11 July 2013

ECB/Cœuré: Reviving credit growth in the euro area

Cœuré talked about the challenges for the European financial sector that had been thrown up by the crisis. These, he said, came under three headings: deleveraging, fragmentation and recession.

I will today discuss in turn the role of three key factors in that respect: monetary policy, Banking Union and financial market structure.

We have introduced a series of measures to ensure that banks can pass on these low interest rates in the real economy, in particular where they are needed the most. These include providing as much liquidity as they need to euro area banks, reviewing our collateral framework, lengthening the maturity of our operations to three years when euro area banks were facing severe funding stress, and removing redenomination risks in financial markets through our announcement of Outright Monetary Transactions (OMT).

Banking Union can help boost credit provision through two key channels. First, by increasing transparency over the quality of banks’ assets, which is key to distinguish strong from weak banks and hence remove the concerns hanging over the whole banking sector. Second, by ensuring that banks that are not in position to lend can be restructured or resolved without creating financial instability.

These two channels correspond to the two main elements of Banking Union: the Single Supervisory Mechanism (SSM) and the Single Resolution Mechanism (SRM).

The SSM should be established later in 2013 and start operating twelve months later as a single system, with a common supervisory manual applying to all participating banks, and the ECB directly supervising larger banks. Generally, the SSM should reduce concerns over hidden losses by creating common oversight of risks in the euro area banking sector and reducing regulatory forbearance.

Specifically, before the ECB takes over its tasks as single supervisor, it will undertake a rigorous balance sheet assessment of the banks it will directly supervise, including an asset quality review. The assessment will be undertaken together with national supervisory agencies and, as needed, with external consultants. In case it reveals capital shortfalls, it is the responsibility of the banks to raise capital themselves. As acknowledged by the European Council, public backstops will ensure that any remaining shortfalls are filled. Such backstops can be provided at national or, as last resort, at euro area level.

Regarding the SRM, the legal framework for resolution contained in the Bank Recovery and Resolution Directive (BRRD) creates a stronger set of tools for winding down failing banks in the future. By ensuring that bail-in must precede bail-out, the BRRD achieves a level playing field and reduces financial fragmentation linked to the strength of national budgets. Moreover, in the transition to the BRRD, and as of next month, new State aid rules will require the burden-sharing of losses by shareholders and creditors, if resolution actions involve public funds. This will ensure that shareholders and creditors are the first to bear losses, and not the taxpayers.

But it is key, particularly for cross-border banks, that there is a strong central authority that can use these tools in a swift and impartial manner. The ECB has been clear that we need a single European resolution authority and a single resolution fund as a fundamental complement to the SSM. I welcome the proposal of the European Commission in this respect and will assess it in detail. The plan that the SRM comes into force in 2014 and can start its operations as from January 2015, when the BRRD enters into force, is also welcomed.

The role of banks has been reduced after the crisis, and the euro area will probably move towards a more balanced financing mix, with a greater role for arms’ length finance based on capital markets. Being more balanced, this model would be more resilient. But the euro area is and will remain a bank based economy. In fact, there are essential constituencies, namely SMEs and households that still obtain credit almost exclusively from banks. Accordingly, there can be no sustained recovery without a healthy, competitive and prudent banking system. Cleaning up the banks, as was done at an early stage in the US, is not merely desirable, it is a condition to finally emerge from the crisis and move on.

The ECB can help reduce divergences in bank funding. But governments have to ensure that banks are properly capitalised and that their balance sheets are cleaned up. Similarly, the ECB can help support the economy and improve the macroeconomic outlook. But governments have to introduce the structural reforms that are essential to open up investment opportunities, and without which banks will not sustainably alter their risk assessments.

Full speech

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