Merkel Warns Against Political Influence on ECB Stress Tests

Chancellor Angela Merkel warned against political meddling in stress tests for European banks and said the world’s biggest economies haven’t finished regulating the shadow banking system.

Any effort to water down the stress tests as the European Central Bank prepares become the euro area’s prime bank supervisor in November will be harmful, Merkel told a banking conference in Berlin today.

“I can only urgently call for there to be little or no political influence here, otherwise the reputation of the European Central Bank as an oversight authority will be damaged before it starts,” Merkel said at the meeting of the BVR association of cooperative banks.

Armed with models for financial and economic crises, the ECB plans to start testing almost 130 European banks in May and release results in October. The stress tests are part of ECB President Mario Draghi’s effort to build up confidence in the health of the region’s lenders.

Merkel invoked previous tests by the European Banking Authority, which gave a clean bill of health in 2011 to French-Belgian lender Dexia SA three months before it failed in a bank run. A year earlier, Ireland’s two biggest banks needed a bailout within months of passing exams by the now-defunct Committee of European Banking Supervisors.

ECB oversight is central to restoring market confidence in the 18-country euro area, Merkel said.

Regulation Fatigue

Citing global efforts to rein in risky capital by the Group of 20 richest nations, Merkel said the group had completed as much as 80 percent of what was needed. The rest will become more difficult as the G-20 seeks to regulate the so-called shadow banking system, she said.

“It’s becoming ever more difficult to regulate money with the growing distance to the crisis,” Merkel said.

Merkel also delivered a warning to the European Commission as it weighs rules on splitting traditional banking from higher-risk businesses. The Commission’s current proposal “goes in the right direction,” she said.

“We’re following the processes very closely, but we don’t in any way want the proven universal banking system to damage the financing of the economy,” the chancellor said.

Germany last year passed rules to force German banks to separate some investment-banking operations from units that work with corporate and retail clients, while preserving Germany’s so-called universal banking model of investment and retail-banking arms.

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