18 February 2013

ECB/Draghi: Introductory statement at the ECON hearing

The impact of a low interest rate environment

Naturally, the ECB is aware of the challenges arising from a protracted period of low policy rates and ample liquidity. Let me elaborate on the three main challenges. The first is that low interest rates may affect the ability of savers and investors to generate returns. This is especially the case for institutions targeting nominal returns, such as insurance companies and pension funds. Yet, by ensuring price stability throughout the crisis, monetary policy has contributed to more stable financial conditions. This is central to the interests of savers and investors: there can only be sustainable returns in a stable environment.

The second challenge relates to incentives. A protracted period of low interest rates and ample liquidity facilitates rolling-over loans at very low costs. Banks may therefore have less incentive to monitor credit risk properly and may provide too many loans to non-profitable business. Over time, such misallocation of financial resources would undermine overall productivity and depress growth and employment.

The third challenge is that protracted monetary accommodation may fuel bubbles in house prices and other asset markets. As the crisis has painfully demonstrated, the bursting of such bubbles inflicts large costs for the real economy.

The establishment of a Single Resolution Mechanism

The Single Resolution Mechanism should be centred in a Single Resolution Authority with a European Resolution Fund at its disposal. I welcome the European Council’s December statement that during the course of 2013, the Commission will submit a proposal for such a mechanism for Member States that are participating in the Single Supervisory Mechanism.

The ECB shares the European Council’s view on timing for the Single Resolution Mechanism, namely that it will be required once bank supervision is effectively moved to the Single Supervisory Mechanism. We therefore welcome the European Council urging the co-legislators to examine the proposal as a matter of priority with the intention of adopting it during the current parliamentary cycle.

There are four main reasons for a Single Resolution Mechanism, with a Single Resolution Authority at its centre.

• The first reason is that only a Single Resolution Authority will ensure timely and impartial decision-making focused on the European dimension. In a situation where a cross-border resolution is required, the Single Resolution Authority would avoid national focus and pursue the optimal resolution strategy, thus mitigating coordination problems.
• The second reason is that the Single Resolution Authority would credibly pursue the least cost resolution strategy, assessing possible cross-border spillover effects and systemic concerns, and ensuring that resolution costs are first and foremost borne by the private sector. It would thereby minimise resolution costs without recourse to taxpayer money.
• The third reason is that the Single Resolution Authority is an essential complement to the Single Supervisory Mechanism. The Single Supervisory Mechanism will provide a timely and unbiased assessment of the need for resolution, while the Single Resolution Authority will ensure prompt and efficient action once the trigger is reached. This will avoid misaligned incentives that could arise with supervision moved to the European level while resolution responsibility remained national.
• The fourth reason is that a Single Resolution Authority would help to break the vicious bank-sovereign nexus.

The Single Resolution Authority naturally needs to be strong and effective to deliver what is needed. This requires three features to be fulfilled:

• First, the Single Resolution Authority needs to dispose of a robust resolution framework, one that provides it with enforceable resolution tools and powers. In this respect, the proposed bank recovery and resolution directive is key. Adoption of the directive, ideally by June, is an urgently needed step towards a strong European resolution framework.
• Second, the Single Resolution Authority needs access to resolution financing. It should therefore have a European Resolution Fund at its disposal, which should be financed by the private sector via risk-based ex ante levies. The European Resolution Fund should be backed by a public backstop mechanism, the support of which would need to be recouped via special ex post levies on the private sector. This means that it would be fiscally neutral over the medium term.
• Third, the Single Resolution Authority should have an institutional set-up that allows for independence, sufficient operational capacity and a robust accountability framework with effective judicial protection against resolution decisions ex post.

The Commission is currently assessing the options for the institutional anchoring of the Single Resolution Authority. I am looking forward to its proposal, which will need to ensure these three essential features.

Full speech

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