Draghi hits out at Spain over Bankia

Posted on May 31, 2012

Mario Draghi, president of the European Central Bank

Mario Draghi, ECB president, has criticised the Spanish government for underestimating the scale of Bankia’s woes and called for the regulation of Europe’s most important banks to be taken out of the hands of national supervisors.

Mr Draghi told the European Parliament on Thursday that, when confronted with a “dramatic need” to rescue banks such as Bankia and Dexia, a Belgian lender, national supervisors repeatedly underestimated the amount a rescue would cost.

    “There is a first assessment, then a second, a third, a fourth,” Mr Draghi said. “This is the worst possible way of doing things. Everyone ends up doing the right thing, but at the highest cost.”

    The ECB president, speaking as chair of the European Systemic Risk Board, said it was better to “err on the high side” in estimating the scale of a bank’s problems at the beginning, rather than having to discover “very painfully” that a lender needed far more capital than first thought at a later date.

    The Spanish government last week announced it would inject an additional €19bn of capital into Bankia, after saying earlier this month that the total bill for state aid to the country’s banking sector would not exceed €15bn.

    Mr Draghi said the lesson from Bankia was that the supervision of banks which presented a risk to the entire eurozone financial system should rest with a centralised authority, rather than national regulators.

    “Bankia is not cross-border, but it is systemic,” Mr Draghi said, later adding: “Bankia, and other cases, show that decisions on recapitalisation are probably simpler to manage if the decision is more centralised.”

    Mr Draghi’s call for more eurozone-wide financial system monitoring comes amid mounting support for such a “banking union” from European leaders in both Brussels and some national capitals. On Wednesday, José Manuel Barroso, president of the European Commission, endorsed similar policies and asked for a “roadmap” to be decided at an upcoming EU summit. Mario Monti, the Italian prime minister, has also promoted such measures and has received some backing from François Hollande, the new French president. However, these measures have been opposed by Germany.

    The ECB president signalled that he was hopeful that the European Stability Mechanism, the bloc’s rescue fund, could in future be used to directly recapitalise the region’s banks.

    “People are working on finding ways how the ESM could be used to recapitalise banks,” he said. “The issue is not so much if ESM money could be used to recapitalise banks, but whether this could be done directly without having to go through governments.”

    He also called for the creation of a pan-European body to resolve failed lenders, and for deposit insurance for bank customers to be provided centrally.

    The ECB president reiterated his calls for eurozone leaders to present a “vision” of how monetary union will look several years from now, and cautioned against relying too heavily on the central bank to resolve the bloc’s woes.

    “Can the ECB fill the vacuum of lack of action by national governments on fiscal growth? The answer is no,” he said. “Can the ECB fill the vacuum of the lack of action by national governments on the structural problem. The answer is no.”

    Mr Draghi also confirmed that the four Greek banks that were barred from borrowing from the ECB in recent weeks were now allowed back following their recapitalisation.

    Additional reporting by Peter Spiegel in Brussels

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