TRENTO, Italy (Reuters) - Excessive capital requirements can backfire, Italy's economy minister said on Saturday, defending a joint French-Italian proposal to cap the amount of reserves that euro zone banks should have to wipe out before they can be rescued.
Rules in force since the beginning of this year require euro zone banks to respect a minimum requirement for their own funds and eligible liabilities (MREL) in order to qualify for access to a bank-financed rescue fund in case of failure, and avoid full liquidation.
In a joint paper, seen by Reuters, Paris and Rome raised doubts on the rationale of introducing a floor for MREL and urged instead a cap that should not exceed 8 percent of banks' debt.
Italian Economy Minister Pier Carlo Padoan told an economic conference on Saturday there was a risk banks could be asked to raise too much capital too quickly, which would leave them vulnerable if tough markets made it hard to raise funds.
"Instead of stronger banks we end up with weaker ones," he said.
"The French-Italian initiative at this very delicate stage of the creation of a banking union is a voice calling for caution. We're all going in the same direction, a stronger banking system, let's do so at the right pace, let's not exaggerate please."
Following the euro zone debt and banking crisis, EU countries have designed a banking union meant to strengthen lenders' financial stability, but have not yet brought the plan to completion.
Germany, the dominant power in the euro zone, is dragging its feet on a European bank deposit guarantee scheme, widely regarded as a missing link in the project.
"If we don't accept risk-sharing why are we wasting our time with the euro?," Padoan said.
Bank of Italy Governor Ignazio Visco on Tuesday warned that incomplete progress in establishing a banking union risked making the euro zone more vulnerable because authorities may be unable to stop contagion in a crisis.
Padoan also saw potential contagion risks from 'bail in' rules hitting bank investors and large depositors before public money can be tapped to rescue a bank.
"We're building a banking union, let's try not to get hurt in the process. This, I think, was the message from the (Bank of Italy) governor whom I tend to agree with," Padoan said.
(Reporting by Valentina Za; Editing by Ruth Pitchford)