26 June 2013

BoF/Noyer: The euro area perspectives

Noyer gave an overview of the current economic and financial situation in the euro area and then discussed the major changes currently underway that are considerably strengthening the monetary union.

Today the first pillar of the banking union is being constructed: the Single Supervisory  Mechanism. We are currently working on legal issues, on identifying systemically important banks within the euro area, on the supervisory model, on the future data reporting and, of course, on the asset quality review that will be undertaken before we take on the responsibility of supervision. The governance structure we have adopted will guarantee that, while the Governing Council will keep the decision power, there will be no conflict of interest between monetary policy and banking supervision. On the contrary, more consistent supervision across the euro area should allow for the early detection of potential risks and imbalances and, ultimately, improve the transmission of monetary policy.

This is a fundamental first step and its rapid implementation will be a major success for the euro area. But, alone, it cannot achieve the objectives of a banking union. That is why we must rapidly construct its two other pillars: a supranational bank resolution authority and a unified deposit insurance system.

The banking union will deliver a higher level of structural coherence to the euro area’s financial system, which has already been considerably strengthened since 2008: banks’ capital levels have been substantially consolidated, certain activities have been streamlined and the most stressed banks have been restructured. Recent numbers show major advances for European banks in their efforts to strengthen their capital base, in line with Basel III requirements and, in particular for big international banks, quite comparable to capital strengthening in US banks (when differences in accounting standards are neutralised) . The banks have reimbursed half of the liquidity injected via the two LTRO programmes.

From the very first signs of the crisis (remember the Eurosystem injected €90 billion in August 2007 to counter the impact of the first freeze in the financial markets), the Eurosystem has provided constant support to bank funding (and thereby underpinning credit to the economy). We have been able to use our collateral framework – with a wide range of counterparties accepted – to relieve the liquidity constraints faced by banks. The maximum maturity of our operations has increased from three months before the crisis to three years. Through these measures, we have addressed the liquidity pressures on banks and avoided a genuine credit crunch. Both our standard and non-standard monetary policies have prevented the materialisation of deflation risk.

The programme we launched a year ago – Outright Monetary Transactions – succeeded in countering speculation about a euro area break-up. Its basic functioning is as follows: if a given State suffers unwarranted tensions on its debt, we could decide to intervene as far as is necessary, provided that State commits to an agreed recovery programme. Undoubtedly, the announcement of the creation of the OMTs had a very strong impact: banks and firms regained access to capital markets; the spreads between the yields on Spanish and German 10-year bonds fell from more than 6pp in July 2012 to just under 3pp in May 2013, while the premium on Italian 10-year bond halved. This new monetary policy instrument has therefore fostered a considerable improvement in financial conditions in the euro area and represents a solid shield against further speculative attacks.

The ECB’s Governing Council has stressed that monetary policy will remain accommodative  for as long as necessary. In the period ahead, we will monitor very closely all incoming  information on economic and monetary developments and stand ready to act if necessary.

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