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European Union: Banks to Be Made to Pay for Failures

(June 14, 2010) On May 26, 2010, the European Commission adopted a communication that outlines its key proposal to impose a new tax on banks within the European Union, to ensure that EU citizens will not be required to carry the financial burden in cases of bank insolvencies. Under the proposal, banks would be required to establish funds, financed mainly from profits and liabilities, that could be used to assume the costs in case of future banking crises.

In proposing this initiative in the banking sector, the European Commission was inspired by a basic EU and international environmental law principle that requires that the “polluter pays.” Based on this concept, the industry responsible for an environmental disaster is primarily responsible for cleaning up and paying damages. This idea was reiterated by the EU financial services commissioner Michael Barnier, who also emphasized that the new funds would not be considered as bail-out money but could be used to make bridge loans, i.e., the temporary purchase of toxic assets from banks split into “good” and “bad” banks. The tax would be obligatory.

The proposals must be approved by the EU Members, in a meeting to be held in Brussels in mid-June 2010. Sweden has played a pivotal role in this initiative, being the first to introduce a levy on companies during the financial crisis. The Swedish government imposes a uniform tax of 0.036% of a bank's total liabilities, with plans to raise the tax to 2.5% of GDP by the year 2015. Should the meeting endorse the proposals, the EU will present its initiative at the G20 meeting in Toronto, Canada, at the end of June 2010. (Andrew Willis, Brussels Hatches Tax Plan to Make Banks Pay, EU OBSERVER, May 26, 2010, available at