September 23, 2013 / 4:25 PM / 6 years ago

ECB's Draghi: national govts can cover fallout from bank reviews

FRANKFURT, Sept 23 (Reuters) - It is realistic to count on national governments to prop up their local banks should the European Central Bank’s balance sheet checks reveal capital shortfalls, the president of the ECB said on Monday.

Before the ECB starts supervising the euro zone’s 130 largest banks directly next year it will run a risk and asset quality assessment and until the single mechanism to wind down and restore ailing banks is in place, the ECB wants national governments to handle the potential fallout from such a test.

“For the asset quality review and the stress test to be credible, we will have to have national backstops in place,” Draghi told the European Parliament ion his quarterly testimony.

Asked by a member of parliament whether it would be realistic to demand such support from crisis-stricken governments such as Greece, Spain or even France, Draghi said banks were in a better state than in before the last stress test in 2011 and that the role of national backstops was there.

“It is realistic, also for the countries that you mentioned.”

Draghi stressed that the ECB should have nothing to do with resolution fund. “The ECB should and will have nothing to do with this fund,” Draghi said.

The single resolution mechanism with a fund to wind down non-viable banks is the second pillar of the so-called banking union and it is expected to take about ten years to establish the bank-funded resolution fund.

Ten years as a time horizon was “too long”, Draghi said.

In the meantime, Draghi said there should be the possibility for the fund to borrow money from some other source, although the a credit line from the euro zone’s permanent rescue fund, the European Stability Mechanism (ESM), may not be work.

“Some people have suggest that the ESM could extend a credit line to the resolution fund. I am not sure that this is possible within the existing treaty,” Draghi said.

ECB Executive Board member Joerg Asmussen had suggested earlier this month that the ESM could function as a backstop to the planned bank resolution fund until it is properly filled. (Reporting by Martin Santa, writing by Eva Taylor; editing by Ron Askew)

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