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Constancio Says ECB Far From Decision on Negative Deposit Rate

May 29 (Bloomberg) -- European Central Bank Vice President Vitor Constancio comments on negative deposit rates, asset-backed securities and financial stability.

He made the remarks in an interview with Bloomberg Television in Frankfurt after presenting the ECB’s twice-annual Financial Stability Review.

On a negative deposit rate:

“Banks will of course react to any such measure. It’s a measure which is very difficult to assess the potential effect of. Certainly there will be contradictory effects of that measure. It could increase the use of liquidity positions to lend, to have active operations an not just being passive. But we have seen in the Danish experience, one of the reactions was to, for a while, increase loan rates to offset. That of course goes into the other direction. There are many effects in different directions. It’s something that we are analyzing, as has been explained by President Draghi several times. But certainly no decision has been taken, we are far away from any decision.”

On a potential ABS-purchase program:

“The potential is reduced because if you look around and see the size of this market it’s very small indeed. Whatever could be done would not be extremely significant. It’s something that’s in the menu of things but I wouldn’t attribute a big importance. The public debate on that has been a bit overblown.”

On financial stability:

“Certainly the situation has improved in general in financial markets and that helps the banking sector. But it is true that in the Financial Stability Review we have expressed our concerns with some aspects and situations of the banking sector, starting with the profitability prospects in view of the weak growth that we now have in Europe. Non-performing loans are increasing as a result of it. So the general assessment in our Financial Stability Review is that financial stability has improved but still remains fragile due to weak growth and some bank vulnerabilities.”

On common resolution:

“There are certainly transitional arrangements that can be devised. If a bank attains a point of non-viability it has to deliver the bank to the national authority. It has to be resolved in that context. The difficulty is with cross border banks. If we talk about national banks, it’s one national authority. We would like to have a European wall to deal with these situations. We can live during a certain period of time without them but I hope a solution will come.”

European Union Commissioner Michel Barnier said that “the commission is working and intends to present a solution that won’t need a treaty change and won’t just be a coordinating entity. It was an important message coming from the commission.”

To contact the reporters on this story: Jana Randow in Frankfurt at jrandow@bloomberg.net; Jeff Black in Frankfurt at jblack25@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net

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