15 April 2013

ECB/Draghi: The role of monetary policy in addressing the crisis in the euro area

In order to give banks sufficient reassurance that access to liquidity will not be a problem over a relevant planning horizon we have extended the maturity of our lending. The longest maturity of our long-term refinancing operations (LTROs) has been raised from the standard three months before the crisis to six months after the post-Lehman cataclysm, to one year by mid-2009, and to three years at the end of 2011. More recently, we have announced the Outright Monetary Transactions (OMTs), in order to eliminate the pricing of unwarranted tail risks in the bond markets. OMTs entail interventions in government bonds with a remaining maturity of up to three years. OMTs have a number of characteristics: they require the government concerned to accept a programme involving support by the European Stability Mechanism that entails strong and effective conditionality. Such conditionality is important in particular to preserve monetary policy independence. Interventions would be ex ante unlimited, which is essential to ensure their effectiveness. All interventions would be sterilised so as to ensure that there is no impact from these measures on the overall monetary policy stance. There would be transparency as the stock of securities acquired under the OMT programme would be published regularly, together with the average duration.

The ECB’s non-standard measures I mentioned earlier are geared towards addressing primarily two types of premia: the liquidity risk and the redenomination risk. The ECB’s liquidity operations, such as the three-year Long-Term Refinancing Operations (LTROs), are intended to relieve banks of liquidity and funding stress. They, therefore mainly aim to reduce liquidity risk in the money market. Most non-standard measures employed by the major central banks around the globe seem remarkably similar. They aim to implement the desired monetary policy stance, in conditions in which the stance may not be smoothly and homogeneously transmitted to the economy, or where a further easing of the stance through standard policy rate adjustments is hindered by the lower bound constraint. The unifying overall goal is to improve the effectiveness of monetary policy, in ways that can support the attainment of the monetary policy objectives.

The genuine Economic and Monetary Union comprises four pillars: a banking union with a single supervisor; a fiscal union that can effectively prevent and correct unsustainable budgets; an economic union that can guarantee sufficient competitiveness to sustain high employment; and a political union that can deeply engage euro area citizens.

Progress is underway in all these directions. As regards the banking union in particular, a first and important step has been made with the decision to create the Single Supervisory Mechanism (SSM), the responsibility for which has been assigned to the ECB in the last ECOFIN. I am confident that the SSM’s euro area perspective will make a significant contribution to safeguarding financial stability in the monetary union. In this sense, it will also support the conduct of monetary policy, as a stable financial system is a prerequisite for the proper transmission of our policy signals. But I would like to stress the importance of quickly complementing the SSM with a Single Resolution Mechanism. This is necessary to guarantee timely and impartial decision-making, particularly in the cases where cross-border resolution is required. What’s more, a Single Resolution Mechanism is essential to ensure that the SSM’s supervisory decisions for resolution can be followed up with action, without reinforcing the vicious link between banks and sovereigns. Finally, a Single Resolution Mechanism will credibly pursue the least-cost resolution strategy from a euro area perspective, also taking into account cross-border spillovers.

Full article

© ECB - European Central Bank