Coeure Says Low Rates May Weaken Will to Fix Balance Sheets

European Central Bank Executive Board member Benoit Coeure said record low interest rates may prompt banks to delay repairing their balance sheets.

“Low short-term interest rates in the euro area should in the short term help to prevent a disorderly adjustment of balance sheets and support the profitability of financial institutions, but they may weaken the incentives for repairing balance sheets in the first place,” Coeure said in the text of a speech delivered in Paris on March 6 and published today.

While the ECB kept its benchmark lending rate at a record low of 1 percent for a fourth month yesterday, ECB President Mario Draghi signaled the central bank has done enough to battle the debt and financial crisis, laying the groundwork for an eventual exit from low interest rates and emergency lending measures by turning the spotlight on inflation again.

“The ECB has used conventional and non-conventional measures to support price stability,” Coeure said. “It is striving to restore the transmission channels of monetary policy and make sure that the impulse stemming from it is transmitted uniformly across the 17 economies of the euro area.”

Coeure echoed Draghi’s sentiment on a more favorable economic outlook, saying that government action on stricter fiscal enforcement and other economic policies is “bearing fruit.”

Clearing Dispute

The policy maker, who until this year was the chief economist of France’s Treasury, restated the ECB’s policy that euro-denominated securities should be cleared within the 17-nation currency bloc. The matter is currently the subject of a legal dispute with the U.K.

“I would like to reaffirm that as a rule, the core infrastructures for the euro should be located in the euro area,” Coeure said. “There can and should be no automatic granting of liquidity to offshore” clearing houses.

Britain is suing the ECB over this policy, trying to protect the business of London-based houses that clear euro-denominated products. The U.K. government accuses the central bank of going against principles of the European Union single market and contravening European law amid wider international efforts to regulate derivatives markets.

Separately, Coeure said euro-area nations should be allowed to toughen some bank rules beyond normal EU standards if their financial stability is threatened.

The ECB has proposed “the possibility for national authorities, within the framework of a single EU rulebook, to adopt -– with specific safeguards -– stricter requirements in their respective member states for macro-prudential reasons,” he said. “This is necessary because member states need to address country-specific financial stability concerns stemming from different structural features of their domestic financial systems.”

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