–Adds Proposals To Strengthen Governance, Bank Capital
FRANKFURT (MNI) – The European Central Bank will do whatever is
necessary with its policy interest rates in order to deliver price
stability, while continuing to contribute to financial stability with
its emergency liquidity measures, ECB Vice President Vitor Constancio
said Friday.
In the text of a speech for delivery at the ECB Watchers’
conference here, Constancio noted that one of the key lessons from the
financial crisis is that monetary policy-makers should not wait until
after a crisis has set in to intervene.
“The large output losses during the financial crisis have clearly
demonstrated that for policy-makers to intervene ex-post is suboptimal.
And the financial distress accumulated before the crisis was just too
colossal to be attributed to insufficient attention for inflation on the
side of central banks,” Constancio said.
“A more plausible explanation is that an exclusive focus on
inflation is not enough to define a robust policy strategy. It needs to
be reinforced through a perspective of a leaning-against the wind to
avoid monetary policy becoming pro-cyclical in relation to boom-bust
credit and leverage cycles.”
Once a crisis has occurred, monetary policy must be separated from
policies intended to foster financial stability, he argued. “We clearly
demonstrated this in April when we decided to leave the non-standard
measures unchanged, but at the same time decided to increase our key
policy interest rates,” he said.
“In the future we will continue to live up to our mandate,” he
pledged. “We will do whatever is necessary to deliver price stability in
the medium term, using our policy interest rates, and continue to
contribute to the stability of the financial system, using our
non-standard measures.”
Constancio called for greater joint governance in the Eurozone,
including the creation of some new Eurozone institutions for the banking
sector and for general political integration.
To address the cross-border issue of weak banks, he proposed the
establishment of a “Euro Area Resolution Fund,” which would be funded by
private sector contributions.
“Such a fund could both mitigate the systemic impact of bank
failures and help to solve the burden sharing problem, which could allow
a swift intervention in a crisis,” he argued. “Naturally, clear,
stringent and properly communicated conditions for the use of the fund
would be a crucial component of the scheme, outlining that any form of
bail-out is to be excluded.”
Constancio also argued for greater political unity on a broader
level. “Ultimately, to give the euro area dimension real impetus
requires a permanent political centre of gravity,” he argued, proposing
a body similar to the European Council just for the Eurozone.
Constancio also called for a strengthened “link between stress
testing of bank capital and recapitalization.”
“Steps are currently being taken in this direction via public and
private sector solutions, but these remain essentially ad hoc and not
part of a well-established framework for maintaining and restoring, when
needed, levels of capital commensurate to the needs of the European
banking sector,” he said.
Nevertheless, Constancio said he hoped there would be a strong link
between tests and recapitalization efforts in the upcoming European bank
stress tests in July.
[TOPICS: M$$EC$,M$X$$$,MT$$$$,MGX$$$,M$$CR$]
