By Eva Kuehnen
FRANKFURT, Oct 8 (Reuters) - Plans for a euro zone banking union promise to fundamentally alter the region's debt crisis and will help make the European Central Bank's monetary policy more effective, ECB executive board member Benoit Coeure said on Monday.
Euro zone countries agreed at a summit in June to establish a single banking supervisor under the watch of the ECB by early next year, the first step in a three-pronged approach to creating 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 of June, is both a game changer for the crisis and a leap forward for Europe," Coeure said in a text for a speech to be delivered at a conference in Frankfurt.
"It will change the dynamics of investors' decisions."
Under the agreement, the creation of a single supervisor will be followed by the setting up a fund to resolve problems banking sector problems, including winding-up troubled banks, and a unified system for guaranteeing bank deposits.
While the latter two are both politically complicated steps and a far way off, the ECB is set to start supervising banks from next year, which Coeure said was important. The European Commission hopes it will be achieved by January.
"The most urgent component of the banking union is in my view the single supervisory mechanism (SSM), which should enter into force as early as possible in 2013 to allow the ECB to prepare for its new tasks, with full accountability and a governance structure that strictly separates monetary policy from supervisory decisions," Coeure said.
The ECB has already lowered interest rates, flooded the banking system with ultra-long and ultra-cheap funds, widened the pool of collateral it accepts from banks in return for cash and now agreed to buy debt-strained governments' debt once they have signed up to a euro zone bailout programme.
With regards to how the new bond-purchase programme, known as OMT, would work, Coeure said the ECB would pause during the regular assessments by the so-called troika - the EU Commission, the International Monetary Fund and the ECB - suspending its bond-buying operations while a review is underway.
"OMTs would not be carried out while a given programme is under review, but they would resume after the review period once programme compliance has been assured," Coeure said.
Senior central bank sources told Reuters last week that the ECB envisioned buying large volumes of sovereign bonds for a period 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 excess liquidity if needed.
"The ECB will stand ready to withdraw liquidity when upward risks 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/