A top European Central Bank official says the euro currency union needs U.S.-style centralized banking oversight so that individual countries don’t have to deal with busted banks alone.
Joerg Asmussen said Friday in the text of a speech in Milan, Italy, that “during the crisis in the U.S., it was federal institutions that stepped into the breach.”
Asmussen, who sits on the ECB’s six-member executive board, cited the role of the Federal Deposit Insurance Corporation, which has overseen the sale or restructuring of hundreds of unviable banks. He also pointed to support from the U.S. Treasury Department for banks to raise capital through the Troubled Asset Relief Program, or TARP. No single U.S. state, he said, could have dealt with such burdens.
“Imagine if the state of New York would have had to provide guarantees to Citigroup,” he said. “The lesson for the euro area is clear: federal institutions can prevent local crises from becoming systemic.”
Banks played a key role in Europe’s debt troubles. The Irish government needed a bailout after the costs of rescuing failed banks made its public debt balloon to unsustainable levels. In other cases, troubled government finances dragged down banks that held government bonds, as happened in Greece.
Europe has started building a centralized banking oversight. The ECB is checking banks for hidden losses before it starts its new role as central European Union banking supervisor for major eurozone banks late next year. European Central Bank president Mario Draghi has said that some banks could fail as a result. But European officials are still at odds over an agency that would have the power to force troubled banks to be broken up or sold, and provide any financing needed.
Asmussen warned that until such an agency exists, individual euro governments must have funds ready to deal with any banks that are found to be in serious trouble.
Otherwise, he said, the credibility of the whole exercise would be put at risk: “Doing this balance sheet assessment without a backstop in place would be a bit like getting on a boat in rough weather conditions, and not taking a life jacket on board.”
The first place to look for new capital to right a troubled bank should be private investors, he said, followed by national authorities. The eurozone’s bailout fund could be used under limited circumstances, although the idea has drawn political opposition from some national governments, including Germany, the eurozone’s biggest member.