ECB wants "executioner" to terminate Europe's weak banks

Wed Nov 28, 2012 8:44am EST
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By John O'Donnell and Paul Carrel

BRUSSELS/FRANKFURT (Reuters) - The European Central Bank has proposed that the EU's powerful antitrust chief be given a permanent role for shutting down weak banks that survive largely on central bank funding, officials familiar with the issue say.

In the absence of a pan-European scheme for winding up struggling lenders, the task of cleaning up the sector has fallen by default to Joaquin Almunia, the European commissioner for competition issues, who ordered a restructuring of Spanish banks on Wednesday and wants similar moves in Greece.

Now, some officials at the ECB are examining how Almunia's job could be enhanced to give him a permanent and more powerful role in winding up banks. That could widen his remit beyond banks receiving state aid to those deemed too weak to survive.

Setting up an agency with the power to close down troubled banks that are being artificially kept alive by ECB loans is one part of a multi-step plan to establish a 'banking union' across the euro zone and the wider EU to restore confidence in an industry struggling after years of runaway lending.

Other elements include creating a single supervisor to oversee European banks, a job that is set to fall to the ECB, and the possible creation of a unified deposit guarantee scheme.

The problem of so-called zombie banks - which are propped up by support from governments and central banks but which have little prospect of lending to the economy again - is one of the first challenges the new watchdog will face.

It is also one of the chief concerns of ECB officials, who believe that the number of banks in the region needs to be shrunk in line with a rapid contraction in lending after years of cheap finance.

There are no reliable estimates on the number of endangered banks in Europe. Almunia has so far demanded the restructuring of about 50 banks since the beginning of the financial crisis and has ordered the closure of some including Germany's WestLB.   Continued...

The Euro currency sign is seen next to the European Central Bank (ECB) headquarters in Frankfurt November 6, 2012. REUTERS/Lisi Niesner