Draghi echoes calls for euro banking union
By Sarah Collins | Friday 01 June 2012
The head of the European Central Bank, Mario Draghi, has said eurozone banks should club together to set up common deposit guarantee and resolution funds and submit to more EU-level supervision. Echoing calls by European Commission President José Manuel Barroso, Draghi told members of the European Parliament’s Committee on Economic Affairs (ECON), on 31 May, that eurozone leaders should lay out their “vision” for such a union in a special report. “To clarify a vision is important but the next question is, how do we substantiate this greater clarity,” he said. “One first step we could take is exactly to create what was defined... as a banking union,” he went on.
Draghi said that greater clarity on where the euro was headed would calm markets and drive down government borrowing costs. “What is being proposed is to have a set-up based on three pillars: a European deposit guarantee scheme, a European resolution fund and greater centralisation of banking supervision,” he said. Barroso called for a banking union, on 30 May, and is currently drawing up a report on eurozone integration with European Council chief Herman Van Rompuy to be presented to EU leaders at a June summit. Meanwhile, on 6 June, Internal Market Commissioner Michel Barnier will release long-awaited proposals on bank resolution that will include greater links between national deposit guarantee schemes.
Draghi, who was appearing in Parliament in his capacity as head of the European Systemic Risk Board, the EU’s top financial watchdog, was quizzed by MEPs on whether problems in the Spanish banking sector in particular would spill over to the rest of the eurozone. “Decisions taken at national level are not enough to calm markets and guarantee financial stability,” said Spanish EPP deputy Pablo Zalba Bidegain. “What markets are punishing is a lack of action, a lack of engagement by the eurozone in defending its currency and its members.”
Draghi also lashed out at governments that failed to recognise the full scale of bank losses, pointing out the cases of Belgium’s Dexia bank - which could need further cash injections after last year’s bailout - or Spain’s Bankia, where the bailout bill has shot up to €23.5 billion. “In the assessment of the needs of recapitalisation by banks, it’s better to err on the high side and exceed in transparency rather than being short of it and then having to discover it very painfully,” he said. “Further centralisation of banking supervision is needed, especially, I would say, for the large systemic groups - systemic doesn’t mean only cross-border groups,” he added. “Bankia, for example is not cross-border but it’s very systemic.”
Portuguese MEP Elisa Ferreira (S&D) said the “central risk element in Europe is [the link between] bank debt and national debt,” and asked whether the ECB or the eurozone’s new rescue fund, the European Stability Mechanism, could be employed to solve the problem.
Draghi hinted at support for using the ESM to directly recapitalise banks, which is another subject EU leaders are discussing to solve the debt crisis (the ESM can recapitalise banks but only through sovereign governments signing up to a bailout programme and taking the debt on to their own books). “I am more optimistic about the possibility that the ESM will actually be used,” he said. “The issue is not so much the use of ESM money to recapitalise banks but whether this would be done directly and not through governments,” he said.
He said the ESRB was collecting information from banks on the risks to the system and the pace of their deleveraging and would report back in June.
Portuguese GUE-NGL deputy Marisa Matias said that governments were faced with either pumping more money into failing banks or letting them go and destroying the economy. “It’s like deciding between the plague and cholera,” she said. S&D deputy Arlene McCarthy (UK) said the greatest threat Europe faced was from a bank run, but Draghi countered that the ECB would step in to inject cash into solvent lenders should this happen. “We will avoid bank runs from solvent banks,” he said.