ECB VP Constancio floats idea of private fund

10th June 2011, Comments 0 comments

European Central Bank vice president Vitor Constancio floated on Friday the idea of setting up a private fund to help deal with any future financial 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 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 or governments assume that the mistakes they make will be covered by taxpayers, for example.

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.

Some economists would argue that terms of the European Union's Stability and Growth pact include a no bail-out clause that has already been breached to aid Greece, Ireland, and Portugal.

© 2011 AFP

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