Draghi Says Effectiveness of Banks’ Review Depends on Backstops

European Central Bank President Mario Draghi said financial backstops need to be in place before policy makers publish their assessment on the health of the region’s lenders to ensure confidence in the results.

The effectiveness of the exercise will “depend on the availability of necessary arrangements for recapitalizing banks, if and when needed, including through the provision of a public backstop, if private funds cannot be acquired,” Draghi said in a statement issued for the International Monetary and Financial Committee in Washington tomorrow. “These arrangements must be in place before we conclude our assessment.”

The Frankfurt-based ECB is preparing for a review of banks’ balance sheets and subsequent stress tests to identify capital shortfalls before it assumes supervisory responsibility over the region’s lenders next year. While lawmakers backed the plan for a single oversight body on Sept. 12, the final text of a law hasn’t been published yet. The U.K. has expressed concern about the impact on British banks.

While the ECB can start practical preparations for its new tasks, including hiring staff and renting premises, it can take on supervisory powers no sooner than one year after the final text of the law is published.

Substantial Adjustment

“We are committed to delivering on our new supervisory responsibilities by November 2014,” Draghi said. “We also strongly support the envisaged timeline for the establishment by the end of 2014 of the single resolution mechanism, which is a necessary complement to the Single Supervisory Mechanism.”

Draghi, who is attending the annual meeting of the International Monetary Fund and the World Bank, said that countries sharing the single currency have undertaken “substantial fiscal adjustment” in the last few years.

“The average fiscal position of the euro-area countries is much stronger than that of global peers,” he said. The U.S. government remains shut down as President Barack Obama and House Republican leaders try to negotiate an agreement on increasing the country’s debt ceiling.

Draghi said economic activity in the 17-nation euro economy “bottomed out in the first half of the year and is expected to strengthen gradually in the period ahead.”

Policy makers remain committed to keeping interest rates low for an extended period, remaining “particularly attentive” to money-market conditions, and considering “all available instruments” to guard the region’s recovery, he said, echoing his Oct. 2 policy statement.

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