ECB VP Constancio floats idea of private bank fund

10th June 2011, Comments 0 comments

European Central Bank vice president Vitor Constancio floated on Friday the idea of a private fund to help deal with future banking crises.

"The establishment of a future Euro Area Resolution Fund ... funded by ex ante private sector contributions, is an avenue that could be considered," Constancio told a banking conference in Frankfurt.

The European Union is already establishing a European Stability Mechanism that would use public funds to deal with crises such as the Greek debt issue which has sent shockwaves across the 17-nation eurozone.

But the idea of a protective rescue fund for banks set up by public authorities "appears unworkable as it creates misaligned incentives as well as the risk of moral hazard and free-riding," Constancio said.

Moral hazard occurs when banks assume that mistakes they make will be covered by taxpayers.

A private fund "could both mitigate the systemic impact of bank failures and help to solve the burden sharing problem, which could allow a swift intervention in a crisis," Constancio argued.

"Naturally, clear, stringent and properly communicated conditions for the use of the fund would be a crucial component of the scheme, outlining that any form of bail-out is to be excluded," he added.

With respect to the Greek crisis, Constancio underscored a position taken on Thursday by ECB president Jean-Claude Trichet, which excluded any measures that would force private investors to participate in a bail-out.

Trichet did not rule out voluntary extensions of maturities on Greek sovereign bonds by private banks, but noted the ECB did not intend to roll over the Greek debt that it owns.

Constancio said the idea of a concerted, or orderly reduction on the amount of money Greece owed, known as a haircut in financial markets, was "definitely a very dangerous path."

The ECB fears that if banks are forced to take losses on Greek debt, it will slam the country's financial sector and possibly send shockwaves throughout the eurozone.

Constancio said that "there are many forms of private sector involvement" in possible eurozone crisis resolution plans but declined to advance any ideas by the ECB.

"That should be the concern and preparation of the governments and treasuries that are advocating something," the ECB vice president said.

It was their responsibility to "find the mechanisms that do not create the type of risks that we are concerned about," he added.

© 2011 AFP

0 Comments To This Article