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BRUSSELS (Reuters) - The euro zone's future bank supervisor on Wednesday promised a warts-and-all probe into the bloc's still fragile financial system, conceding that she and other supervisors had made mistakes in the past.
Seeking the backing of the European Parliament to become the supervisor for euro zone banks, Daniele Nouy listed sovereign debt among the banks' potentially riskiest assets as she laid down her ambitions for testing the health of lenders.
"What we will do is look at the most risky portfolios including sovereign risk," she said, commenting on planned health check of banks next year. "We have to deliver a tough and transparent exercise to the market."
Defending her role as French supervisor in the collapse of Franco-Belgian group Dexia, Nouy expressed regret over the "mistakes" she and her supervisory peers made in the financial crisis.
"Like many other supervisors, holding sovereign debt and assets linked to loans of local authorities, the risk wasn't flagged and clear to us," she said. "That was a mistake, no doubt about that. Perhaps we should have shown more authority."
The euro zone's debt crisis has been compounded by the dependence of many governments on banks buying their bonds, and by the banks' dependence on their governments picking up the bill if loans go bad.
The 63-year-old French technocrat is now tasked with leading one of the biggest clean ups yet of European banks, billed by many economists as the bloc's last chance to resolve a crisis that has dogged it for more than half a decade.
As head of the European Central Bank's supervisory body, she will first lead an examination that aims to come clean on bank problems, pinpointing loans such as mortgages that may never be repaid.
But she will face immense hurdles in getting national governments to face up to the true scale of the losses and repair those banks, a step that could require taxpayer cash.
Then there is the problem of accounting more accurately for the risks of holding government debt. Unlike other forms of lending, banks are not required to set aside capital to cover possible losses on state bonds they buy.
Nouy told lawmakers in the European Parliament that banks should not be given a regulatory incentive to buy government bonds.
"We learned through this crisis that there is no risk free asset," she said. Besides, she added: "We need the banks to finance the economy. If they increase their holdings of sovereign debt, they are less able to finance the economy."
Nouy will also herald in a new era when more of the burden of salvaging or shutting failed banks will be shunted onto their creditors, a radical model tried out in Cyprus, where banks' biggest depositors suffered losses.
Germany wants prompt rules to hit senior bank bondholders, a step that worries Spain and others. It will fall, in part, to Nouy to weigh the risks that such losses could upset market calm in deciding how radical such steps should be.
Her job will be as political as it is technical.
"She has to be a technical master and speak truth unto power," said Graham Bishop, an advisor to the European Commission.
Reporting By John O'Donnell; Editing by Ruth Pitchford