Draghi Says ECB Will Act If Market Turmoil Threatens Outlook

Is Draghi Raising Expectations Bad For the Market?
  • ECB president says euro-area banks now more resilient
  • ECB will monitor headwinds as global economy rebalances

The European Central Bank will take measures to ensure its monetary policy reaches the real economy if that appears threatened by financial-market turbulence, President Mario Draghi said. The euro fell.

“In the light of the recent financial turmoil, we will analyze the state of transmission of our monetary impulses by the financial system and in particular by banks,” Draghi told European Parliament lawmakers in Brussels on Monday. In addition, the ECB will examine the impact of renewed declines in energy prices and “if either of these two factors entail downward risks to price stability, we will not hesitate to act,” he said.

Mario Draghi in Brussels
Mario Draghi in Brussels
Photographer: Emmanuel Dunand/AFP via Getty Images

The Frankfurt-based ECB faces its next policy decision on March 10 at a time when price gains in the currency bloc are far below the central bank’s goal of just under 2 percent, depressed by slowing global growth and an energy supply glut. Bank-led equity sell-offs in the past week now threaten to choke off a fragile recovery in credit and stymie the euro area’s recovery.

Referring to the global economy, Draghi said that “a continuation of the rebalancing process is needed to secure sustainable growth over the medium term.” He also said this “could imply some headwinds in the short term, which will require close monitoring of the related risks.”

Bank Outlook

As Draghi presented his remarks, the euro fell and bank stocks initially declined before recovering. The Euro Stoxx Banks Index rose 3.6 percent at 4:24 p.m. Frankfurt time and the single currency slid 1.1 percent to trade at $1.1135.

QuickTake Europe’s QE Quandary

Attempting to draw a line under the past week’s turmoil, which saw one-day stock-price declines of more than 10 percent at both Deutsche Bank AG and Societe Generale SA, Draghi underlined the ECB’s efforts since 2014 to repair confidence in the region’s banking sector.

“The fall in bank equity prices was amplified by perceptions that banks may have to do more to adjust their business models to the lower growth/lower interest-rate environment and to the strengthened international regulatory framework that has been put in place since the crisis,” he said. “However, we have to acknowledge that the regulatory overhaul since the start of the crisis has laid the foundations for durably increasing the resilience not only of individual institutions but also of the financial system as a whole.”

Even though the ECB combed the balance sheets of the euro-area’s largest banks in 2014 prior to becoming their supervisor, investor concerns in recent weeks have focused especially on the pile of bad loans still present at Italian lenders, and political uncertainty over plans to reduce them. Italian bank stocks have lost almost 30 percent since the beginning of the year.

No Discussion

Draghi said euro-area banks are in a “good position” to bring down non-performing loans in an orderly manner over the next few years, and added that they won’t face additional legal capital requirements. He dismissed a report by Reuters on Monday that the central bank is discussing including asset-backed securities based on Italian non-performing loans in its asset-purchase program.

“As far as I know, however, I’m not aware of any talk or conversation,” he said. “We are not talking about buying anything.”

Questioned about the U.K.’s current negotiations with the European Union over its continued place in the bloc, Draghi said it should be an opportunity to deepen the monetary union.

The ideal goal in the negotiations should be to “anchor the U.K. in the European Union,” Draghi said, so that “both can draw benefit from this.” He added that the ECB isn’t party to the discussions.

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