Weidmann wants strong German voice in Europe bank union

FRANKFURT Mon Nov 19, 2012 4:11pm IST

FRANKFURT (Reuters) - Bundesbank chief Jens Weidmann called on Monday for Germany to have a strong voice in Europe's planned banking union, adding that the European Central Bank's new banking supervisory role must be clearly separated from its monetary policy mandate.

Weidmann, who sits on the ECB's Governing Council, also said that banks should limit their exposure to government debt by backing up their sovereign debt holdings with sufficient capital and by introducing a cap for how much money a bank can lend to a state.

Making the ECB the supervisor for lenders chiefly in the 17 countries that use the euro would be the first of three pillars of a banking union, which also aims to break the negative feedback loop between indebted governments and troubled banks.

Weidmann has resisted a push to broaden the ECB's remit by putting it in charge of banking supervision in Europe - a move he says risks compromising the ECB's main goal of price stability.

In a speech at Euro Finance Week in Frankfurt, the Bundesbank chief called for a clear separation of the two tasks - which he said was possible, but difficult - and a stronger German voice when voting on banking supervisory matters.

"As such decisions could also lead to fiscal costs, it would only be consistent to have voting weights based on capital shares," Weidmann said.

Germany's Bundesbank has the largest share of the capital base at the ECB with 27.1 percent. It is still not clear how the ECB plans to organize its new task.

"The banking union should relieve common monetary policy - but there is a conflict of interests between banking supervision and monetary policy in the practical implementation," Weidmann said.

"Both areas must therefore be strictly separated," he added. "This separation is doable, but difficult - difficult from an organizational viewpoint and difficult from a legal viewpoint."

ECB Executive Board member Benoit Coeure, also speaking on Monday, stressed that the ECB should supervise all banks not only the top banks, warning that restricting the ECB's scope could result in a two-tier system of banking.

DEBT LIMITS

Complementing the new supervisory regime with two additional pillars - a central scheme to wind down banks and a combined means of deposit protection to prevent bank runs - would complete the banking union.

Weidmann pointed out that the third aspect of establishing a joint deposit guarantee scheme - which Germany opposes - had moved to the background, "in my view rightly so".

He also said that banks should back up their sovereign debt holdings with sufficient capital and there should be a cap on lending to a state.

"It is now courteous to criticize the close connection between state finances and national banking systems. But many encourage banks nonetheless to buy ever more bonds from their respective governments," he said.

That showed how short-term measures to fight the crisis did not match the long-term needs, Weidmann said.

"If the banking union was simply to lead by the back door to a comprehensive, joint liability and simply give the state more possibilities to run up debts, then the currency union would be a disservice. This risk exists, and I think we should not underestimate it," Weidmann added.

(Writing by Eva Kuehnen; Editing by Susan Fenton)

Comments (0)
This discussion is now closed. We welcome comments on our articles for a limited period after their publication.

  • Most Popular
  • Most Shared

REUTERS SHOWCASE

Power Outage

Power Outage

India may face blackouts as coal shortage cuts power output  Full Article 

Moody's on Inflation

Moody's on Inflation

Persistent inflation hurting India's sovereign ratings - Moody's  Full Article 

Carmichael Project

Carmichael Project

Adani buys Australia coal mine royalty rights from Linc for $145 million  Full Article 

GDP Preview

GDP Preview

Economy likely grew faster in June quarter: Reuters poll.  Full Article 

India-Japan Meet

India-Japan Meet

Modi eyes breakthrough nuclear pact on Japan trip   Full Article 

Monetary Policy

Monetary Policy

BofA says RBI may cut rates by 75-100 bps starting early 2015  Full Article 

Road to IPO

Road to IPO

Mega-IPO to rekindle the 'bromance' behind Alibaba's rise  Full Article 

Automakers Haven

Automakers Haven

Tata, Volkswagen, others agree to invest $1.9 bln in India  Full Article 

Rare Earth Output

Rare Earth Output

India to chip in with 5 pct of global rare earth output  Full Article 

Reuters India Mobile

Reuters India Mobile

Get the latest news on the go. Visit Reuters India on your mobile device.  Full Coverage