, which needed bailing out.

And on Friday the Bank of England stepped in on Friday to rescue
Northern Rock, Britain's fifth-biggest mortgage provider, pledging
to provide emergency funds.

But so far the current turmoil has not sunk a cross-border investment
firm to trigger the dilemma of whether taxpayers money should be
used in a bail out and if so, which country or countries it should
come from.

EU Internal Market Commissioner Charlie McCreevy welcomed the
blueprint but said the burden-sharing issue needed sorting out.

"We are making progress but I would not want to put it any stronger
than that," McCreevy told reporters on the sidelines of the meeting.

"We are moving to the next stage. You can only move as fast as you
are allowed," McCreevy added.

European Central Bank President Jean-Claude Trichet said the blueprint
was acceptable as it did not contain a detailed "ex ante" burden-sharing
concept.

"We encourage intimate co-operation between all banking authorities.
We also insist on flexibility. Flexibility is really of the essence,"
Trichet told a news conference.

German Finance Minister Peer Steinbrueck said he opposed strict
"game rules" for crisis prevention.

"I'm in favor of much flexibility with principles. I cannot imagine
that those who have the right to vote on the budget -- parliament
-- would be obliged to provide taxpayers- money for ex-ante
arrangements," Steinbrueck told reporters.

Saturday's move was based on recommendations made by the Economic
and Financial Committee made up of high level finance ministry and
central bank officials in the EU.

"The present EU arrangements for financial stability ... may not
ensure timely, efficient, and least-cost solutions in a cross-border
context," the EFC said in its recommendations.

"These are weaknesses which must be addressed as a matter of
priority," the EFC added.

Financial integration in the EU has made it easier for a crisis in
a cross-border bank to spread more quickly. There are now 46
cross-border banking groups in the bloc, 21 of which have significant
operations outside their home country, the EFC said.

The new blueprint for handling financial crises will be formally
adopted by EU finance ministers in October and implemented over the
next two years.