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Monday 11 December 2017

No room for complacency as ECB warns euro zone still fragile

ECB President Mario Draghi
ECB President Mario Draghi

THE European Central Bank has warned there is no room for complacency following early signs of easing strains on financial markets.

It urged governments to push ahead with reforms after it was granted powers yesterday to supervise banks Europe-wide.

Putting the ECB in charge of supervising euro zone banks and possibly others from the European Union is important to make the bloc's institutions more crisis resilient, but more needs to be done to avoid a renewed crisis flare-up, it said.

"The situation is still very fragile in many ways," ECB Vice-President Vitor Constancio said at a presentation of the bank's twice-annual Financial Stability Review.

"Key financial stability risks remain and there is no room for complacency," the ECB said in the report.

The main risks are a possible renewed intensification of the crisis if governments fall behind on their reforms, a deterioration of banks' health and further funding strains as money and debt markets are still not functioning properly.

The banking union - a three-part process which involves creating a single supervisor, establishing a fund to wind down problem banks and fully coordinating national schemes that guarantee deposits - is seen as key to address such risks.

Following months of negotiations, EU finance ministers agreed yesterday to hand the ECB authority to police directly at least 150 of the euro zone's biggest banks and to intervene in smaller banks at the first sign of trouble.

"Those 150 banks represent 85pc of total assets in the euro area ... which I would say is more than enough," Constancio said, adding that the single supervisory mechanism had legal competence over all euro zone banks.

The next step is to establish a fund to wind down troubled banks, which Constancio said should be modelled on the U.S. Federal Deposit Insurance Corporation (FDIC).

"This is not about creating a European fund with big amounts of money to use for resolution," Constancio said. "You can look to the example of the U.S., where the FDIC does this task."

The FDIC had dealt with more than 400 troubled banks since 2008 without using public money, Constancio said, adding that the resolution mechanism should not be used to bail out banks, which was the responsibility of governments.

"It's about bail-in - it's not about bailout - in order to minimise any possible contribution of public money to the resolution of banks. That's one of the lessons of the crisis," Constancio said.

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