ECB’s Weidmann Says Banking Union Can’t Cover Bad Debts
European Central Bank Governing Council member Jens Weidmann said the proposed banking union can’t take responsibility for existing bad debts.
“In order to keep liability and control in balance, only risks that have arisen after common supervision is established can be taken under joint liability,” Weidmann, who heads Germany’s Bundesbank, said at a speech in Berlin today. “The legacy burdens on bank balance sheets have to be underwritten by the countries under whose supervision they have arisen.”
Weidmann’s comments come after finance chiefs from Germany, the Netherlands and Finland said this week that direct recapitalization of banks by the euro area’s permanent bailout fund should be a last resort and that legacy debts should remain the responsibility of national authorities. European leaders agreed in June that, as part of a prospective banking union, banks would qualify for direct aid once an ECB-led supranational supervisory mechanism has been established.
“Mutualization of risks can’t be the primary purpose of a banking union,” Weidmann said. Allowing the euro-area bailout fund to help ease the existing debts of banks would amount to “financial transfers,” he said.
Irish bonds slumped this week on concern that a deal to cut the nation’s legacy bank debt may unravel. Prime Minister Enda Kenny’s political opponents said the statement by the three AAA- rated euro states was a setback to the government’s campaign to win retroactive bank recapitalization.
German lawmakers are due to vote today on a non-binding motion co-sponsored by Chancellor Angela Merkel’s Christian Democratic Union that would require banks to undergo a health check before coming under joint supervision. The motion reflects German reluctance to assume guarantees for the whole euro zone as it moves toward closer coordination on banking.
Weidmann, in a speech titled “Trust -- Prerequisite for Success of a Stable Currency,” also made veiled criticisms of ECB President Mario Draghi’s bond-purchase plan.
Speaking of how the Chinese invented paper money around 1,000 A.D., he said the emperors of the time “knew the importance of this invention and used it richly.”
“They produced more and more banknotes, but unfortunately without withdrawing the old ones. The result wasn’t surprising: Inflation.”
Weidmann said central banks mustn’t take on fiscal tasks, and voiced concern about the side-effects of “ultra-expansive monetary policy.”
“Central banks around the world have done a great deal to avoid an escalation of the crisis, but many of the measures also have unwanted consequences,” he said. “It is important and right that central banks all over the world discuss how to employ short-term measures in a way that trust in central banks is maintained.”
To contact the reporter on this story: Jeff Black in Frankfurt at firstname.lastname@example.org
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