–Adds Comments On Banks’ Vulnerability To A Spike In Interest Rates

ROME (MNI) – The officials of individual Eurozone states, not the
European Central Bank, must solve the problems of banks that are still
“addicted” to ECB funding, Governing Council member Mario Draghi said
here Friday evening.

National authorities “have to resolve this, otherwise we’ll have
zombie banks in the EU,” Draghi warned.

Speaking at a conference organized by the Bank of Italy, which he
heads, Draghi also warned that many banks internationally have been
benefiting from a low interest rate environment but may be building up
risky assets that could cause problems when interest rates rise.

“When interest rates are very low, the incentive to assess client
risk properly goes down because clients can pay up on the low interest,”
Draghi explained. “When rates go up, the client goes bust and
deterioration in the quality of underlying credit emerges.”

He added: “There’s a risk to banks of a sudden rise in interest
rates that we should pay great attention to. Global economies are at
risk because of banks that did not pay sufficient attention to the
quality of credit conceded.”

With regard to the ECB’s crisis-induced liquidity measures, Draghi
underscored the thorny dilemma the ECB faces in withdrawing them.

“A successful exit strategy has to respond to two conflicting
needs,” he said. “First it’s essential to continue to support the
orderly functioning of the interbank and financial markets and to
sustain the flow of credit to the economy in a situation that has
improved but remains fragile.”

However, “at some point we must stop in order to avoid creating
distortion,” he added. “We must not sow the seeds of future imbalances
by creating too much liquidity. A successful exit strategy will also
require banks to obtain adequate funding from the market, reducing the
need for central bank intermediation.”

Bank of France Governor Christian Noyer, speaking at the same
conference argued that having low interest rates for too long can lead
to excessive risk taking. Surging credit growth in the past has led to
asset bubbles, leading some to raise the question of whether monetary
policy should address such bubbles, Noyer noted.

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