Belfast Telegraph

ECB eyes phase-out of lifeline to banks

"swift and decisive" action is needed to deal with the small number of banks that are too reliant on emergency loans, according to the European Central Bank (ECB).

Although the ECB does not name names in its semi-annual financial stability report, published this week, it is clear that Irish banks - accounting for around 25% of all the ECB's emergency funding - are in that category.

A small number of institutions are "excessively reliant on central bank liquidity" and account for "a substantial share of the overall refinancing volumes", the report says.

ECB unhappiness with the state of the Irish banks is widely held to have triggered the EU/IMF rescue last month, even though the Irish government did not have to borrow fresh funds until well into next year.

The ECB report lends some support to that view.

"The main source of concern stems from the interplay between sovereign debt problems and vulnerabilities in segments of the euro-area bank sector," it said.

The ECB also noted the difficulty raised by high-deficit countries like Ireland having to borrow more to recapitalise their banks, as is planned in the EU/IMF deal.

"Any additional requests to provide support to ailing banks may further exacerbate the risk of adverse feedback between the financial sector and public finances," it said.

"The continuing dependence of a limited number of financial institutions on public support in some countries means that action is the form of restructuring, de-risking and, where necessary, downsizing of the balance sheets."

ECB vice-president Vitor Constancio appeared to give support to the idea of an increase in the size of the €750bn (£630bn) rescue fund as a way of calming market fears.

He said such an increase could be helpful, although the operation currently has sufficient funds.

The ECB's Governing Council last week committed to keep offering banks as much cash as they want for at least the first three months of next year, but is worried about its inability to phase out such measures because of the weakness of some banks.

"Concerns about the challenges that these banks may face when the ECB proceeds further with the phasing-out of the enhanced credit support measures remain acute," the ECB said.