UPDATE 1-ECB's Asmussen says ESM should be last port of call for banks
(Adds disagreement between German coalition partners on ESM as backstop)
BERLIN Nov 4 (Reuters) - Europe's rescue fund should only be used in the last instance to help banks shore up their balance sheets, European Central Bank (ECB) Executive Board member Joerg Asmussen said on Monday.
A bank's owners and the market should be tapped first, and then states or national bank rescue funds, Asmussen told German public broadcaster ARD.
"In the view of the ECB, the (European Stability Mechanism) ESM with the instruments that it has at its disposal is the last port of call," Asmussen said, adding that it was important to clarify how to shore up banks' balance sheets before the results of stress tests were released.
The ECB promised last month to put top euro zone banks through rigorous financial tests next year, staking its credibility on a review that aims to build confidence in the sector.
The central bank wants to unearth risks hidden in balance sheets before supervision comes under its roof as part of a banking union designed to avoid a repeat of the euro zone's debt crisis, which was exacerbated by massive bad property loans in countries including Ireland and Spain.
To complete the roll-out of Europe's banking union, Asmussen has called for a common resolution mechanism to be funded through a levy on banks. In the meantime, the ESM should provide a backstop.
German Chancellor Angela Merkel's conservatives, who won September's federal election, have agreed to the idea of the ESM providing a backstop to recapitalize banks.
But the Social Democrats (SPD), with whom they are in talks to form a governing majority, have rejected the idea.
Herbert Reul, chief negotiator for Merkel's conservatives on European policy was quoted in a newspaper on Monday as saying this remained a hurdle between the prospective coalition partners.
"In the second round of talks, we have a few big hurdles awaiting us. It will be more uncomfortable than the first meeting," he told Handelsblatt. (Reporting by Kerstin Doerr; Writing by Sarah Marsh; Editing by John Stonestreet)
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