Euro zone banking sector problems risk dominating central bank policymaking to the neglect of its price stability mandate, ECB Executive Board member Benoit Coeure said on Tuesday.
Because of this danger, it was crucial to agree new rules on banking supervision, giving the leading role to the ECB, Coeure told an audience at Euro Finance Week.
"We are at risk in Europe to face a situation which is a little bit like Japan in 90s, with forbearance in addressing issues in the banking system and the temptation on relying on central bank to provide liquidity to banks even at the expense of efficiency and ultimately at the expense of price stability," Coeure said
In the 1990s, Japan went through a lost decade of lacklustre growth and deflation dangers, where the central bank stepped in to aid ailing banks and kept interest rates very low.
Coeure also said that a new euro zone banking supervisory system should not be put together hastily, adding that while the ground rules should be agreed by January, actual implementation could start later.
Costs from bank failures should be carried by taxpayers only in exceptional situation, and even then local taxpayers should have to bear the costs before involving those at a European level, Coeure said.
"In case these accidents (of bank failures) materialise, the residual risk to taxpayers will be borne first by local taxpayers and only at a later stage by European taxpayers," said Coeure, who joined the ECB at the beginning of the year.
Coeure also said that the ECB was ready with Outright Monetary Transactions (OMT) as its new bond-buying plan, if a country were to apply for help from the European bailout fund.
The new programme had helped to calm financial markets, even though it has not yet been activated, he said, adding that this situation would not last were countries to slacken their reform and budget consolidation efforts.
(Reporting by Sakari Suoninen and Eva Kuehnen; editing by Stephen Nisbet)