June 26, 2012 / 9:36 AM / 7 years ago

Euro zone's ESM fund could backstop bank deposits: document

BRUSSELS (Reuters) - The euro zone’s permanent bailout scheme, the European Stability Mechanism, could be used to backstop a fund to protect bank deposits or wind up failing lenders, according to a document prepared for European leaders meeting this week.

“The credibility of any deposit guarantee scheme requires access to a solid financial backstop,” said the report, outlining one of a series of proposals to move towards deeper economic and monetary union and shore up the euro.

“As regards the euro area, the European Stability Mechanism could act as the fiscal backstop to the resolution and deposit guarantee authority,” said the report. Taking such a step would first require the blessing of Germany, which has so far been reluctant to back such a move.

The 7-page report was drafted by European Council President Herman Van Rompuy, European Commission President Jose Manuel Barroso, European Central Bank President Mario Draghi and the head of the Eurogroup countries, Jean-Claude Juncker. It will be discussed by EU leaders at a summit on Thursday and Friday.

Setting up a single euro zone scheme to cover the costs of winding down troubled banks and to shield the deposits of savers is an important element a banking union, designed to rebuild confidence in the bloc’s lenders.

The report addresses the need to create what it calls an “integrated financial framework”, one that would apply to all EU states while differentiating between euro and non-euro nations on issues that affect the single currency.

It raises the prospect of creating a European deposit insurance scheme as well as a European scheme for the winding down or resolution of banks “to be primarily funded by contributions of banks”.

The 17 euro zone countries have set up two rescue funds to try to contain the crisis, the temporary European Financial Stability Facility, and the ESM, which is expected to start operating next month.

The rules governing the phasing out of the current euro zone rescue fund, the EFSF, and the introduction of the ESM mean the ceiling of the two funds cannot exceed 500 billion euros.

Reporting By Luke Baker and John O'Donnell

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