–Adds Weidmann Comments On Capping Banks’ Sovereign Bond Buys

FRANKFURT (MNI) – Bank supervision decisions taken under the
European Central Bank should be based on capital shares to give
countries taking on greater financial risks a larger say, ECB Governing
Council member Jens Weidmann said Monday.

Weidmann, in the text of a speech prepared for delivery here, also
said a Eurozone banking union should include a resolution fund financed
by banks. He warned against pooling the legacy assets of banks, saying
this would weaken reform incentives. And he said talk of joint EMU
deposit guarantees had “rightly” been shifted to the background of

Weidmann also proposed an “upper limit” on the amount of sovereign
bonds an individual bank can hold in order to protect banks in the
future from exposure to an unsustainable buildup of government debt.
Banks should also have to back up their debt purchases with capital that
is based on the degree of risk being taken on.

Germany’s Bundesbank, which Weidmann heads, has previously warned
that while the ECB’s three year refinancing operations may have eased
market tensions temporarily, they have further strengthened the link
between weak banks and sovereigns, since banks in the Eurozone’s
periphery used the cheap central bank funds to stock up on national
government bonds.

Weidmann argued that the measures he was proposing, together with
EMU-wide bank supervision, would offer early signals that government
debts were becoming unsustainable and would prevent governments from
continuing to receive cheap credit despite an erosion in their fiscal

“Banks must be more strongly pushed to deal with unnecessary
government solvency risks,” he said.

Weidmann warned that a banking union should not be seen as a path
to joint liabilities “through the backdoor” that would allow countries
to increase their debt burdens. “This danger exists, and I think it
should not be underestimated,” he said.

He argued that ensuring separation of the ECB’s monetary policy
from its new bank supervision role was “doable, but difficult –
difficult from an organizational perspective and difficult from a legal

He made clear that the financial risks associated with bank
supervision mean countries with larger potential burdens should have
more say. “Given that such decisions also could entail fiscal costs, a
voting weight based on capital shares would make sense,” he said.

As for the Eurozone in general, the key principle for a banking
union should be that “liabilities and control must be in balance,”
Weidmann said. He welcomed the fact a joint EMU deposit scheme did not
seem to be a priority at the current time.

“As a third element, a joint deposit guarantee is being discussed.
But this has somewhat moved into the background – in my view rightly
so,” he said.

Regarding a bank resolution fund, Weidmann said taxpayers should
only have to step in should the bank-financed fund be overstretched.

“There is a lot to say for a sufficiently large fund, into which
the supervised banks pay and their resources primarily cover the cost of
a resolution or restructuring,” Weidmann said.

— Frankfurt bureau: +49 69 720 142; email: frankfurt@mni-news.com

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