EBRD calls for non-euro nations to join ESM bailout fund

(LONDON) - The European Bank for Reconstruction and Development called Wednesday for the EU's proposed 'banking union' to allow non-euro countries to contribute to and borrow from the eurozone's debt bailout fund.

"Plans for the creation of a European banking union are an important step towards solving the current crisis in the eurozone but they need to be extended in order to embrace emerging Europe," the EBRD said in its key transition report.

Authorities are seeking a deal on a banking union that will establish a single Europe-wide regulator under the oversight of the European Central Bank. The union would also work alongside the new eurozone debt rescue fund which is known as the European Stability Mechanism (ESM).

When the supervisor is in place, the ESM would then be allowed to recapitalise weak member state banks directly, avoiding adding on to a country's debt burden.

The London-based ERBD on Wednesday praised the plans as "large steps in the right direction," but argued that they would be "incomplete" without a broader membership.

"Non-eurozone countries should be allowed to opt into both the supervisory mechanism and the European Stability Mechanism."

It added: "Recent proposals to unify bank supervision, harmonise resolution frameworks and transform the ESM into a fiscal safety net for banking systems in the eurozone should go a long way towards arresting the present crisis and addressing coordination failures ... within the single currency area.

"They remain incomplete, however, because resolution authority would remain at the national level for the foreseeable future, and because access to the ESM-based safety net would be limited to eurozone members.

"The latter implies that few EU members outside the eurozone are likely to exercise their option to join the single supervisory mechanism."

It continued: "Some eurozone members worry about transferring virtually all supervisory powers to a central supervisor that may not be as concerned about local financial stability as national authorities.

"Some countries outside the eurozone worry that giving banks in the euro area the possibility of direct recapitalisation from ESM resources will tilt the competitive balance against banks headquartered outside.

"There is also a concern that national resolution authorities may not face the right incentives if fiscal losses are mutualised at the eurozone level."

The EBRD was formed in 1991 to help former Soviet bloc countries switch to a market economy, and invests alongside private-sector firms. It agreed earlier this year to expand its reach into emerging Arab democracies.