April 9, 2018 / 3:19 PM / 8 months ago

ECB needs way of financing banks during wind-down: Constancio

FILE PHOTO - European Central Bank (ECB) Vice President Vitor Constancio holds a news conference at the ECB headquarters in Frankfurt, Germany, March 7, 2018. REUTERS/Ralph Orlowski

FRANKFURT (Reuters) - The European Central Bank needs a way to finance failing banks while they are being wound down, ECB vice-president Vitor Constancio said on Monday, citing the British and U.S. models as possible examples.

A bank run on Spain’s Banco Popular last summer laid bare a hole in European rules, which bar the ECB from supporting a failing bank while the European Union’s Single Resolution Board organizes a rescue.

Constancio cited Britain, where the Bank of England can request an indemnity from the government on loans extended to banks in resolution, and the United States as possible models.

“The UK and U.S. have... a solid, whole process of resolution that includes those liquidity problems during that period of time, and I hope that Europe will get to some solution to this problem,” Vitor Constancio told the European Parliament.

Banco Popular was immediately bought by larger peer Santander (SAN.MC), which allowed it to keep functioning as normal.

But the Spanish case showed how the euro zone framework, which lets national central banks provide Emergency Liquidity Assistance to cash-strapped lenders only if these are still viable, is not fit for purpose.

Sources say the ECB is considering taking on the task via a new lending facility called Eurosystem Resolution Liquidity.

But any such move is likely to require approval from the Eurogroup of euro zone finance ministers, where richer countries fear it could be used inappropriately to prop up banks with public money.

Reporting by Francesco Canepa; Editing by Hugh Lawson

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