Draghi wants European banks backstop in place by 2015

FRANKFURT Wed Oct 23, 2013 10:09am EDT

Mario Draghi, President of the European Central Bank, addresses the Economic Club of New York luncheon in New York City, October 10, 2013. REUTERS/Mike Segar

Mario Draghi, President of the European Central Bank, addresses the Economic Club of New York luncheon in New York City, October 10, 2013.

Credit: Reuters/Mike Segar

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FRANKFURT (Reuters) - A common resolution mechanism for dealing with troubled banks is a crucial part of the euro zone's banking union and the European Central Bank wants it in place by 2015, ECB President Mario Draghi told Reuters on Wednesday.

Wary of a lopsided banking union that could see it supervise euro zone banks without a common backstop in place, the ECB has urged governments to agree on a strong single resolution mechanism (SRM) to salvage or wind down banks in trouble.

However, this second stage of the planned union is incomplete as politicians discuss how much of the costs should be shouldered by taxpayers. Plans for a third stage, a common deposit insurance scheme, have completely stalled.

"The ECB thinks that a resolution mechanism is a very important pillar of our banking union. We still aim at having it in place by 2015," Draghi said in a Reuters television interview as the ECB embarked on its new supervision mission.

Setting out its plans to scrutinize 128 top euro zone lenders, the ECB earlier promised to put them through rigorous tests next year, staking its credibility on a review that aims to build confidence in the sector.

The ECB wants a tough review so that it does not face surprises once it has taken charge, and to avoid repeating the mistakes of two earlier European-wide stress tests that failed to spot risks that led to the Irish and Spanish banking crises.

"The ECB wants to have full responsibility for the assessment, but nothing to do with what has to be done following the assessment, namely the task of the resolution authority. The two things must be completely separated," Draghi said.

Asked if the ECB would delay starting its new supervisory role if the SRM backstop is not in place when it is due to begin in November next year, Draghi said: "No, absolutely not."

"We will proceed with our asset quality review, the balance sheet assessment, the stress test throughout 2014, we will deliver the results by October next year and we will start and we will take over our task," he said.

"At the same time, obviously we hope that member governments will have found an agreement about the nature of the single resolution mechanism."

Draghi told the European Commission in a July 30 letter that banks that are still viable but need state aid to boost their capital base should be allowed to receive help without inflicting losses on their junior bondholders.

New EU rules on state aid to struggling banks came into force in August 1 after a major overhaul agreed the previous month with the aim of shifting the burden of restructuring a lender from taxpayers onto shareholders and holders of junior debt.

Asked what danger there would be if Germany and the European Commission ignored his advice, Draghi said his letter addressed a specific problem relating to two kinds of bank.

"One bank that is found to be with a level of capital which is below the regulatory minimum after the asset quality review. For this bank there is no question, the state aid rules, as they are defined in the framework, would apply - with a bail in of shareholders, then of creditors according to the pecking list described in the framework.

"But there is another kind of bank that is found to be with the level of capital which is above the regulatory minimum as found by the asset quality review. This bank could be found in need of capital after the stress test," he added.

If such banks are solvent but could need fresh capital in stressed conditions "the supervisor should be free to continue his or her supervisory action so as to increase the capital of the bank as needed without any danger of the creditors of the bank or any fear by them that they could be bailed in. That's why backstops ought to be in place.

"And my letter addressed exactly this second problem and fortunately, since that letter both the Commission and the ECB are working together to address this specific problem.

(Writing by Paul Carrel. Editing by Jeremy Gaunt.)