ECB's Mersch talks of extending EU banking union to financial union

Fri Jun 20, 2014 6:49am EDT

* Mersch says ECB's policing role could cover other parts of finance

* Wider banking union would smooth out any shocks - Mersch

* Remarks follow IMF criticism that euro zone needs plan for big banks

BRUSSELS, June 20 (Reuters) - A European Central Bank policy maker has floated the idea of widening the ECB's new policing of big banks to other financial players, providing a rare glimpse of its ambition to extend the reach of banking union.

Addressing an audience of officials and others in Brussels, Yves Mersch spoke of the benefits of creating a "genuine financial market union and not only a banking union", warning that the economic crisis that hit the region was not yet over.

"This would include ... the shadow banking system and areas outside our supervision right now. This would further enhance the smoothing of shocks via the capital markets," said Mersch, who is a member of the ECB's core Executive Board.

Mersch's comments come despite the fact that some elements of the fledgling scheme to police big banks and tackle those in trouble have yet to be finalised, such as a back-up for big banks that fail.

The International Monetary Fund has criticised this, saying the 18-country euro zone needs a strong system to handle big banks in trouble.

The European Central Bank will begin supervision of big banks across the euro zone later this year, the first step in banking union.

The next step will be a common approach to preventing banks in trouble from dragging down the governments of euro zone countries, as happened with Ireland. That step remains a work in progress. So far, only a small emergency fund exists.

The IMF has argued that it should be easier for the euro zone's rescue fund, the European Stability Mechanism, to help struggling banks directly, rather than lending money to the banks' home countries.

"We still would think the common fiscal backstop is not sufficient," Mahmood Pradhan, an official at the International Monetary Fund, said on Thursday. (Reporting By John O'Donnell Editing by Jeremy Gaunt)

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