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EU not fully prepared to deal with failing banks: commission

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The European Union is not yet fully prepared to handle banking collapses in the event of a new financial crisis, the European Commission said on Friday, urging member states to agree on pooling more resources to weather future storms.

[BRUSSELS] The European Union is not yet fully prepared to handle banking collapses in the event of a new financial crisis, the European Commission said on Friday, urging member states to agree on pooling more resources to weather future storms.

Following the euro zone debt and banking crisis, EU countries have designed a banking union meant to strengthen lenders' financial stability, but have not brought the plan to completion. "There is still lots to be done to make sure that we are in the best possible position to resolve a failing bank," the EU Financial Services Commissioner Jonathan Hill said on Friday.

As part of the banking union, euro zone states have agreed on common supervision of the bloc's banks and have set up the Single Resolution Fund (SRF) to rescue ailing lenders, but have failed to agree on a financial backstop to support the SRF in its first years.

"We need to provide a credible long-term backstop for the single resolution mechanism," Mr Hill said in a video message address to a conference held by the Single Resolution Board, the authority that manages the newly established SRF.

In a document addressed to EU finance ministers in April, France and Italy have called for the euro zone bailout fund, the European Stability Mechanism, to provide financial support to the SRF. The ESM has a lending capacity of 500 billion euros (S$765.3 billion).

Euro zone countries are also divided on setting up a European deposit insurance scheme (EDIS), conceived as the third and last pillar of the banking union.

National deposit insurance schemes are already in place in EU states to underwrite savings of up to 100,000 euros if domestic lenders fail, as required by EU rules.

But national schemes may prove insufficient to deal with multiple failures. "EDIS would make banks better protected if there were larger local shocks," Mr Hill said.

Despite strong backing from all EU institutions and many states, the plan is not taking off because of German opposition, as Berlin fears that its wealthier deposit guarantee funds may be used to rescue savers in other countries.

REUTERS