Mersch Says ECB Must Be Mindful About Limits of Monetary Policy

Executive Board member Yves Mersch said European Central Bank policy makers need to realize they can’t fix the region’s economic crisis by themselves.

“The Executive Board and the Governing Council need to be mindful about the limits of what can be asked of monetary policy, what can be asked of central banks and what must not be asked,” Mersch said in a speech in Luxembourg today. “Equally though, other policy areas need to be mindful -– and be reminded -– of their respective responsibilities for the stewardship of the euro.”

The ECB cut interest rates to a record low of 0.5 percent last week to rekindle growth in the 17-nation euro area and President Mario Draghi signaled borrowing costs could decline further if the economic outlook deteriorates. The Frankfurt-based ECB started to consult with European institutions on ways to improve the credit flow to small and medium-sized enterprises.

“One example of the need for action in the respective domains to help unclog specific transmission and funding channels concerns impediments to SME funding and possible measures to re-activate securitization markets,” Mersch said, according to the text of his speech distributed by the ECB.

“The latter may be impaired by a combination of unwarranted stigma due to the fallout from the U.S. subprime crisis, by stringent regulatory requirements and by a range of structural and practical factors,” he said. “These have to be addressed primarily outside the realm of monetary policy, even if the latter could potentially perform a catalytical role in some circumstances.”

Banking Union

Mersch also said that the regulation for a single bank supervisor “is nearing adoption subject to the necessary parliamentary approvals in a number of jurisdictions,” and a draft regulation for a single resolution mechanism is expected from the European Commission in the coming months.

“While a common fiscal backstop is needed for the SRM, resolution funds could come from the private sector, namely the financial industry and the banks eligible for the SRM,” Mersch said. “To achieve fiscal neutrality this could be done via private sector pre-funding or via a mechanism that would re-reimburse any loans from the SRM ex post via a bank levy. In this way recourse to taxpayer funds could be limited and remain temporary for the SRM.”

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