No EU deposit insurance if bad loans not cut: ECB's Draghi

FRANKFURT (Reuters) - There cannot be a common European insurance scheme for bank deposits if the level of unpaid loans is not reduced, the president of the European Central Bank said on Monday.

Mario Draghi's comments mark a rare alignment with Germany's position on a key issue and also his first attempt at a fightback against Italian criticism of the ECB's decision to force banks to set aside more money against loans that sour.

The creation of a European deposit insurance scheme (EDIS) has long been a key goal of the ECB but has faced opposition from Germany, where the government fears having to foot the bill for banks in countries such as Italy that are burdened with high levels of non-performing loans (NPLs).

"The NPL issue and the EDIS are interlinked," Draghi told the European Parliament's economic committee.

"Risk reduction and risk sharing should go in parallel ... and NPLs are part of this," he added.

Draghi was echoing comments by the head of Germany's Bundesbank, Jens Weidmann, who had defended the ECB's clampdown on bad loans on Friday and said the high levels of soured credit was an impediment to a common safety net for depositors.

Last month the European Commission discarded earlier proposals for full-fledged European insurance of savers if banks fail, leaving the burden largely with individual member states.

EU rules guarantee deposits up to 100,000 euros ($118,000), a provision meant to strengthen confidence in the region's banks after a decade-long crisis that has seen the bailout of several top banks.

But existing national schemes to insure depositors are considered insufficient to cope with a major banking crisis.

Draghi said a full-fledged deposit insurance scheme had to remain the ultimate goal and that any postponement should be limited in time.

"(There) shouldn’t be a vague postponement because EDIS remains a fundamental pillar of the banking union," Draghi told the European parliamentarians.

EDIS was also a point of contention in Germany's coalition talks, which have collapsed due to disagreements over immigration policy.

(Reporting by Francesco Canepa; Editing by Gareth Jones)