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ECB calls for further reform of euro zone bailout fund ESM

Reuters  |  FRANKFURT 

(Reuters) - The supports proposals to integrate the zone bailout fund ESM into law, even if further reforms are needed, ECB said in a legal opinion on Thursday.

A broader mandate for the ESM would improve financial stability, provide quicker funding for crisis-hit member states and could provide much-needed liquidity support for failing lenders during their resolution.

The ESM is now an intergovernmental body, operating on the basis of a treaty between the 19 countries sharing the Integrating it into the wider EU law would make it an EU, rather than just a zone institution.

Most zone governments oppose it on concerns of losing full control over the funds' 500 billion lending capacity.

"The proposed regulation is an important first step ... (but) further reforms of the ESM will be essential," the ECB said.

The ESM should be provided with the financial instruments needed to fulfill its tasks and should have the capacity for swift and credible decision-making procedures.

"In particular, the precautionary financial assistance instruments, with adequate conditionality, should be improved in order to better contribute to crisis prevention," the ECB said.

Supervising Europe's biggest banks, the ECB said it also supported efforts for the reformed ESM to provide a backstop to the Single Resolution Fund, which is tasked with resolving failing lenders.

Such a backstop, which should be in place no later than the end of 2023, could help provide liquidity support to failing banks to ensure they are wound down at the lowest possible cost.

"Such liquidity support presents a far smaller risk that losses will be incurred, and is by definition temporary in nature," the ECB said.

Such a backstop would still shield the taxpayer as costs could be recouped through ex post levies on the financial industry, the ECB said.

Repeating a key objection to the reform proposal, the ECB said the ESM should not be renamed as as it will have no monetary function since monetary policy is the task of the ECB.

(Reporting by Balazs Koranyi; editing by and Richard Balmforth)

(This story has not been edited by Business Standard staff and is auto-generated from a syndicated feed.)

First Published: Thu, April 12 2018. 21:01 IST