BMPS Banca Monte Dei Paschi Di Siena Spa

LONDON—European regulators are open to using public funds to help clean up toxic assets weighing on bank balance sheets and hampering lending in the bloc's struggling economy.

"I think the authorities should consider whether, if the process is not going fast enough, whether state aid could be part of the ingredients to accelerate this process," Andrea Enria, chairman of the European Banking Authority, said Wednesday at a Wall Street Journal Financial Regulation Pro event here.

Mr. Enria's comments came as investor worries are mounting about the health of leading banks in Italy and Germany in particular, prompting speculation about whether government assistance might play a role, despite strict postcrisis continental rules intending to limit bailouts. Shares in Deutsche Bank AG have plunged over fears that a threatened American fine in a mortgage-securities probe could strain its capital levels, while Italy's Banca Monte dei Paschi di Siena SpA is struggling to complete a private recapitalization plan.

European law "does not exclude the possibility of state aid," said Mr. Enria, whose agency monitors the health of European banks. "First of all," he stressed, "it says that before getting to state aid you need to have private investors of course paying their fair share of the price." But, he added, "there are conditions to have state aid, and there are also situations in which state aid can be say used in case of systemic events. There are rules to do that and I think that these rules should be applied."

European policy is now structured to favor investor "bail-ins" as opposed to taxpayer "bailouts"—that is, to force investors to absorb losses before turning to public funds.

But the politics of "bail-in" have proved complicated, particularly in Italy, where household investors own a large portion of banking debt, having been sold the instruments with the promise that they were virtually as safe as deposits.

"Bail-in is a very intrusive tool—it's a mighty weapon," said Joanne Kellerman, a member of the Single Resolution Board, the newly created agency in charge of writing resolution plans and winding down a bank in case it is failing or likely to fail.

Ms. Kellermann, who was on the panel with Mr. Enria, added that "if there are issues with a large number of bail-in able securities being held by private investors, that is something to be addressed, especially if those securities were sold under a false pretense"—as some in Italy have alleged.

She didn't specify how she thought those issues should be addressed.

(END) Dow Jones Newswires

September 28, 2016 07:15 ET (11:15 GMT)

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