ECB Mulls Guidelines for 'Bad Banks'

The European Central Bank is drawing up guidelines regarding 'bad banks'—financial vehicles that would ring-fence risky assets held by European banks.

The concept, currently being considered by a number of EU governments, would allow banks to offload their risky assets into a separate company.

It is hoped this would enable banks to start operating normally again and in particular restart lending.

The central bank is also working on guidelines for governments such as the UK who have opted for an alternative asset insurance scheme.

This latest ECB initiative for a more co-ordinated EU response to the financial crisis is designed to prevent bank support schemes in one member state from creating negative effects in other member states.

Last year, a unilateral move by the Irish government to guarantee deposit accounts in Irish banks caused many British savers to move their savings across the Irish Sea.

There have also been calls for the ECB to take on a larger supervisory role of the financial sector by those who feel national regulators are ill equipped to deal with today's cross-border financial transactions.

The German government is currently fleshing out proposals under which German banks would set up their own individual 'bad banks' to carry assets such as loans to struggling investors.

The measure, which appears to have support from both the conservative and social democrat parties in the governing coalition, would prevent the government from being saddled with this further debt.

The maintenance of solid public finances is of great concern to many politicians in Germany, already alarmed by the increased debt caused by the €50bn stimulus plan announced by Chancellor Angela Merkel last month.

A European bond?

Italy, meanwhile, currently has a debt-to-GDP ratio of over 100 per cent.

Concern over a possible Italian default has pushed money-lenders to demand higher returns on Italian bonds, thus increasing the cost of government borrowing for stimulus projects.

Italian finance minister Giulio Tremonti has responded by saying he is in favour of a European bond.

"Now my feeling—I am speaking of a political issue not an economic issue—is ... now we need a union bond," Tremonti said at last week's World Economic Forum in Davos.

However, a number of eurozone member states, in particular Germany, are not in favour of the idea, insisting that member states should adhere to the Stability and Growth Pact rules that underpin the eurozone.

"Personal responsibility for financial policy and the commitment to solid public finances of every member state are a constituent element of the European currency union," German Bundesbank president Axel Weber told the Handelsblatt newspaper on Sunday (1 February).

"This has always been a German concern and one of the prerequisites for the acceptance of the common currency over here," he said.

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