MNI 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

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