ECB eyes supervisor role to squeeze weak banks

Fri May 17, 2013 2:13am EDT
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By John O'Donnell

BRUSSELS (Reuters) - The European Central Bank could use its new supervisory role from next year to single out weak banks and make it harder for them to get its financial support, people familiar with the matter say.

Such a hardening of approach would keep ECB funding flowing to Europe's most important lenders but compel laggards to beef up their capital buffers, prod national central banks to take on the problem or even force some banks to go to the wall.

The thinking denotes a growing concern at the ECB, which bankrolls much of the financial system, about the risks of backing banks with often only weak collateral as security.

It follows an unprecedented public threat by the euro zone's central bank to cut emergency financing to Cypriot banks, in the middle of the Mediterranean island's crisis which led to the closure of one as part of a stringent bailout.

"Central banks provide liquidity against collateral. But what do you do for addicted banks?" said one person familiar with ECB thinking.

"If a bank returns continuously to get liquidity, (the ECB) will make it more difficult. You will have to pay a higher price. You will have to change the rules for provision of liquidity."

The ECB declined to comment. It gave 1 trillion euros of cheap three-year loans to banks last year and has offered further unlimited support since.

The possible use of such tactics is also a response to the constraints the ECB may face when it takes on bank supervision next year. German opposition could mean there is no separate agency to close problem banks although it is unclear if the ECB would accept this and take on supervision nonetheless.   Continued...

Outside view shows the Euro sculpture in front of the headquarters of the European Central Bank (ECB) in Frankfurt September 18, 2008. REUTERS/Alex Grimm