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Free AccessMNI EXCLUSIVE: ECB GC Moots Adequacy Of Its Bank Crisis Tools
--Deposit Insurance Scheme Insufficient Without Public Backstop
--Safety-Net Can Be Either At European Or National Level- Not Real Issue
--Scenario With No Backstop Raises Financial Stability Risks
--EC Also Looking Possible New Bank Crisis Policy Tools
LONDON (MNI) - The European Central Bank's Governing Council is discussing
whether further 'adequate' policy tools might be needed to tackle potential
future bank crises in an efficient manner, a Eurosystem source told MNI in
exclusive comments.
"A debate is underway on whether we are already equipped with all adequate
instruments to handle bank crises, if these tools are already at our disposal or
not, and whether they are indeed efficient in staving-off liquidity shortages
that could jeopardise financial stability, or, if we need to make steps forward
to boost resilience with new tools," the source said.
The issue, however, is not currently on the agenda for discussion at the
upcoming March 8 meeting, but is nonetheless on the Governing Council's "wider
long-term agenda and remains a top priority to address," according to the
source.
And as much as the ECB Governing Council may discuss the need for new
tools, any change in the framework for improved banking regulation must come
from Brussels, with sources in the Berlaymont noting the European Commission
wants to keep its political capital to push on completing the banking union
There is a banking package under scrutiny right now in Brussels, MNI
understands. Although it does not fundamentally change the banking crisis
regulation regime, it does add a few tools with limited scope.
The completion of the banking union with the implementation of the deposit
insurance scheme, the so-far missing "third-leg", is crucial, the source said,
yet it will likely not be enough on its own in the absence of a real public
backstop, which must be complementary.
--DEPOSIT INSURANCE INADEQUATE
"The (deposit insurance) scheme can be used to deal with single bank
defaults, but in order to tackle large-scale systemic crises that can hit the
eurozone, with the risk of expanding, we need to have a proper financial
backstop in place, supported by the firepower of public resources, he argued.
The issue of whether such a safety net be set-up at central European or
national level makes no difference and is a petty argument that is only delaying
its adoption. "What is paramount, is for it to be put in place quickly. It is
unacceptable that such a policy tool is still currently lacking," the source
warned.
"We've come to a paradox whereby new European rules against state aid now
prohibit any form of state management of bank crises -- even when member states
could have the resources to step-in -- but at the same time no substitute,
European backstop scheme has been implemented as backup. There's a regulatory
void that must be addressed," the source stressed.
If in the past there were safety nets at national level, such competences
have now by law been transferred to the central European level but are
nonetheless still absent from the EU architecture. The source acknowledged that
the delay was due to several political problems among member states in coming to
terms with greater burden sharing, and pointed-out that such political issues
were not an ECB competence.
--OVERCOME OBSTACLES
"But these obstacles need be overcome to reach a rapid solution. If it is
hard to implement a EU-wide backstop due to political reasons, then national
backstops should be taken into account and allowed," the source said. "The risk
we face in the absence of such policy tools is that of entering into a tunnel
where no backstops are available in times of need."
A scenario with no backstop renders stricter rules at the European level
and common supervisory and resolution mechanisms inadequate in preventing the
outbreak of potential liquidity crises, and even more, in tackling their
consequences, he explained.
"There's no point in modernising the bloc's financial governance framework
without the definition and implementation of those necessary policy tools
required to guarantee financial stability," he added.
--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com
[TOPICS: MT$$$$,MX$$$$]
To read the full story
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Please enter your details below.
Why MNI
MNI is the leading provider
of intelligence and analysis on the Global Fixed Income, Foreign Exchange and Energy markets. We use an innovative combination of real-time analysis, deep fundamental research and journalism to provide unique and actionable insights for traders and investors. Our "All signal, no noise" approach drives an intelligence service that is succinct and timely, which is highly regarded by our time constrained client base.Our Head Office is in London with offices in Chicago, Washington and Beijing, as well as an on the ground presence in other major financial centres across the world.