–Adds Comments On Challenges Banks Face In Raising Capital
PARIS (MBI) – The European Central Bank’s recent rate cut and its
announcement of additional liquidity measures were designed to counter
“strong headwinds” in the economy generated by bank deleveraging, ECB
President Mario Draghi said Thursday.
Speaking in Berlin, Draghi said funding problems at European banks
were slowing the flow of credit to the Eurozone economy, adding to
market tensions that have already weakened growth.
Banks are “facing problems in raising longer-term funding in
financial markets,” Draghi said. “The resulting shortening of their
funding leads in turn to maturity mismatches on balance sheets of the
kind that caused the financial crisis.”
Draghi noted that a new capital-raising requirement for banks is
“not an easy process.” Europe’s biggest banks are required to increase
their core tier 1 capital ratios to 9% by mid-2012. Draghi noted that
they can do so either by raising new capital, selling assets, or
reducing lending.
Finding new capital is the best of the three options, but it is
“expensive in a depressed market and faces resistance from
shareholders,” Draghi observed. “Selling assets is less preferable and
curtailing credit to the real economy is even worse,” he added.
Earlier Thursday, Market News International reported that ECB
officials were supporting a plan to modify the new capital ratio
requirement in a way that would eliminate the incentive for banks to
dump assets or restrict lending.
Sources said that under a new proposal being discussed in official
circles, banks would be required not to reach a 9% ratio but to raise a
specified, fixed amount of capital by the mid-2012 deadline.
Based on figures that banks provided to the European Banking
Authority as of end-September, the regulators would calculate the amount
of capital each bank would have needed to hit the 9% ratio at that time.
Each bank would then be required to raise the specified level of capital
regardless of what they had done with their assets since then or what
they might do with them in the future.
Draghi said the banking problems in Europe are also damaging the
monetary policy channel by which the ECB’s rate decisions are translated
into easier credit conditions in the real economy.
“In the present conditions, this process turns out to be hampered,
so that the impact of a rate cut by itself is weakened,” Draghi said.
“Banks limit their lending to other banks and potentially to the broader
economy, and they hold on to precautionary balances of cash as
self-insurance.”
Draghi said the ECB’s decision to offer refinancing operations with
a maturity of three years, its decisions to accept bank loans as
collateral and its move to reduce the required reserve ratio from 2% to
1%, were all designed to address the tight credit conditions in the
banking system.
That package of measures, he said, “should be felt tangibly in the
financial sector and the real economy over the coming weeks and months.”
Regarding the recent European Union summit, Draghi said that the
decisions to create a fiscal compact with clear rules and automatic
sanctions were “capable of making public finances in the euro area
credibly robust.”
He said that together with recent “six-pack” economic governance
rules recently approved by the European Parliament, the Brussels
decisions of last week were “a breakthrough for clear fiscal rules in
our monetary union.”
But he added that “the crisis has not ended yet. It is now
important not to lose momentum and to swiftly implement all those
decisions that have been taken to put the euro area economy back on
course.”
–Paris Newsroom, +331-42-71-55-40; jduffy@marketnews.com
[TOPICS: M$$CR$,MFX$$$,M$$EC$,MGX$$$]