CENTRAL BANK GOVERNOR Patrick Honohan has called for an EU-wide “banking union” as a way of combating the ongoing debt crisis.

Honohan also proposed that distressed Irish banks should be directly recapitalised by the European Financial Stability Fund.

He said such a mechanism – in which the EFSF would inject cash directly into banks, rather than lending money to the country in question, which is then saddled with huge national debt – would help pool risk across the eurozone and get financial markets moving again.

“The €17 billion injected by the Irish government [into recapitalising banks] last year alone [...] added some 13 per cent of GNP to Ireland’s debt,” Honohan told an audience in London.

But if a sizable fraction of the sums invested that had been injected directly as capital by the EFSF, debt sustainability would be much less of a concern to the rating agencies and the EFSF could look forward to upside in the recovery by being the owner of two banks with a substantial national franchise.

However, he said that such measures would need an EU-wide regulatory structure, which he called a “banking union”.

In simple terms, the main elements of a banking union would be a degree of (i) centralised bank regulation, licensing and supervision as well as (ii) central responsibility for resolution and for depositor protection and any public sector solvency support.

Within the structure there would need to be scope for varying policies on mortgages and banking capital ratios between different countries, he said – adding that “maximum harmonisation” and a one-size-fits-all policy across the EU is not necessary to reap the benefits of the single market.

VIDEO: ‘Austerity has not failed in Ireland but the ECB must do more’>

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