FRANKFURT – Europe’s financial risk watchdog has called for tough conditions to be attached to any bail outs for banks and for insolvent lenders to be sold off or closed down, ahead of an expected request from Spain for loans to help fix its troubled financial sector.
The European Systemic Risk Board, which is chaired by European Central Bank head Mario Draghi, said Wednesday that “systemic risk” â€” risk to the entire financial system â€” remained high because of the government debt crisis. Debt loads are threatening Spain and Italy, while Greece, Portugal and Ireland have already needed bailouts.
The board said that Europe needed to “support credible mechanisms for the recapitalization and restructuring of the banking sector.” It added that any aid must come with “strong conditionality on the relevant banks with regard to the use of any publicly funded recapitalization.”
And it urged “the resolution of non-viable institutions.”
The EU set up the risk board in the wake of the financial crisis to monitor and advise on the stability of the financial system as a whole. Other members include Bank of England head Mervyn King, who is vice chair, and European Banking Authority chairman Andrea Enria and the governors of the national central banks of member states.
Banks are a key weak link in Europe’s debt crisis. Bailout costs helped ruin the finances of Ireland and are threatening Spain, which had to turn to the eurozone bailout fund rather than raise money on its own to bail out its banking system. Fears that governments’ financial trouble will default on their bonds has helped dry up credit to banks believed to be holding those bonds. Some banks in troubled countries remain dependent on emergency credit from the European Central Bank.
Governments are compelled to bail out banks because they are crucial in providing credit to the economy.
European leaders are discussing proposals for stronger central supervision of banks, in part because national regulators have been regarded as overly reluctant to force troubled banks to be restructured, wound down or sold off.