The Central Bank Governor said last night that not allowing temporary or permanent bail-out funds to directly recapitalise banks directly is a “missed opportunity”.
Patrick Honohan, a member of the European Central Bank’s governing council, said that injections from the European funding mechanisms to governments inflated their debt, which in turn led to concerns amongst rating agencies.
“Using pooled European funding mechanisms directly as a means of recapitalising weak banks and acting as a backstop for future problems is an obvious way of pooling risk and breaking the sovereign-bank linkage,” Professor Honohan said in a speech in London.
Euro zone officials knocked back press speculation that the European Central Bank and a group of euro zone countries were working on a possible initiative to enable crisis-stricken banks to have direct access to Europe’s permanent bailout fund.
The discussion stems from market concerns about the banking sector in Spain, where a sharp drop in property prices and a recession have triggered investor expectations that Spanish banks may need more money than previously thought to recapitalise.
EU Economic and Monetary Affairs Commissioner Olli Rehn told Reuters in an interview last month that there were no plans to use the permanent European Stability Mechanism (ESM) or the temporary European Financial Stability Facility (EFSF) to lend to recapitalise Spanish banks.
Professor Honohan also highlighted the need for a European-level resolution agency to cover bondholders’ claims in bank resolutions among members states.