German banks chief raises fund doubts

THE head of Germany’s Central Bank has expressed serious doubt over the potential effectiveness of the proposed European Stabilisation Fund, which is aimed at reducing future failings in the international banking sector.

Bundesbank president, Axel Weber – who is also a European Central Bank (ECB) council member – was in Dublin yesterday addressing the annual lunch of the IBEC-affiliated Financial Services Ireland representative body.

In his speech, Mr Weber said the fund – a quasi-International Monetary Fund proposed by Germany – “has major shortcomings”.

“A more important supplementary measure would be the implementation of a special resolution regime for banks. Such a regime would ensure that even large and systemically relevant banks could fail without triggering far-reaching disruptions within the financial system.

The fund would, according to Mr Weber, “drain capital from banks” and “would not solve the moral hazard problem”.

He continued: “As the fund would act as lender of next-to-last resort for failing banks – the government would still have to step in if the fund’s resources were exhausted in a crisis – the problem would merely be shifted from the level of government to the level of the fund. The banks, in fact, would still have an incentive to take on too much risk, while relying on the fund to cover potential losses.”

Mr Weber also played down the White House-proposed Volcker Rule (named after Federal Reserve chairman and White House adviser, Paul Volcker), which is aimed at stopping banks engaging in certain forms of risk-taking, such as investing in hedge funds.

“The most fundamental problem of the Volcker rule lies in the fact that a complete prohibition of certain activities – activities that are perhaps more risky, but not necessarily economically inefficient – is a very far-reaching market intervention,” he said.

Also addressing yesterday’s lunch, FSI chairman and EBS Building Society chief executive Fergus Murphy said Ireland can achieve strong growth over the next 10 years if “the right Government supports” are in place and we “focus our efforts on sectors of the economy in which we have a track record of success”.

“Recent indicators suggest the Government has succeeded in stabilising the Irish economy. The key question now facing Ireland is whether we use this stabilisation as a platform for renewed growth or allow our country to stagnate for years,” he added.

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