Draghi Says EU Needs ‘Strong’ Authority to Resolve Banks

European Central Bank President Mario Draghi said the European Union needs a strong central authority to handle failing lenders, after the region’s leaders failed to agree on plans to overhaul bank resolution.

“Banking union should help speed up the repair of banks -- that is if, as I hope, we end up with a strong single resolution mechanism,” Draghi said at an event in Berlin today. “We need a mechanism that allows non-viable banks to be wound down without financial stability risks, as we see in the U.S.”

Two days of talks between the region’s finance ministers in Vilnius, Lithuania, that ended Sept. 14 were unable to produce a consensus on a European Commission plan for a Single Resolution Mechanism. The centralized procedure would be part of a banking union that aims to break the link between lenders and governments. German Finance Minister Wolfgang Schaeuble said the proposal must be overhauled because it’s on shaky legal ground and could endanger national control of budgets.

Draghi said a lack of transparency over the real worth of assets on bank balance sheets is hampering lending, and having a central resolution mechanism would help support a quicker economic recovery. The ECB is due to begin a review of bank assets soon, paving the way for it taking over bank supervision by next year.

Fragile Economy

ECB Executive Board member Yves Mersch said in Dubai today that the banking union is the “most immediate concern.” The ECB has started preparatory work on the planned review of bank balance sheets and will provide a proposal for the assessment in coming weeks, he said.

On Europe’s recovery, Mersch said the region is seeing “tentative green shoots.” Draghi said that while the euro area’s return to growth in the second quarter after six quarters of contraction is “welcome,” the recovery is “only in its infancy.”

“The economy remains fragile, and unemployment is still far too high,” he said. “Given the overall subdued outlook for inflation extending into the medium term, the ECB’s Governing Council expects the key ECB interest rates to remain at present or lower levels for an extended period of time.”

The 17-nation euro area has made progress in stabilizing the economy, and the risk of “an extreme event” has fallen, Draghi said. “Governments are addressing their fiscal policy challenges. That has been crucial in reassuring markets about debt sustainability.”

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