Asmussen Says Bailout Fund Could Wind Down or Capitalize Banks

European Central Bank Executive Board Member Joerg Asmussen
European Central Bank Executive Board member Joerg Asmussen said, a so-called Single Resolution Mechanism “would have the legal and financial capacity, as well as the independence, to ensure that viable banks survive and non-viable banks are closed down.” Photographer: Sean Gallup/Getty Images

European Central Bank Executive Board member Joerg Asmussen said Europe’s permanent bailout fund could act as a resolution mechanism as well as providing capital to ailing banks, as long as certain conditions are met.

A so-called Single Resolution Mechanism “would have the legal and financial capacity, as well as the independence, to ensure that viable banks survive and non-viable banks are closed down,” Asmussen said late Tuesday in Frankfurt, in remarks embargoed for today. Such a body could “concentrate decisions on resolution and act pre-emptively and quickly, helping to preserve the value of banks and save money for taxpayers.”

Europe is seeking to sever the link between its banks and state finances by creating a so-called banking union that marries central supervision by the ECB with a joint pot of money to aid stricken lenders. European leaders have already signed a deal to establish ECB supervision as the first pillar, and said public money for recapitalization will be available next year, when further work on a resolution mechanism is also scheduled.

Asmussen said that while public funds to recapitalize and wind down banks must be available, costs incurred should “first and foremost be covered by the private sector.” A resolution fund should be created through levies on the banking sector, he said.

Four Conditions

While the ECB has a target deadline of March 2014 to actually start supervising banks, joint recapitalization funds could be unlocked earlier if euro-area ministers agree and the ECB steps in to oversee, according to the compromise brokered in Brussels last week.

At the same time, Asmussen laid out four conditions that should be met before joint European support can be used.

Banks applying for funds should undergo a “thorough and independent economic evaluation,” and have a viable business model to establish the case for aid, Asmussen said. Private sector funds should be tapped first, and failing that, money from individual member states should be sought before joint aid from the fund, known as the European Stability Mechanism, could be released.

“Only in the very last step, would European public funds be used,” Asmussen said, adding that “funds can only be used after the single supervisory mechanism has effectively assumed its duties.”

Deposit Rate

The ECB cut its economic forecasts on Dec. 6, predicting the 17-nation region will contract 0.5 percent this year and 0.3 percent in 2013. As a majority of policy makers were open to easing borrowing costs, according to three officials speaking on condition of anonymity, expectations of a rate cut early in 2013 have been rekindled.

As the ECB traditionally moves its deposit rate, currently at zero, in tandem with the benchmark, discussions about negative rates have mounted.

Asmussen said he would be “very reticent” about taking the deposit rate below zero.

“One has to calmly look at what the effects, what the advantages and disadvantages would be,” Asmussen said.

Fears that the euro would break up have eased after the ECB announced its bond-buying program and European leaders agreed to push toward greater financial and economic cooperation, Asmussen said.

While decisions on banking union reached this month are not the “definitive vision” for economic and monetary union, Asmussen said, it does give “citizens and investors a sense of direction of where the euro is heading.”

“Putting probabilities on a euro break-up had become a cottage industry. Today, we have grounds to be cautiously optimistic,” Asmussen said. “The fear of catastrophic tail risks has lessened.”

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