Ahead of the European Commission revealing plans to rescue and winddown failing lenders on the continent as the Spanish banking crisis mounts, Britain has ruled out participating in any European bank bailout
or new fund.
Spain's banking sector is in crisis due to a housing bubble that burst three years ago causing debts to pile up. Bankia, the fourth biggest bank has been bailed out.
European officials are working on two sets of plans
to address the crisis facing the European banking system.
The first, due to be published on Wednesday, is a new "crisis management framework" that would see the establishment of a Europe-wide resolution regime for banks. It would give officials powers to seize and wind up failing lenders.
The other plan, which officials are still working on, is for a European bailout fund to recapitalise the banks and restore market confidence. The scheme would be funded by a levy on banks. The full proposal will be put to EU leaders later this month.
However, Britain is opposed to this proposal, potentially putting it at odds with France and Spain. Germany is said to side with Britain.
A British government source said: "We have told our European partners that there is no chance of the UK contributing to a Greek or Spanish bank rescue. We will not help fund any bailout.
"The UK is against setting up a pre-funding for a bank bailout vehicle as it encourages moral hazard."
The government believes that setting up a bailout fund will just encourage banks to carry on with existing practices, rather than fixing their balance sheets, writing off bad debts and tightening up their lending practices.