07 March 2014

ECB/Lautenschläger: Interview with WSJ

Lautenschläger discussed i.a. the OMT programme and the AQR. "The AQR and the stress test will be tough", she said. "They will be credible, stringent and consistent. It's the last chance to clean up."

Your predecessor, Jörg Asmussen, favoured the Outright Monetary Transaction (OMT). The institution you worked for until a couple months ago, the Bundesbank, vigorously opposed it. What's your position?

Without knowing the future concrete circumstances underlying a decision on the potential activation of the OMT, it is difficult to answer this question. Overall, I am a little bit critical about the incentives structure offered by the OMT. I do see some legal questions coming up. But to get the concrete answers on those questions you need concrete circumstances: the economic conditions; what you buy; how much you buy, mitigating factors like the conditionality, etc.

How important is it that monetary policy decisions are not influenced by the state of the banking system?

What is important is that you have to make sure that the decisions in the banking supervisory arm are not influenced by your monetary policy task and vice versa, and that you can do. But you cannot have a Chinese wall in your head. As a central banker, you should be very well familiar with what is happening to banks within in the euro area, after all they constitute one of the biggest monetary policy transmission channels. But rest assured we will implement strict rules and practices to ensure separation between both tasks. Currently, we are examining best practices of other central banks around the world which are also tasked with banking supervision. The decision-making procedure for supervisory decisions is a very special one: the Supervisory Board of the Single Supervisory Mechanism will draft the decision and the Governing Council, the ultimate decision-making body, adopts it through a non-objection procedure.

Does there need to be a response from the European Union to the Federal Reserve’s new rules for international banks?

We have an agreement between the United States and Europe that there is a certain kind of reciprocity in accepting the regulatory regime as equal. The next half-year should be a period where we ask our colleagues from the Fed how they want to implement the new foreign bank rules. And then we need to talk in the European arena about how we want to react, in particular when we are talking about reciprocity.

Isn’t the asset quality review (AQR) process for euro area banks too late? The United States addressed problems with its banks several years ago.

No, it is not too late. The AQR and the stress test will be tough. They will be credible, stringent and consistent. It’s the last chance to clean up. We are a little bit late, but then again, the situation in the United States was a different one. The US banks had many problems in the beginning, in 2008, because of the huge amount of toxic assets on their balance sheets. The problems some European banks had to face, the perceptions we are fighting against, are stemming from 2008 and from the sovereign crisis of 2012.

Do you think a lot of banks will fail as a result of the AQR and the stress test?

Shall we define fail? Fail means for me not to meet the targets of 5.5 per cent capital in the adverse scenario or the 8 per cent on the baseline scenario of the stress test. Well, I think there will be some banks, which will need to improve their capital situation. I won’t tell you a number because I do not know a number. But what is the objective of the exercise? It is to boost confidence. If we do this correctly and confidence in the system improves, then I am pretty sure that these banks will not have many problems to improve their capital situation.

Full interview

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