By Eva Kuehnen
FRANKFURT, Oct 8 (Reuters) - Plans for a euro zone bankingunion promise to fundamentally alter the region's debt crisisand will help make the European Central Bank's monetary policymore effective, ECB executive board member Benoit Coeure said onMonday.
Euro zone countries agreed at a summit in June to establisha single banking supervisor under the watch of the ECB by earlynext year, the first step in a three-pronged approach tocreating a banking union across the 17 euro zone countries.
"What I would like to stress here is that the banking union,agreed upon by the heads of state or government at the end ofJune, is both a game changer for the crisis and a leap forwardfor Europe," Coeure said in a text for a speech to be deliveredat a conference in Frankfurt.
"It will change the dynamics of investors' decisions."
Under the agreement, the creation of a single supervisorwill be followed by the setting up a fund to resolve problemsbanking sector problems, including winding-up troubled banks,and a unified system for guaranteeing bank deposits.
While the latter two are both politically complicated stepsand a far way off, the ECB is set to start supervising banksfrom next year, which Coeure said was important. The EuropeanCommission hopes it will be achieved by January.
"The most urgent component of the banking union is in myview the single supervisory mechanism (SSM), which should enterinto force as early as possible in 2013 to allow the ECB toprepare for its new tasks, with full accountability and agovernance structure that strictly separates monetary policyfrom supervisory decisions," Coeure said.
The ECB has already lowered interest rates, flooded thebanking system with ultra-long and ultra-cheap funds, widenedthe pool of collateral it accepts from banks in return for cashand now agreed to buy debt-strained governments' debt once theyhave signed up to a euro zone bailout programme.
With regards to how the new bond-purchase programme, knownas OMT, would work, Coeure said the ECB would pause during theregular assessments by the so-called troika - the EU Commission,the International Monetary Fund and the ECB - suspending itsbond-buying operations while a review is underway.
"OMTs would not be carried out while a given programme isunder review, but they would resume after the review period onceprogramme compliance has been assured," Coeure said.
Senior central bank sources told Reuters last week that theECB envisioned buying large volumes of sovereign bonds for aperiod of one to two months once its OMT programme was launched,but would then suspend purchases during an assessment period.
Coeure stressed the ECB would be ready to withdraw excessliquidity if needed.
"The ECB will stand ready to withdraw liquidity when upwardrisks to medium-term price stability materialise," Coeure said."Liquidity can become destructive if it gets out of control."
(Reporting By Eva Kuehnen; editing by Luke Baker)
Keywords: ECB COEURE/