European Central Bank Executive Board member Benoit Coeure said policy makers would consider offering more long-term loans to banks only when they are in a position to lend to companies and households.
“It’s not necessarily about conditioning the liquidity provision on actions taken by the bank, it’s also about making sure it happens in an environment where the money will be useful and find its way to the real economy,” Coeure said late yesterday in Frankfurt. “We want to ensure that when we provide lending to banks, it serves a purpose.”
ECB President Mario Draghi signaled last week that any new liquidity tools must ensure that the money reaches the economy rather than helping financial institutions bolster their capital. When the ECB issued more than 1 trillion euros ($1.4 trillion) of 3-year loans at the height of the debt crisis in 2011 and 2012, banks used most of the money to buy higher-yielding government bonds. A policy of conditionality was first floated in October by Klaas Knot, the Dutch representative on the 23-member Governing Council.
Coeure said it’s not for the ECB to tell banks how to use the money they borrow because “if we move too far into credit allocation there can be a risk that we are doing a thing that we should not do.” New loans are “not needed at the current juncture,” he said.
At the same time, policy makers are aware that liquidity provision “can create excessive risk taking” as banks “can invest the money in assets not contributing to the transmission of monetary policy,” he said, citing purchases of government bonds as an example.’’
A strong banking supervisor can help mitigate these risks, according to Coeure. The Frankfurt-based ECB started a three-stage probe into bank balance sheets last month that’s designed to identify capital shortfalls before it assumes oversight tasks next year.
“We want to be able to trust the supervisory arm of the ECB to do the right thing, to avoid that banks take risks, to make sure that their funding models are sound, to make sure they have access to enough funding in the market so that we can do our job, which is providing liquidity for monetary policy purposes,” Coeure said.
The recovery in the 17-nation euro-area came close to a halt in the third quarter, with the economy expanding 0.1 percent after it emerged from its longest-ever recession in the three months through June. Inflation was 0.9 percent in November, compared with the ECB’s target of just under 2 percent.
While price gains are low, the euro area is nowhere near deflation, Coeure said. Inflation rates will come back to 2 percent “at some later point but not so long after” the ECB’s forecast horizon of 2015, he said.
The ECB last week predicted growth of 1.1 percent next year and 1.5 percent in 2015. It sees inflation averaging 1.1 percent in 2014 and 1.3 percent the following year.
“We have to be alert and ready to act if needed, and that’s when we consider all instruments,” Coeure said. “Large-scale asset purchases -- it is possible, it is an instrument the ECB can use provided that we don’t breach other treaty requirements. I don’t see the inflation prospect as requiring such action.”
The forward guidance the ECB introduced in July, after plans by the U.S. Federal Reserve to taper bond purchases pushed up global money-market rates, “has worked in my view,” Coeure said. Draghi pledged to keep borrowing costs at or below current levels for an extended period, a promise that he has reiterated since cutting the benchmark interest rate to a record low of 0.25 percent in November.
When the Fed does start to scale back asset purchases, “it shouldn’t have much of a market impact,” Coeure said. Still, “we should be prepared to make sure that anything that happens to euro-area money market rates is in line and consistent with our forward guidance.”
At the same time, he acknowledged that a time will come when that guidance will have to change. “When we see upward risks to price stability materializing, we will have to raise rates, that’s for sure,” he said.
The publication of minutes of the Governing Council’s monetary-policy discussions may provide economists and investors with more clarity about when that situation will occur. Draghi said in August that the Executive Board will make a proposal to the council “during this fall.” He said last week that talks are delayed given the complexity of the issue.
“We are not ready,” Coeure said. Governors will talk about the release of council deliberations at some point in early 2014. “I will be more prudent than the president; I will not commit on a timeline,” he said. “But it will come.”
One contentious point is whether the voting behavior of individual council members will be revealed. Board member Joerg Asmussen has said that minutes should disclose who voted for what, while council members including Austria’s Ewald Nowotny have expressed their concern that publishing minutes with individual votes might expose policy makers to political pressure from their national governments.
“There are very good arguments against it, there are also good arguments for it,” Coeure said. “Governors are bound by the treaty to vote in the euro-area interest, so it doesn’t matter too much if the minutes are published or not.”
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