Draghi Says ESM to Recapitalize Banks Once Supervision in Place
European Central Bank President Mario Draghi reiterated that the euro area’s bailout fund won’t be able to take a direct stake in lenders until a single banking supervisory system is established, which may not happen until next year.
Asked by European parliamentarians about the European Stability Mechanism directly recapitalizing banks, Draghi said it “certainly can be done only when the supervision is in place.” He added at the hearing that “it might take some time” and “we certainly want to see something close by the end of this year.”
The 500 billion-euro ($616 billion) ESM will start once Germany and Italy give final approval. It will work with paid-in capital, making it more flexible than the 440 billion-euro European Financial Stability Facility that it replaces. Euro- region leaders pledged on June 29 to give the ESM the power to make direct cash injections into banks once the euro zone sets up a single banking supervisor, possibly as early as 2013.
The statement from their summit said that “when an effective single supervisory mechanism is established, involving the ECB, for banks in the euro area the ESM could, following a regular decision, have the possibility to recapitalize banks directly.”
This is to be considered “as a matter of urgency by the end of 2012,” according to the statement.
Draghi said today it wouldn’t be a problem if the ESM isn’t able to do that this year because markets will understand that any recapitalizations in the meantime will only temporarily impose a cost on governments.
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