April 14, 2016 / 12:40 PM / 4 years ago

UPDATE 1-France, Italy urge propping up of euro zone bank fund -document

* Joint paper distributed ahead of EU finmins’ meeting

* Euro zone bank fund may not be enough in a banking crisis

* Germany opposes government-funded backstop for bank fund (Adds details, background)

By Francesco Guarascio

BRUSSELS, April 14 (Reuters) - The euro zone bailout fund, the European Stability Mechanism, should provide a credit line to a new European fund for troubled banks to offset risks of a fresh banking crisis, France and Italy said in a joint document seen by Reuters.

European countries have long debated how to give the new Single Resolution Fund enough firepower to weather a large banking crisis, but are divided on where to find the resources to bolster the fund in the short term.

Germany is opposed to a government-funded backstop for the SRF, because it fears this would expose its taxpayers to unfair costs. It wants measures to make euro zone banks less risky, such as limits on their government debt holdings, before agreeing any new financial commitment.

“A credit line from the European Stability Mechanism to the SRF is the simplest and most consistent option,” the French-Italian document said.

The ESM has a total lending capacity of 500 billion euros.

The paper was circulated among European Union national representatives ahead of a monthly meeting of the bloc’s finance ministers in Amsterdam on April 22-23.

The SRF, operational since January, is to be gradually financed by banks to reach a total capacity of 55 billion euros by 2024. The problem is that if a new major banking crisis struck earlier, the SRF may find itself under-capitalised, Italy and France warned.

They called for the establishment of an EU working group to advance planning for an SRF backstop.

“FISCALLY NEUTRAL”

The group should set a date of entry into force for the common backstop and its amount, which should be calculated on the basis of banks’ recapitalisations in past financial crisis, the joint document said.

The backstop would be “fiscally neutral” as public funds used to prop up the SRF would be reimbursed over time by banks in a “realistic” period, according to the paper.

The SRF backstop is seen by its supporters as a necessary step within the EU flagship project of a banking union, which includes a single supervisor for euro zone banks, a common resolution procedure for troubled lenders and a joint insurance on banks’ deposits.

EU finance ministers will discuss next week how to strengthen the banking union and they will focus on reducing banks’ exposure to sovereign debt with options including caps and higher costs for holding public debt.

Germany supports limits on banks’ holdings of public debt because it says this measure would break the “doom loop” of debt dependency between states and banks.

France and Italy said in their joint document that this vicious nexus could be weakened with the establishment of a backstop for the SRF. (Reporting by Francesco Guarascio; Editing by Gareth Jones)

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