Business World

Monday 19 February 2018

Bundesbanker says ‘nein’ to ESM help for historic bank debt

EUROPE’S planned banking union will not help countries with past banking problems, the Bundesbank's Andreas Dombret said on Thursday, dampening our hopes of tapping the euro zone rescue fund to help its banks.

Eurozone leaders said in June the ESM rescue fund would be able to recapitalise lenders directly once the new banking supervision under the roof of the European Central Bank was in place, which could aid Ireland's full return to debt markets.

But Dombret said the fund could only be used for future losses and damages, striking a similar tone to finance ministers from Germany, the Netherlands and Finland, when they last month laid out the terms under which they would allow the ESM to grant such assistance.

"No doubt, the banking union is an important building block for a more stable monetary union. But, as such, it is meant to mitigate future risks and not to cover past sins," Dombret said in the text of a speech to be given in Dublin.

"Legacy assets are those risks which evolved under the responsibility of national supervisors," Dombret said, adding that "these assets have to be dealt with by the respective member states".

"Anything else would amount to a fiscal transfer," he said.

Dombret is in charge of financial stability on the board of Germany's Bundesbank, and the board members often share the same point of view as the bank's president, who sits on the ECB Governing Council.

EU leaders agreed earlier this month to build a new system of supervision led by the ECB, as a step towards a banking union where chiefly euro zone countries would jointly back problem lenders in a move to underpin the currency.

Adding bank supervision to the ECB's job of conducting monetary policy would, however, not come without risks, Dombret warned, calling for a strict separation of the two areas.

"Such a separation will be difficult from both a legal and an organisational point of view," Dombret said.

He also said that a comprehensive bail-in of bank creditors and an appropriate risk-weighting of sovereign bonds should be key parts of the banking union.

"To minimise the risk that bank rescues pose to government finances, creditors have to be the first in line when it comes to bearing banks' losses. Implicit guarantees have to be removed as taxpayers' money can only be the last resort," Dombret said.

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