European Central Bank Vice President Vitor Constancio said expectations for a plan from the central bank to stimulate the market for asset-backed securities have become inflated.
“Whatever could be done would not be extremely significant,” Constancio said in an interview with Bloomberg Television in Frankfurt today. “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.”
With the euro-area stuck in its longest-ever recession and the ECB’s benchmark rate already at 0.5 percent, policy makers are searching for new tools to help companies hampered by high retail lending rates or overly strict rules. ECB President Mario Draghi said on May 2 the central bank would consult other euro-area institutions on how to restart the market for ABS.
“The potential is reduced, because if you look around and see the size of this market, it’s very small indeed,” Constancio said.
Should the ECB need to cut interest rates again, it might face a choice of whether to begin charging banks to park funds in its deposit facility. Such a measure would have “contradictory effects,” Constancio said, adding that banks could pass the costs on to customers.
“It’s a measure which is very difficult to assess the potential effect of,” he said. “But we have seen in the Danish experience, one of the reactions was to, for a while, increase loan rates to offset.”
No decision on such a measure has been taken by officials, Constancio added.
With the ECB assuming responsibility for supervising Europe’s banks next year, policy makers have pushed for a joint resolution authority to be ready at the same time. As that has been opposed by the German government, Constancio said the ECB could live with an interim arrangement such as that proposed by Bundesbank Vice President Sabine Lautenschlaeger.
“There are certainly transitional arrangements that can be devised,” he said. “If a bank attains a point of non-viability it has to deliver the bank to the national authorities.”
“We would like to have a European wall to deal with these situations,” Constancio said. “We can live during a certain period of time without them but I hope a solution will come.”