European Union mulls emergency bank wind-up fund

BRUSSELS (Reuters) - The European Union is considering making banks pay for an emergency wind-up fund in case one of them goes bust, in an effort to prevent another spiral like the one that followed the Lehman Brothers collapse.

Coping with banks on the verge of failure is central to the political agenda in Brussels and on Friday the bloc's financial markets chief Michel Barnier unveiled his ambitious plan, one that could face opposition from Britain.

"The financial institutions are going to have to be called upon to contribute to such a fund," said Barnier, commenting on a facility that would be tapped for a bank in serious difficulty. "Why should our citizens be footing the bill?"

Speaking at the same event, the head of the International Monetary Fund, a lender of last resort for governments, proposed a similar scheme to help flagging institutions.

"What I think is needed is a European resolution authority, armed with the mandate and the tools to deal cost-effectively with failing cross-border banks," Dominique Strauss-Kahn said.

European governments, which were forced to bail out flagging lenders, are now looking for a way of preventing a repeat.

But who should pay to salvage a failing cross-border bank has provoked argument.

Bank of England Deputy Governor Paul Tucker sounded a note of skepticism when he said a European fund would have to be "absolutely ginormous, a trillion euros maybe, to solve this problem."

POLLUTER PAYS

"I favor the 'polluter pays' principle," Barnier, the commissioner in charge of a regulatory shake-up of the sector, said. "Something similar should also apply in the financial sector."

"We have to be clear about a resolution fund," said Barnier, a former French foreign minister who puts forward new laws on financial services for the 27-country European Union.

"We have to have a regime that aims at restructuring the banks. If we could harmonize the national resolution tools, this would be a first step."

As the banking crisis unfolded, national governments in Europe rushed to ring-fence problems on their own territory.

Politicians are keen to prevent a repeat of the Fortis debacle, when an unexpected decision by the Netherlands to nationalize parts of the financial group in its territory forced neighbor Belgium to do the same.

Britain, home to the bloc's biggest banking center, has made clear that it would "push back very strongly against any central fund an EU state has to pay into."

London has said it does not want to be locked into a system that will force British taxpayers to bail out banks from another country and it will be suspicious of Barnier's suggestions.

The Commission, the EU executive, has warned that in any future financial crisis there may be no alternative other than to use public funds to support the banks.

Efforts by the Group of 20 major economies focus on forcing big banks to draw up living wills -- plans for how they would handle failure -- by the end of this year. But differing national bankruptcy rules make this difficult.

The Financial Stability Board, tasked by the G20 to coordinate market reform, will put forward proposals later this year on handling cross-border bank crises.

On Friday, FSB adviser Eva Huepkes said it could be possible to give banks access to markets only if they have resolution plans to meet global standards.

(Additional reporting by Huw Jones in London, editing by Dale Hudson/Ruth Pitchford/Toby Chopra)