FRANKFURT (MNI) – Europe’s permanent bailout fund, the European
Stability Mechanism, should be allowed to inject capital into European
banks directly and a European banking union should be created to end the
negative feedback loop between banks and sovereigns, European Central
Bank Executive Board member Benoit Coeure said in a speech released over
the weekend.
“The adverse feedback loop between banks and sovereigns, in which
doubts about the solvency of the sovereigns feed doubts about the
solvency of the banks, and vice versa, will be broken more readily by
the establishment of a true banking union,” Coeure said.
“This should include the creation of a pan-euro area deposit
insurance fund and a pan-euro area bank resolution framework, supported
by a single supervisory system with centralized decision-making. If the
European Stability Mechanism could inject capital directly into banks,
with strong conditionality and control, this would also help to break
the bank-sovereign loop,” he said
Coeure said that “decisive steps towards a banking union” is key in
helping to restore the proper functioning of money markets. Confidence
in banks’ solvency must be restored also by reducing the leverage of the
euro area banking system,” he added.
“It may take a long time before secured, and particularly
unsecured, money market segments begin to function normally again. More
importantly, money market transactions will not come back if the
fundamental causes are not addressed,” Coeure said.
–Frankfurt bureau tel.: +49-69-720142. Email: jtreeck@marketnews.com
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