You mentioned in the introductory statement further information and analysis being available in early March. Is that an indication that maybe you’re postponing action, that you are postponing additional stimulus, rather than just deciding not to do it today? And what kinds of things should people who follow the ECB be looking at to see if your medium-term outlook on inflation is changing?
The reason for today’s decision not to act is really to do with the complexity of the situation that I have just described, and the need to acquire more information. In this sense, today’s instance is different from what we had in November... The macro-economic projections by our staff, which will be coming out at the time of our monetary policy meeting in March, will contain, for the first time, forecasts for 2016, and that is a very significant change in our analysis, a significant change in the information set that we use for our analysis.
The second factor that led us to reflect is that when we look at monetary and credit developments by year end, which look subdued – although they are stabilising, especially the credit flows – we believe that, and we think we have evidence that, these figures are affected by banks’ behaviour in view of the asset quality review (AQR) performed by the ECB in the course of 2014, because the data upon which the AQR is going to be performed are data for year-end 2013. So, one would not rule out a certain behaviour by the banks that would like to present their best data by the end of 2013, which means that this is going to affect credit flows, which means that we may have different figures in the coming weeks about that.
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It is pretty clear... that banks, in view of the AQR, had carried out some deleveraging, also in some cases significant deleveraging. And so the short-term consequences of the AQR are that banks have to clean up their balance sheets; they know that we will shed light on what is in their balance sheets, so they want to be presenting balance sheets that are clean, and this has a negative effect on credit. But, in the medium to long term, which is now, because the data are from 2013, the AQR will be positive for lending, because it will increase the confidence in the banking system, it will reopen capital markets for banks, as we are already seeing, and it will cause what supervisors call “prompt corrective action”, namely raising capital standards, provisioning and so on. And we are already seeing this by the way, and we are welcoming this action that takes place even ahead of our AQR. All this means that in the not too distant future we will have a more resilient banking sector capable of lending more than it would if the AQR had not been there. We tend to forget that basically concealing the evidence of the banks’ balance sheets, preserving their opaqueness, doesn’t help lending – it in fact hurts lending, so that is the other factor.
And finally, what I said, what I hinted at in Davos: asset-backed securities (ABS). We think that a revitalisation of a certain type of ABS, a so-called plain vanilla ABS, capable of packaging together loans, bank loans, capable of being rated, priced and traded, would be a very important instrument for revitalising credit flows and for our own monetary policy.
Incidentally, our own monetary policy is also going to benefit from the AQR because, if the bank lending channel works, we will see interest rates translating themselves into lower lending rates.
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The press release about the AQR mentions the fact that, together with Common Equity Tier1 (CET1) instruments, additional capital instruments that mandatorily convert into CET1 may be eligible. I was wondering if among those instruments the ECB could also consider hybrid securities and if those hybrid securities could be part of hypothetical market purchases by the ECB?
Constâncio: First, just a reminder that this possibility, which is indeed in the information note that we published, is subject to several conditions. First, it can only be used in the adverse scenario of the stress tests. Why? Because we said for the adverse scenario, the capital requirements may not be demanded immediately. It is different if it results from the AQR or from the baseline scenario – then of course any shortfalls would have to be satisfied with other instruments. For the adverse scenario, which is a scenario that has some degree of risk of happening but it is not a certainty that it will happen, these other types of hybrid are accepted. That is the first condition.
The second condition is that they have to be totally mandatory. It is something that must be in the contract, or, if you wish, in the terms of insurance, of those instruments – namely that the supervisor can convert them into capital. It has to be there.
And the third condition is that any trigger for the conversion has to be such that it is related to the threshold of the adverse scenario. These three conditions have to be fulfilled. As you see, it is a relatively narrow thing.
Full introdutory statement with Q&A
Sharon Bowles: ECB-must do more
Asked at a House of Lords' committee hearing in London whether negative rates were an option for the ECB, ECB Governing Council member Erkki Liikanen replied: "If our inflation outlook worsens, we must be ready for that. Among all these tools, which we can consider and which we have discussed, negative deposit rates is one of those." "But of course, when we take policy decisions in our monetary policy meeting, it's based on the most recent data and careful preparation", he added.
At their March meeting, ECB policymakers will have more information at their disposal, including new forecasts from the bank's staff that will extend into 2016 for the first time. Despite inflation undershooting the ECB's target, Liikanen dismissed concerns that deflation could grip the eurozone. "Deflation means normally a broad-based fall of prices over a prolonged period and on a broad front, and we don't have signs of deflation in the euro area", he told the committee hearing in London, speaking via video link.
Further reporting © Reuters
Bruegel-comments
See also: ECB's decision identifying the credit institutions that are subject to the comprehensive assessment, 4.2.14
© ECB - European Central Bank
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