Weidmann says ECB liquidity cannot replace bank capital needs

BERLIN (Reuters) - Governments should not look to the European Central Bank to ease their role in recapitalising banks as liquidity is no substitute for bank capital, ECB Governing Council member Jens Weidmann said on Tuesday.

Euro zone banks will undergo an intensive inspection of their books next year before the ECB starts supervising them.

The review could expose holes in the capital base of banks, which then need to be filled with fresh capital from investors or, if that is not possible, by state support.

"Ensuring bank solvency is not a task of the Eurosystem (of central banks)," Weidmann, who also leads the German Bundesbank, said in the text of a speech to be given at a conference organised by insurer Allianz.

"Central bank liquidity provision may not become a substitute for potentially needed recapitalisation by governments."

The ECB has provided banks with unlimited cash since the intensification of the financial crisis in 2008, and gave them more than 1 trillion euros ($1.4 trillion) in 3-year loans in two instalments beginning in December 2011.

Many analysts expect it to offer more long-term funds to banks before the review is published, and ECB President Mario Draghi has said long-term loans are one of the options the central bank has.

Weidmann said that while the ECB had succeeded in preventing an escalation of the crisis, it had come at some cost.

"Indeed, it has moved far into unknown and also dangerous territory," said Weidmann, who has opposed the ECB's government-bond buying programmes.

"It must look out not to become a prisoner of governments."

While the borders between monetary policy and fiscal policy blur more easily in crisis times, the further central banks move into that territory, the more their independence will be questioned, Weidmann said.

He repeated the ECB's forward guidance that it did not expect to raise interest rates for an extended period of time, but added that the central bank must be ready to increase borrowing costs when needed.

"It is also clear that low interest rates for a long period of time give false incentives, which have to be considered. The impact of extreme low interest rates decreases over time, while risks increase," Weidmann said.

Low rates risk a delay in cleaning up balance sheets, can lead to excessive risk-taking and asset price increases, and put off pressure from governments to reform, he said.

(Reporting by Alexandra Hudson, writing by Sakari Suoninen)