Bloomberg News

Mersch Says Watering Down Parts of Banking Union Endangers Whole

June 27, 2013

European Central Bank Executive Board member Yves Mersch warned political leaders not to weaken or delay measures aimed at creating a banking union, amid signs they’ll back away from promises to support stressed lenders.

“The different elements of banking union are bound in a symbiotic way with each other,” Mersch said today in a speech in Hachenburg, Germany. “Forgetting or watering down individual parts endangers the success of the whole project.”

Draft conclusions for a two-day summit of European Union leaders in Brussels that started today omit a previous commitment for states to put “credible backstops” in place for banks that fall short of capital once the ECB conducts a review of lenders’ assets beginning this year. That review is a precondition for the ECB taking over supervision duties as part of the banking union aimed at breaking the link between the financial system and nations’ budgets.

The latest draft obtained by Bloomberg News instead says that member states should “make all appropriate arrangements” before the ECB reviews. The document also omits language describing the ECB balance-sheet reviews and subsequent stress tests as “particularly important to complete the process of strengthening bank balance sheets.”

“Without Compromise”

“In order to achieve the regime change to a credible single supervisor, the asset quality review has to be thoroughly carried out, without compromise,” Mersch said.

He also criticized a deal struck on the sequence of losses that should occur when a bank fails. Ministers agreed to German-led demands that banks’ recourse to government funds should be limited, and secured commitments that private investors should absorb losses before banks can seek aid from governments or the region’s bailout fund.

“The political compromise is neither strictly rule-bound nor completely discretionary,” he said. “So that the remaining room for maneuver can be appropriately used, and not subjugated to national interests, a central authority should decide on the concrete implementation.”

Mersch warned against any delay to legislative steps needed for the ECB to formally take over supervision duties. Two euro-area officials said last week the ECB may not commence its supervisory tasks until late 2014, instead of the March date originally envisaged.

“The agreed timetable for the construction of the banking union should be kept,” he said. “Even when the need for short-term stabilization measures has eased, we can’t lose the impetus on reforms for longer-term stability.”

To contact the reporters on this story: Jeff Black in Frankfurt at jblack25@bloomberg.net; Stefan Riecher in Frankfurt at sriecher@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net


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