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ECB could provide cash to failing banks if conditions met: Coeure

FILE PHOTO: Benoit Coeure, board member of the European Central Bank (ECB), is photographed during an interview with Reuters journalists at the ECB headquarters in Frankfurt, Germany, May 17, 2017. REUTERS/Kai Pfaffenbach/File Photo

FRANKFURT (Reuters) - The European Central Bank could provide liquidity to failing banks while they are being wound down under certain conditions, ECB director Benoit Coeure said on Monday.

A bank run on Spain’s Banco Popular last summer laid bare a hole in European rules, which bar the ECB from supporting a failing bank while the European Union’s Single Resolution Board organizes a rescue.

The ECB is considering taking on the task via a new lending facility called Eurosystem Resolution Liquidity but this is likely to require approval from the Eurogroup of euro zone finance ministers, where richer countries like Germany fear it could be used inappropriately to prop up ailing banks.

Coeure said the ECB would provide liquidity only if it was sure the bank in question was not set for liquidation, had enough collateral and if doing so would not interfere with monetary policy.

“It should be possible (but) it comes with important conditions that they have to be financially sound so if we know that the outcome of the resolution will be liquidation then of course we shouldn’t provide central bank liquidity,” he told an event.

He was responding to comments by the head of the SRB, Elke Koenig, who had told the same conference earlier that the ECB and other EU central banks needed a play a role as the SRB’s Single Resolution Fund would not have enough resources.

“Our fund will never be sufficient to be the sole answer and this means an important role for central banks, in particular for the European Central Bank,” Koenig said in a recorded speech.

ECB vice-president Vitor Constancio has cited Britain, where the Bank of England can request an indemnity from the government on loans extended to banks in resolution, as a possible model for the EU.

Banco Popular was immediately bought by larger rival Santander SAN.MC, which allowed it to keep functioning as normal.

Reporting By Francesco Canepa; Editing by Richard Balmforth