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ECB’s Coeure Says ESM Should Recapitalize Banks Directly

European Central Bank Executive Board member Benoit Coeure said Europe’s permanent bailout fund should be allowed to offer capital directly to banks.

“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,” Coeure said during a speech in Tourrettes, France, today. Coeure also backed 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.”

European policy makers are debating the future design of a more integrated single currency as a debt crisis that has seen four countries appeal for bailouts highlights its shortcomings. While the ESM, the euro-area’s 500 billion euro ($632 billion) permanent rescue fund, is due to start operating next month, some countries have still not ratified the mechanism and a debate over whether bank recapitalization funds can flow directly or only via governments is yet to be resolved.

Coeure said the fundamental causes of a lack of trust in Europe’s banking sector need to be addressed if the functioning of money markets is to return to normal.

“It may take a long time before secured, and particularly unsecured, money-market segments begin to function normally again,” he said.

The Frankfurt-based ECB has granted more than 1 trillion euros in 3-year loans to the financial sector since December, in a bid to ward off a looming credit crunch.

“Restoring proper market functioning requires a series of actions to rebuild confidence in the creditworthiness of banks and governments, as well as the taking of decisive steps towards a banking union,” Coeure said.

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