* Resolution bodies a 1st step to possible EU authority
* Possible curbs on shifting capital, liquidity across banks
* Supervisors could appoint "special manager" to run bank
By Huw Jones
LONDON, Oct 14 (Reuters) - The European Union is considering the idea of setting up pan-EU resolution bodies that could deal with failing cross-border lenders faster and prevent national authorities from taking unilateral action, a draft EU document showed.
Policymakers want to allow a bank to fail without it destabilising the broader financial system -- unlike at the height of the financial crisis, when governments found they had no easy and cheap way of letting banks go under.
Governments had to commit the equivalent of 30 percent of the bloc's economic output in capital injections, guarantees on assets, liquidity support and other measures to stop destabilising bank failures.
"There is a consensus that this must never happen again. Banks must be allowed to fail, like any other business," the draft European Commission document obtained by Reuters said.
EU Internal Market Commissioner Michel Barnier is due to publish the paper outlining a new crisis management framework next week and launch a public consultation in December ahead of legislative proposals early next year.
The EU paper is part of a global effort, spearheaded by the Group of 20 leading economies, which hold a summit next month in Seoul to discuss resolution and other ways of dealing with banks deemed "too big to fail".
Differing insolvency rules mean it won't be possible to set up a single EU body to resolve troubled banks straight away.
Barnier is proposing two interim reforms -- "resolution colleges" and group-level resolution authorities.
Resolution colleges, made up of resolution authorities covering the banks' various operations across the EU, would be responsible for crisis planning, the document said.
Group level resolution authorities should have the power to decide in the case of a group failure, the document said.
"Pending that decision, which would need to be taken quickly, national authorities would be restricted from adopting national measures," the document said.
Resolution should primarily be paid for by shareholders and creditors of a bank but resolution funds would also be needed, the document said.
EU finance ministers have already agreed in principle on making banks pay for future bailouts, but there is no consensus on whether money raised from levies on lenders should go into a ring-fenced fund or general government coffers.
Once the proposed framework has been introduced, the paper sketches out further possible steps, starting with a review of national insolvency regimes in 2012 and two years later assessing the possibility of an EU resolution authority.
The paper also mentions possible curbs on how banks can transfer assets within the group in order to reassure EU states where some of their biggest banks are branches of banks based in other bloc countries.
SPECIAL MANAGER
Arming the bloc's members with the same set of crisis management tools should make it easier to coordinate the resolution of cross-border banks, the Commission document says.
The framework Barnier is putting forward will initially cover banks and "some investment firms", irrespective of whether they operate across borders or only domestically.
Further work in 2012 will focus on whether insurance companies, investment funds and central counterparties or clearing houses should also be included.
The tools focus on three main areas -- preparatory and preventive measures, early supervisory intervention, and resolution tools and powers:
-- Supervisors could be given powers to appoint a special manager for up to a year to run the business.
-- More on-site supervisory checks of banks.
-- All institutions must have recovery plans to address liquidity problems, raise capital or cut risk without the need for taxpayer money.
-- There could be earlier triggers for supervisory intervention to include "where a bank or investment firm is likely" to fail to meet regulatory capital requirements.
-- The trigger for use of resolution tools should be before a bank is insolvent.
-- Supervisors could be given powers to prohibit dividend payments, require replacement of managers, or require a bank to divest activities.