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17:40, Tuesday 31 May 2011
FRANKFURT (Reuters) - Safeguards should be built into EU plans for shoring up troubled branches of cross-border banks so broader financial stability is not undermined, the European Central Bank said on Tuesday.
The European Union's executive European Commission has published preliminary plans on how to deal quickly with an ailing bank so the wider financial system is not frozen up as seen after the collapse of Lehman Brothers in 2008.
The ECB said the Commission proposal was legally too vague in saying capital and liquidity transfers within a banking group can be based on the common interest of the group.
Financial stability could be endangered if the mechanism for helping out parts of a banking group in different countries became too automated, leaving little room for supervisory discretion.
"There is a risk that in certain situations the Commission's proposals on intra-group support may not contain contagion risk and ultimately could even have a negative impact on the financial stability of the transferor and other involved countries," the ECB said in a contribution to the commission's public consultation.
"The mechanism foreseen could turn granting of intra-group support into semiautomatic procedure, leaving very limited opportunity to consider the impact of the transfer," the document added.
The Commission is due to publish its formal legislative proposal on cross-border bank resolution in coming months, with EU states and the European Parliament having the final say.
The ECB also said it supported setting up national bank resolution funds.
Turning to banking stress tests, the ECB said the results of stress tests conducted under normal market conditions should not be made public, but that publishing them should be considered when market uncertainty is high.
Before releasing the results, authorities would have to make sure backstops are in place to restore market confidence, if needed.
(Reporting by Sakari Suoninen; Writing by Huw Jones; Editing by David Holmes)