November 16, 2017 / 4:50 PM / a month ago

UPDATE 1-ECB's Villeroy: strengthen European bank rescue fund

(Adds more comments by Villeroy.)

AMSTERDAM, Nov 16 (Reuters) - Euro zone countries need to strengthen their fund aimed at preventing state bail-outs of failing banks, the head of the French central bank said on Thursday.

“The case of the Italian banks has illustrated just how complex it is to combine the resolution regime with the state- aid framework”, Francois Villeroy de Galhau said in Amsterdam.

Earlier this year, the Italian government used state aid to save ailing bank Monte dei Paschi di Siena and to wind down two regional banks, despite European rules intended to prevent the use of taxpayer money to rescue banks.

The EU has set up a bank-financed rescue fund for failing lenders, the Single Resolution Fund (SRF), but its 17 billion- euro ($20 billion) is considered too small to deal with a large financial crisis.

“Confidence in the Single Resolution Fund and its capacity to intervene has to be bolstered”, Villeroy said. A common backstop to increase the firepower of the fund, as proposed by the European Commission is “a promising avenue”, he said.

Different authorities responsible for the European banking sector, such as the European Central Bank, the Single Resolution Mechanism and the European Banking Authority, should better coordinate their roles, Villeroy said, to have a clearer “pilot in the plane” in times of crisis.

“At a later stage, we should even consider establishing a single banking authority for our single banking union, acting to bolster the robustness of the European banking sector.”

MONETARY POLICY

Villeroy also said the ECB will follow a gradual path to normalisation of monetary policy, decreasing the emphasis on its 2.55 trillion-euro bond-buying programme as it unwinds its crisis-era stimulus, the head of the French central bank said on Thursday.

“We will clearly follow this path of gradual normalisation, with caution but combining the whole range of our instruments - and there shouldn’t be excessive focus on the net purchases of assets,” the central bank president, a member of the ECB’s rate- setting Governing Council, said.

“But monetary policy cannot be the only game in town, and therefore we should not overburden it,” he said, just weeks after the ECB agreed to halve its asset purchases from the start of next year in light of improved economic growth.

$1 = 0.8498 euros Reporting by Bart H. Meijer; Writing by Balazs Koranyi; Editing by Gareth Jones, Larry King

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