FRANKFURT (Reuters) - European Central Bank rate-setter Jens Weidmann defended a plan to force banks to build more provisions on non-performing loans, saying the high level of such loans was impeding the creation of a bloc-wide deposit insurance scheme.
The ECB has recently come under fire over the proposal and its supervisory arm has already backtracked, suggesting a delay in implementation and a refinement of the rules were possible.
But Weidmann, also Bundesbank president and touted as a potential successor to Mario Draghi as ECB head, said the plan was sensible since the bad debt pile was preventing an agreement on deposit insurance.
"Insurance usually covers future damage, not damage that already exists," he told a conference in Frankfurt on Friday.
"Hence, in order to be eligible for a common deposit insurance, banks in the euro area have to either fully provision for non-performing loans or divest them," Weidmann said.
According to ECB figures, soured debt in the euro zone banking system totalled around 800 billion euros (£714.8 billion) at the halfway point of 2017.
While the ECB's proposal deals with new non-performing loans, the bank also plans to detail in the first quarter a proposal to tackle the existing stock of bad debt.
"The proposals that were recently made by the ECB in this regard strike me as a sensible way forward," Weidmann said.
Germany has long resisted a joint deposit insurance scheme for the euro zone, fearing that German taxpayers would be on the hook for irresponsible banking in the bloc's periphery.
A long-time critic of the ECB's ultra-loose monetary policy, Weidmann also said policymakers should last month have opted for less aggressive stimulus, as growth was better than expected and the economic recovery might be farther along than inflation figures suggested.
The ECB last month halved its bond buys, aimed at keeping borrowing costs low, but extended the scheme by 9 months until the end of September while also keeping it open-ended.
"We must be attuned to the fact that the economic recovery has progressed further than inflation figures currently suggest," Weidmann said.
"This is why, in my view, a less distinct loosening of monetary policy in the next year and setting a clear end date for net asset purchases would have been justified."
Calling the recovery impressive, Weidmann said growth in Germany, the euro zone's biggest economy, may now be stronger than the Bundesbank projected in June.
(Reporting by Balazs Koranyi; editing by John Stonestreet)