Draghi calls for centralized banking control

[May 31, 2012]  FRANKFURT, Germany (AP) -- European Central Bank head Mario Draghi says Europe needs a centralized way of forcing its troubled banks to restructure and argued that recent cases have shown national regulators are choosing "the worse possible way" to help their banking sectors by delaying tough decisions.

Draghi said the cases of bailouts for Bankia in Spain and before that Dexia in Belgium show that national regulators are reluctant to admit the extent of troubles at their home institutions. That raises the costs in the end and undermines trust and transparency, he said.

"What Dexia shows and Bankia shows as well is that whenever we are confronted with the dramatic need to recapitalize, if you look back, the reaction of the national supervisors... is to underestimate the problem, then come out with a first assessment, a second, a third, fourth. "

"That is the worst possible way of doing things, because everybody ends up doing the right thing but at the highest possible cost and price," Draghi said in testimony in the European Parliament in Brussels.

Banks have been a key part of the European economic and financial crisis stemming from excessive levels of government debt. Bank bailouts are an additional burden on financially weak governments, and weak government finances in turn hurt the banks that hold those governments' bonds. The ECB has made euro1 trillion in emergency loans to shore up the banking system, but Draghi warned that the ECB cannot fill "the vacuum of lack of action by national governments" in reducing deficits and reforming their economies.

Draghi was speaking in his capacity as head of the European Systemic Risk Board, a panel set up to monitor the stability of the financial system and advise EU leaders, but also made wide-ranging comments that touched on the ECB and the continent's debt crisis.

The ECB chief added that the eurozone needed "further centralization of banking supervision." He appeared to give a general endorsement of efforts highlighted Wednesday by the European Union's executive commission to create a "banking union" that would be based on a centralized regulator and bailout fund as well as an EU-wide deposit insurance backstop. Currently most powers to regulate banks have been left with national authorities, who have been seen as protective of their domestic financial services industry.

[Associated Press]

Copyright 2012 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.