Mario Draghi made his comments to a committee of MEPs in Brussels just days after the White House confirmed plans to reform several areas of regulation, including Dodd-Frank.
That refers to the wide-ranging measures introduced in 2010 to prevent a repeat of the financial crisis, such as greater regulatory oversight and capital controls.
President Trump has long argued that tighter regulation has cost banks hundreds of billions of dollars - money that could have been used to create jobs and spur economic growth.
Mr Draghi insisted lax regulation had been a key cause of the crisis a decade ago.
He said: "The last thing we need at this point in time is the relaxation of regulation.
"The idea of repeating the conditions that were in place before the crisis is something that is very worrisome." [...]
Hearing of the Committee on Economic and Monetary Affairs of the European Parliament
[...] You asked me to discuss the financial stability implications of our accommodative monetary policy. In short: the benefits of our policy clearly outweigh potential side effects. And the latter are best addressed – if necessary – through other policies.
As I have just argued, our monetary policy has been key in supporting the ongoing recovery. Going one step further: our measures have played a key role in preserving stability in the euro area – and that includes financial stability.
Let me now elaborate on the potential side effects of a very accommodative monetary policy on financial stability.
One of those side effects concerns the impact on banks’ profitability. Let us first look at the data. Following a slowdown in profit generation in the first quarter of 2016, the profitability of euro area banks stabilised in the second quarter. According to preliminary data, developments for the third quarter seem to be in line with those observed for the second quarter.
Monetary policy can have an impact on bank profitability through various channels. Our assessment is that so far these effects tend to largely offset each other. Low (and negative) rates might dent bank profits through the narrowing of net interest margins. At the same time, in supporting the recovery, accommodative monetary policy reduces delinquency and default. It thus improves the credit quality of firms and households. This improved credit quality in loan portfolios – together with increasing intermediation volumes – is certainly positive for banks. It has been a key factor sustaining banks’ earnings over the last year. Moreover, low longer-term interest rates increase the market value of financial assets held by banks. This, in turn, results in capital gains that further support bank profitability. This aggregate picture masks some heterogeneity within the banking sector. In particular, depending on their business models, individual banks might be affected in different ways by the low interest rate environment.
A second issue is the potential risk of credit or asset bubbles. Currently, we do not see compelling evidence at the euro area level of stretched asset valuations. Both corporate bond spreads and equity prices appear to be broadly in line with fundamentals. [...]
Nevertheless, the longer the accommodative measures need to be kept in place, the greater the risks of unwarranted side effects on the financial system become. For instance, asset prices may increase to levels that are not in line with fundamentals because investors might be tempted to take on more risk during times of low yields.
Such developments are best addressed by enacting appropriate macro and micro prudential policies.
While our single monetary policy is geared towards delivering price stability for the euro area as a whole, macroprudential policy measures can be designed to address financial stability risks that may be building up in specific market segments, jurisdictions or individual countries. Addressing potential risks at their origin also reduces the probability of contagion throughout the euro area.
Microprudential policies also help to reduce vulnerabilities in banks. I therefore welcome the European Commission’s risk reduction proposals presented last November, which further develop the EU’s legal framework for credit institutions and should increase the resilience of banks. [...]
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