The International Monetary Fund called on Friday for the creation of a European Resolution Authority to deal with failures of cross-border financial institutions. IMF Managing Director Dominique Strauss-Kahn said such an authority should be part of a broader European crisis prevention, management and resolution system. It would be funded by the financial industry from deposit insurance fees and levies on institutions, he said.
"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 - an ex ante solution to the problems that currently hamper co-operation in crisis situations, rather than an ex post one," Strauss-Kahn told a conference.
"It should cover at least the major cross-border banking groups, as well as all banks running large-scale cross-border operations under the single passport." He said the system's overriding objective should be "cost-effectiveness, in a broad sense - minimising contagion, collateral damage to the economy, losses to depositors, and costs to government budgets."
To achieve this, the system should ensure that losses are borne in the first place by shareholders and holders of equity-like instruments, and in the second place by uninsured creditors. The system would also need access to a fiscal back-up mechanism, he said, with a mechanism of burden sharing between governments. He said the European Union's financial supervision and regulation reforms were valuable, but not sufficient.