End of ‘too big to fail’ culture may not come soon enough for Spain

Proposals aimed at breaking the “too big to fail” culture in the European banking sector were unveiled yesterday, but analysts warned the plans may come too late to save Spain’s troubled banks.

Under the commission’s plans, banks that posed no systemic risk to the national or international economy would simply be allowed to close.

However, those whose failure would pose too grave a threat to the stability of financial markets would be propped up in part by having unsecured creditors of the bank, such as bondholders and shareholders, take losses rather than having taxpayers give the institution rescue money.

Member countries would have to collect money through an annual levy on banks, equivalent to 1 per cent of deposits, which could cover both the wind-down of banks and emergency payouts to savers.

EU financial services commissioner Michel Barnier said: “We must equip public authorities so that they can deal adequately with future bank crises – otherwise citizens will be left to pay the bill, while the rescued banks continue as before knowing that they will be bailed out again”.

Governments have so far injected “unprecedented” levels of public money into banks. The EC approved €4.5 trillion (£3.6tn) of state aid – 37 per cent of EU GDP – between October 2008 and October 2011.

EC president Jose Manuel Barroso described the proposals as an “essential step towards banking union in the EU and will make the banking sector more responsible”.

A Downing Street spokeswoman said: “The UK government’s view is it represents a positive step in tackling the problem of ‘too big to fail’ in the banking sector.”

The plans first need to be approved by EU countries and the European Parliament and may not take effect until 2015. This would be too late for Spain, which could be forced to seek a bailout for its banks if it cannot support lenders saddled with bad property loans and other debt.

One banker said: “It’s a shame we didn’t have this years ago. It’s not going to help Spain.”

An external audit of Spain’s banking system, expected before the end of this month, is likely to reveal additional capital needs of €30 billion to €70bn, economists say. Prior to that, an IMF report into the country’s banking sector is due next week.

Yesterday, the European Central Bank dashed some hopes of an easing in monetary policy by keeping rates unchanged at 1 per cent, although it emerged that “a few” governing council members were in favour of a rate cut.

Most analysts expect the Bank of England to leave interest rates on hold at their current record low of 0.5 per cent today, but the worsening global economic outlook is adding pressure on the Bank to embark on a further round of quantitative easing by as much as £50bn.

Howard Archer, chief UK economist at IHS Global Insight, said he could not rule out the possibility of the Bank announcing an extension to the current £325 billion stock of asset purchasing, as much depends on the results of a closely watched survey into Britain’s key services sector.

“If this shows a substantial softening in activity, the Bank of England could well feel it is time for more stimulus,” he said.

“Latest economic activity news has largely taken a turn for the worse, while inflation developments have been more favourable. Meanwhile, events in Greece and Spain are magnifying the uncertain and worrying economic outlook.” There was a sliver of good news yesterday, as the EU statistics office said strong exports saved the eurozone from a recession in the first quarter, and ECB head Mario Draghi said the bank was sticking to its forecast for a gradual economic recovery this year, but the region’s debt crisis posed an increased “downside risk” to growth.

He said economic activity “remains weak, with heightened uncertainty weighing on confidence” as the central bank left its projections for this year unchanged, with its forecast ranging between a contraction of 0.5 per cent and growth of 0.3 per cent.

Meanwhile, ratings agency Moody’s has cut its credit ratings of several German and Austrian banks.