ECB should tackle zombie banks, Germany's Bundesbank says

FRANKFURT (Reuters) - The European Central Bank should use its power to restructure ‘zombie banks’ which are burdened by excessive amounts of bad loans but are kept alive for political reasons, Bundesbank board member Andreas Dombret said on Monday.

Andreas Dombret, member of the board of the Deutsche Bundesbank speaks during a news conference at the Deutsche Bundesbank's Regional Office in Hesse in Frankfurt in this file photo dated October 26, 2014. REUTERS/Ralph Orlowsk

The ECB has made it a priority to tackle the burden of soured debt that has weighed on the balance sheet of banks, particularly in countries such as Greece and Italy, since the financial crisis.

“There are still many zombie banks that are kept alive for political reasons,” Dombret told a banking conference.

In an answer to a question, Dombret said Italy was a country with high levels of bad loans at its banks but that this was by no means an Italian only problem.

He called on the ECB to use its so-called early intervention powers on banks that are at risk of failing.

“The Single Supervisory Mechanism and the Single Resolution Mechanism have to assert their power ... in order to restructure a stressed credit institution or ultimately wind down virtually insolvent banks,” he said.

Dombret welcomed Italy’s recent launch of a fund, dubbed Atlas, to underwrite capital increases of weak banks and buy non-performing loans.

The ECB has yet comment on the fund, which is backed by Italy’s main financial institutions and state lender Cassa Depositi e Prestiti.

“Italy can benefit from this decision because Italy does need a secondary market for non-performing loans,” Dombret said.

The fund received the green light from the European Commission’s competition authority after lengthy negotiations.

“If (the competition authority) agrees on a scheme in Italy I have all confidence in the world that it is a good scheme in terms of market pricing.”

His views were echoed by Concetta Brescia Morra, the vice chair of the ECB’s arbitration body, ABoR, which decides on disputes between the ECB and the banks it supervises.

“The European Commission adopts very strict criteria,” said Brescia Morra, who was speaking on the same panel as Dombret, stressing she was speaking as a law professor, not on behalf of the ECB.

“The secondary market for non-performing loans is very important and probably the agreement between the Italian government and the European Commission is a very important tool in that direction.”

Reporting By Francesco Canepa; editing by John O’Donnell/Jeremy Gaunt