ECB calls for further reform of euro zone bailout fund ESM

FRANKFURT (Reuters) - The European Central Bank supports proposals to integrate the euro zone bailout fund ESM into European Union law, even if further reforms are needed, ECB President Mario Draghi 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 euro. Integrating it into the wider EU law would make it an EU, rather than just a euro zone institution.

Most euro zone governments oppose it on concerns of losing full control over the funds' 500 billion euro 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 the Resolution Fund 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 European Monetary Fund as it will have no monetary function since monetary policy is the task of the ECB.

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