FRANKFURT (Reuters) - Properly controlled state aid for euro zone banks can be justified, and regulated support is a fundamental component of a well-structured banking system, European Central Bank supervisor Ignazio Angeloni said on Monday.
His comments come as Italy negotiates a controversial plan to recapitalize lenders with public money, limiting losses for investors and giving banks a boost to work through a mountain of bad debt, weighing down their books for nearly a decade.
State aid must be used sparingly, Angeloni told a conference in Barcelona. But he added that other jurisdictions, particularly the United States, also allow for such intervention and even current European rules allow for government support in the interests of financial stability.
"A role for the public sector is justified on conceptual grounds," Angeloni said. "In fact, the existing European legislation, including the Bank Recovery and Resolution Directive and the Commission communication of 2013, provide safeguards that balance the provision of state aid and the involvement of private sector creditors, in the interest of financial stability."
"This notion has, in my view, been somewhat lost in some recent debates," Angeloni added.
Shares in Banca Monte dei Paschi di Siena <BMPS.MI>, Italy's third-largest lender, fell 14 percent on Monday after the ECB told the bank to slash its bad debts by 40 percent over three years, heaping more pressure on Rome and Brussels to stabilize the Italian banking system.
Monte dei Paschi is the weakest link among big lenders in the euro zone's fourth-largest bank sector and may have to raise capital to meet the ECB's target. That is a concern for the government as the bank relies heavily on retail investors, including ordinary households, who are at risk of sharing the losses.
Angeloni said that state aid could still distort the playing field but more balanced regulation and supervision and resolution authorities has reduced the potential for harmful effects.
"Making the judgment in concrete cases, is not easy and requires, in my view, the full cooperation of the competition, supervision and resolution authorities," Angeloni added.
(Reporting by Balazs Koranyi, editing by Larry King and Hugh Lawson)