by Alessandra Cardone
FLORENCE, Italy, May 11 (Xinhua) -- The eurozone needs a new fiscal instrument to help its members face financial crises, European Central Bank (ECB) President Mario Draghi said on Friday.
The ECB chief delivered his address at the ongoing "State of the Union" conference, organized by the European University Institute in the Tuscan city between May 10 and 12.
"We need an additional fiscal instrument to maintain convergence during large shocks, without having to overburden monetary policy," Draghi told top European Union (EU) officials and analysts.
"Its aim would be to provide an extra layer of stabilization, thereby reinforcing confidence in national policies," he added.
Keen attention was paid to the ECB president's remarks, considering that a European Council summit on June 28 and 29 is expected to address EU reforms in some crucial areas, such as the banking, economic, and monetary sectors.
In order to create a more stable financial sector, Draghi said banks needed to increase their resilience, and both the banking union and the capital markets union should be completed.
The eurozone have already shown some progress on these fronts. "The post-crisis regulatory reforms have significantly strengthened the banking sector," the top official stated.
For example, Common Equity Tier 1 ratios (a crucial evaluation of a bank's financial strength) of significant lenders rose from 8.7 percent in 2008 to the current 14.5 percent, and leverage ratios rose from 3.7 percent to 5.8 percent in the same period.
Plus, the creation of European banking supervision would have also brought about a more uniform approach to how banks are supervised.
Yet, "the eurozone as a whole was shown to have no public and very little private risk-sharing," the central banker said, stressing that, as much as structural reforms within EU member states are still needed, they would never provide a full shield against financial turmoil.
"While sound domestic policies are key to protect countries from market pressure, the crisis showed that -- in certain conditions -- they may not be enough," Draghi warned.
As such, some form of "common stabilization function" to prevent countries from diverging too much during crises would be needed.
"Public risk-sharing through backstops for failing banks helps reduce risks across the system by containing market panic when a crisis hits," he said.
At the same time, "a strong resolution framework ensures that, when banks do fail, very little public risk-sharing is actually needed, as the costs are fully borne by the private sector."
