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12 December 2013

ECB/Praet: Interview with the Financial Times


Praet stressed the importance of strong comprehensive assessments, and said that the ECB was prepared to act should the procyclical impact of the AQR be significant. (Includes comments from Mario Draghi.)

Mr Draghi said last Thursday that there had been a brief discussion of negative interest rates and that any further LTRO would have to involve an extension of lending to the real economy. Are these two policies for which you feel as though you could build a strong consensus of support on the governing council should economic – or financial – conditions disappoint?

What is important here is to remember that the governing council unanimously shares the same assessment of economic conditions: Price pressures are going to be subdued for a prolonged period of time. As a result, we all agree to have an accommodative monetary policy for as long as needed. And even take more measures, if needed. That's why we can say: we are ready to act and able to act.

Under what conditions would you act?

We are very well aware that price pressures are likely to remain subdued for a prolonged period of time but we expect inflation rates to converge again towards 2 per cent as the cyclical upswing of the economy takes hold. We are at the same time very conscious that, if some of the downside risks do materialise, then we would act decisively again.

What are the scenarios that could lead you to act?

There are a number of downside risks that we have identified. They relate to the state of the economy and downside risks to growth, a tightening of global financial conditions with undue spill-overs to the euro area, energy prices, and a fatigue in structural reforms in Europe. However, for this last downside risk, monetary policy has clearly its limits in what it can do.

Another risk would be that, as a result of the comprehensive assessment, there could be some dampening effect in the short term. However, this potential procyclical effect of an AQR should not lead to softening the rules of the AQR. 

Could you just say a little bit more about the possible impact of the AQR?

A strong comprehensive assessment makes central bank action more effective. Monetary policy does not work as well if banks’ capital basis is thin and insufficient to support lending.
The pass-through of monetary policy is primarily via the banks and it takes time. The comprehensive assessment should shorten the time it takes for monetary policy to impact the real economy. Indeed, it is easier for the central bank to support the economy as healthier banks tend to lend more.

Perhaps paradoxically, a rigorous AQR and stress test helps monetary policy. Appropriately treating banks’ holdings of sovereign debt according to the risk that they pose to banks’ capital makes it unlikely that the banks will use central bank liquidity to excessively increase their exposure to sovereign debt. Therefore, should the procyclical impact of the AQR be significant, then monetary policy would be able to act - without hesitation and being reassured that the side effects of a liquidity injection that we have seen for the 2011-2012 operations would be minimised.

And if you did act because of the impact of the AQR, what exactly would you do?

Depending on the situation, the central bank can decide on the most effective way liquidity provision can be provided. There are no restrictions on the way a central bank provides liquidity to the banks via repo, a priori.

Full interview


ECB President Mario Draghi has said he won’t hesitate to fail lenders if needed, signalling a determination to prove the central bank can spot weaknesses before it becomes the euro area’s single bank supervisor in November.

Draghi said in October that if “banks have to fail, they have to fail". He said on December 5 that the “ultimate test of credibility” of the review is that institutions regain the confidence to resume lending to each other.

A key factor in the stress tests will be sovereign bond portfolios. Draghi said this month that banks have used the ECB’s long-term liquidity operations to stock up on government debt, which carries a zero risk-weight under current international rules set by the Basel Committee on Banking Supervision.

The ECB president said that sovereign debt “is going to be stressed like all other categories in the banks’ balance sheets”. The regulations governing the risk-weighting of government bonds aren’t a matter for the ECB and will be discussed by the Basel Committee “at the appropriate time", he said.

Full article © Bloomberg

Further speech, 13.12.13

See also: ECB-Draghi: Sovereign Debt to Be Included in Stress Test © WSJ



© ECB - European Central Bank


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