To Vitor, the spoils

ECB takes off hair shirt; puts on kid gloves

The idea that strict European state aid rules should be re-examined has received support from an unexpected place. In a speech on July 7, Vitor Constancio, the European Central Bank vice-president, flagged the risks of a doctrinaire interpretation of European bank reforms that force their creditors to be hit if they get state aid. That's uncomfortably close to Italian Prime Minister Matteo Renzi's recent request for a temporary delay on the same rules.

It's possible to see where both men are coming from. Renzi seems reluctant to force losses on Italian consumers. Some of them own the subordinated debt that, under European rules, could get forcibly converted into bank shares or written down if the government contributes to shoring up bank capital. Constancio is concerned that an over-zealous insistence on a so-called bail-in for every bailout can sometimes create financial instability rather than ease it. He cites the International Monetary Fund as a proponent of flexibility rather than dogma.

Simply put, this looks like the ECB swapping its hair shirt for kid gloves. Since it started regulating the biggest 120 European lenders in late 2014, the central bank has been trying to harmonise national regulatory regimes so that some countries' banks don't get an unfair advantage over others. It's a nice idea, but is proving hard to execute. The risk now is that the ECB is seen to align with political leaders motivated by domestic rather than prudential concerns - even though the strict line on state aid is intended to stop ordinary taxpayers getting hit by bank rescues.

There is nothing wrong with being flexible when the facts change: when interest rates are likely to remain close to zero for a long time, it's difficult for the ECB to insist on ever more capital and regulation for banks. But, bending the rules ought only to be done when banks are suffering from a genuine market failure or collapse. A 20 per cent fall in share prices since Britain voted to leave the European Union, and euro 950 billion in bad debts across the euro zone, are weighty problems. But they are best solved by euro zone states clubbing together -not by relaxing rules as they see fit.