Draghi supports five-year mutualisation for bank rescue fund

ECB president Mario Draghi weighed into the debate over the euro zone's single resolution fund today, outlining his support for the full mutualisation of the fund within five, rather than ten years as agreed by member states in December.

As negotiations between the European Parliament and member states continue behind the scenes in Brussels on the details of the fund, the president of the European Central Bank said he saw merit in doubling the pace of mutualisation "to have a genuine European fund within five years. "

“To be clear, this would not imply that banks have to pay higher fees. The fund would still only reach its target level after 10 years, yet it would be a truly single fund after five years,” the ECB president said at a conference in Brussels.

The “protracted time frame” of ten years over which national compartments are to be mutualised, created uncertainty, the ECB president said. “As legacy risks will be addressed by the ECB’s comprehensive assessment, this seems an unduly long period.”

The ECB is preparing to undertake asset quality review of the European banks that will fall under its supervisory authority later this year. Those reviews will in turn feed into European Banking Authority stress tests scheduled for later in the year.

In December member states agreed a framework for a single resolution fund of 55 billion euro, which will underpin the second pillar of European banking union which deals with the resolution of banks. A key aspect of the complex proposal is a plan to build up the fund gradually over ten years, at which point it will be fully ‘mutualised’ into a joint fund, rather than a collection of national funds. However, the European Parliament, which must agree to the proposal, has raised questions about the period of time in which the fund will be accumulated, favouring a swifter process.

The ECB president also reiterated the need for a backstop to be in place during the transition period when the fund is being built up, should a bank need more capital. This could be in the form of a credit line, potentially from the European Stability Mechanism (ESM) or by borrowing from the markets with the help of guarantees from participating member states.

“ What makes resolution authorities credible is the knowledge that, when private sector solutions do not suffice, they can draw on temporary public bridge financing. This steadies expectations and supports financial stability,” he said.