FRANFKURT (MNI) – A banking union would be a “major step” towards
breaking the link between the banking system and the sovereign and must
include a comprehensive “bail-in” for creditors and an appropriate
risk-weighting of government bonds, Bundesbank board member Andreas
Dombret said in a speech text prepared for delivery on Thursday.

“In order to minimise the risk that bank rescues pose to government
finances, creditors have to be the first in line when it comes to
bearing banks’ losses,” Dombret said in Dublin. “Implicit guarantees
have to be removed as taxpayers’ money can only be the last resort.”

“By the same token, sovereign bonds need to be risk-weighted
appropriately when it comes to the adequacy of capital buffers,” the
central banker added. “Riskier bonds have to become more expensive in
terms of the amount of equity that they tie down, as is already the case
for non-sovereign bonds.”

Dombret also warned of the risks in tasking the European Central
Bank with bank supervision, noting the conflict of interest that could
arise “if the institution responsible for ensuring the financial
soundness of banks simultaneously influences banks’ financing conditions
via its monetary policy.”

“If the ECB is to be tasked with supervising European banks, there
will have to be a strict separation of monetary policy and supervision,”
Dombret said. “Such a separation will be difficult from both a legal and
an organisational point of view. In this respect, there still are
questions that need to be resolved.”

Earlier this month, an EU Council legal opinion emerged that
questioned the legality of housing the single banking supervisor within
the ECB.

European Economic and Monetary Affairs Commissioner Olli Rehn was
quick to downplay the opinion, however, stressing that people should not
take it “literally”.

Dombret called a banking union “an important building block for a
more stable union”, but added that it was meant to lessen future losses
rather than “past sins”, including legacy assets.

“From what I have already said, it follows that these assets have
to be dealt with by the respective member states,” the Bundesbank board
member said. “Anything else would amount to a fiscal transfer.”

Dombret allowed for the possibility that such transfers could be
necessary. “But then, they should be conducted via national budgets and
subject to approval of national parliaments, rather than under the guise
of a banking union, which would then have to start under a heavy
burden,” he added.

Late last month, finance ministers from Germany, the Netherlands
and Finland had put out a statement that markets had interpreted to mean
that Spain would not be able to benefit retroactively from direct ESM
bank recapitalization. Ireland, which had been forced to accept
financial assistance after bailing out its banking system, had also been
expected to benefit.

German Chancelor Angela Merkel reiterated Germany’s stance against
retroactive recapitalization following last week’s EU Summit. “There
will be no retroactive direct recapitalisation…it will be only
possible for future” bank recapitalisation programs, Merkel said.

— Frankfurt bureau: +49 69 720 142; email: twailoo@mni-news.com —

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