UPDATE 1-ESM chief warns of urgent need for backstop for weak banks
* ESM head: plan of action needed to back weak banks
* Regling: backstop needed before stress tests
* ESM would need rule change before taking on such a role
(Adds background, detail)
BRUSSELS, Sept 24 (Reuters) - Europe needs a financial backstop in case next year's round of bank stress tests uncovers capital problems, one of the bloc's most senior financial officials warned on Tuesday.
The frank comments from the head of the euro zone's rescue fund, Klaus Regling, underscore a growing sense of alarm that Europe may be ill-prepared to support banks exposed as having difficulties when they face ECB and EU health checks next year.
The checks, which some experts have described as a last chance to come clean on the full extent of euro zone banks' problems after earlier stress testing failed to do so, are aimed at repairing trust in the financial sector.
"It's ... useful to have a backstop to reassure markets in case something really big happens," Regling, managing director of the European Stability Mechanism, or ESM, told members of the European Parliament at a hearing.
Regling said little had been done to address the "urgent" need for banks that cannot shore up their capital alone to have a backstop.
And he underlined the importance of having "clarity about all this the moment the results of the asset quality review and the stress tests are announced".
"Sometimes it's very good to have certain instruments, not with the intention of using them but to have them available ... to reassure markets," Regling said.
But he warned against expecting the ESM to take on that role, saying the fund's rules would first need to be changed.
Those comments would appear to place responsibility for problem banks with national governments rather than the ESM, which has lending firepower of 500 billion euros. Although political agreement has been reached to allow the ESM help banks with direct aid, this is not yet possible.
"It is very clear that at the moment, the ESM would not be able to play that role," Regling said. "It would require a change in the ESM treaty."
Regling's remarks will add to fears that next year's health checks will pinpoint capital shortfalls without provision to fill them having been made, undermining investor confidence.
Earlier this week, the head of the European Central Bank also said national governments - including those of crisis-hit countries such as Greece - would have to prop up their local banks if the stress tests reveal problems.
"For the asset quality review and the stress test to be credible, we will have to have national backstops in place," ECB President Mario Draghi told the European Parliament.
The ECB will conduct a risk and asset quality assessment before starting to directly supervise the euro zone's 130 largest banks next year. There will also be wider EU tests.
The stakes are high. Earlier this month, ECB Executive Board member Joerg Asmussen said: "For a number of reasons two stress tests in Europe failed to create this transparency and to repair the bank balance sheets, and this is now our third and maybe our last chance to do it."
(Reporting by Martin Santa; Writing by John O'Donnell; Editing by Catherine Evans)