26 August 2013

Bundesbank/Weidmann: The crisis is not over

What is the Federal Government not telling us about the cost of rescuing the euro?

The high risks of the current programme in Greece were known, as was the need for further funding from 2015. The programme has very little leeway. Even small delays in its implementation can quickly lead to additional funding requirements.

Can you – unlike the politicians – say roughly how large a third support package will be?

Not reliably. The only people who can do that are the troika consisting of the International Monetary Fund, the ECB and the European Commission. They are “on the ground” and have access to the necessary information.

What would help Greece more – new lending programmes or a second haircut

The crisis in Greece can only be resolved by initiating reforms in the country itself. New aid alone will not create competitive enterprises and sound public finances in the long term. A haircut that only leads to us facing the same situation again in five years' time would be counterproductive and send the wrong signal to the other programme countries.

The financial markets have been relatively calm since the President of the ECB, Mario Draghi, promised a year ago to do everything in his power to protect the euro. Is the renewed debate about Greece likely to undermine market confidence in this "newfound" stability?

The members of the Governing Council agree that the crisis cannot be resolved by the ECB, as the underlying problems do not relate to monetary policy. The calm was therefore deceptive, and the current discussion shows that the crisis is still far from over and that much remains to be done before it is overcome. The structural problems in the crisis countries have built up over many years and will take years rather than a couple of quarters to resolve. To promise a swift end to the crisis would be factually incorrect and would undermine reform efforts.

Will the ECB keep interest rates at their current low until the crisis is over?

The ECB's job is to maintain price stability – and that is our guiding principle. I do not expect interest rates to remain low for years into the future, partly because the boost that ultra-loose monetary policy provides to the economy fades the longer it is in place and the risks to financial stability increase.

The decision to transfer national banking supervision to the ECB has already been made. It was recently reported that Spanish banks have many more non-performing loans on their books than originally thought. This would seem to suggest that banking supervision is urgently required?

I believe that a clear distinction must be made here. The Banking Union is a forward-looking project that aims to prevent future problems. Existing problems must be dealt with as a separate matter. They came about under national supervision regimes and should not be communitised through the Banking Union. Therefore, special care must be taken when auditing banks’ accounts. It is also in the best interests of the ECB to ensure that the banks under its supervision are financially sound. Only then can it prevent possible conflicts between monetary policy requirements and financial stability.

If capital requirements are identified in inspected banks, how will they be covered?

First, the bank will have to attempt to reduce business volume, retain earnings or raise capital on the market. If no private investors can be found, detailed analysis must be undertaken before any public funds are committed to establish whether the bank’s business model is sustainable or whether it should be wound up – providing this does not jeopardise the financial stability of the euro area. If a bank’s business model is not deemed sustainable, it should not be kept afloat using public funds.

Is the German banking system resilient?

The average capital adequacy of German banks has improved considerably since the beginning of the financial crisis. Banks have reduced their risk exposures and increased capital. As a result, the capital ratio of the 20 biggest institutions has, on average, roughly doubled. However, for the appraisal to be realistic, it must also take into account the structurally low profitability in the banking system, which cannot be improved fundamentally in the short term given the low-interest rate environment.

Is the plan for supervision to start in the second half of 2014 still realistic

Supervision – and the entire Banking Union – is an enormous challenge, comparable to the creation of monetary union. Being thorough is therefore more important than being quick. We will only be able to stick to the ambitious schedule if national supervisors continue to play an important role. Their experience will, for example, be invaluable in the mixed teams formed under the umbrella of the ECB.

Full interview

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