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

Economic Pulse

REUTERS SHOWCASE

Indian State Media

Indian State Media

Controlling the message: Modi chooses state media  Full Article 

ONGC Stake

ONGC Stake

Govt meeting bankers to discuss share sale in ONGC - source  Full Article 

Gold Curbs

Gold Curbs

Finance Ministry wants to reimpose curbs on gold imports - ET  Full Article 

World Stocks

World Stocks

Shares advance on strong data, earnings  Full Article 

IBM Chip Unit

IBM Chip Unit

IBM to pay Globalfoundries to take chip unit  Full Article 

Eyeing Reebok

Eyeing Reebok

Investor group aims to buy Reebok unit - WSJ  Full Article 

Reuters India Mobile

Reuters India Mobile

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