FRANKFURT, March 7 (Reuters) - Europe's banking sector needs to be cleaned up and companies' access to capital markets improved to support the economic recovery in the euro zone when it picks up speed, European Central Bank policymaker Yves Mersch said.
Weak loan issuance in the 18-country bloc was linked to lacklustre demand at the moment, as could be expected in "the current weak phase of economic growth", Mersch said in the text of a speech for delivery in Munich on Friday.
"But when economic growth picks up speed again, we should be well prepared on the supply side," he said.
To this end, Mersch said Europe's banking sector needed to be cleaned up thoroughly, capital market access for companies must be improved, and lending to small- and medium-sized firms should be supported.
On the banking sector, Mersch said forthcoming stress tests should be conducted on a level playing field across Europe.
"In this respect, the stress test, which accompanies the balance sheet assessment, should not be diluted by national interests," he added.
This meant that "prudential filters" to ease the impact of losses "must be introduced homogeneously and may not be subject to the discretion of the national supervisory authorities".
The ECB and the European Banking Authority are preparing a set of stress tests, which will subject banks finances to a series of simulated shocks - such as a slowdown in economic growth - to ensure they can withstand such adverse scenarios.
The tests are part of a "comprehensive assessment" of the sector that the ECB is undertaking before taking over responsibility for supervising the euro zone banking sector in November this year.
To improve companies' capital market access, Mersch called for a harmonisation of securities regulations in individual states, which he said was "required urgently". This would help firms in one country issue bonds in another.
To support small- and medium-sized firms, he called for improved transparency in the credit risks for these companies to help improve their financing options. He also said national development banks could work more closely together and across borders. (Writing by Paul Carrel; Editing by Toby Chopra)