He focused on the essential issues to be tackled in the banking sector, including the need to strengthen banks’ balance sheets and expanding banks’ supply of loans once loan demand picks up in the recovery.
He presented three essential points regarding the banking sector:
· First, banks need to strengthen their balance sheets. They need to become self-reliant and be able to stand on their own two feet. The authorities can – and have – provided considerable temporary support, but in a market economy we cannot manage the financial sector or provide exceptional support indefinitely. Banks must rebuild their capital base. There are many ways to do so. The improved capital markets offer opportunities to raise funds including equity. Profits earned should be used – as priority – to build capital and reserves, rather than to be paid out as dividends or undue compensation.
· Second, banks should lend, because the magnitude of public support has been provided for this purpose, and the strengthened balance sheets will allow them to lend. Banks should strive to maintain their supply of loans. Most recently, in the third quarter of this year, the annual growth of loans to non-financial corporations continued to decline, while the annual growth of loans to households remained broadly unchanged. This pattern of loan dynamics is broadly in line with past regularities around business cycle turning points. But the latest ECB bank lending survey suggests that, while the peak in the tightening of banks' credit standards is behind us, credit standards remain considerably tighter than prior to the turmoil. It will be particularly important that banks intensify their efforts to expand their supply of loans once loan demand picks up in the recovery.
· Third, compensation and bonuses must remain contained. When necessary, banks should take advantage of the available government support to achieve these goals.
Mr Trichet concluded by saying “the financial industry has to increase transparency, strengthen its management of liquidity and risk, and make its business models more robust. As I mentioned, while maintaining the flow of finance to the real economy, financial institutions must continue to strengthen their balance sheets, by improving their capital and funding positions.”
© ECB - European Central Bank
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