Weidmann Says ECB Liquidity Shouldn’t Be Too Generous

European Central Bank Governing Council member Jens Weidmann said liquidity tenders for banks shouldn’t interfere with the functioning of capital markets.

“The terms should not be too generous in comparison with market conditions,” Weidmann said during an event in Berlin today. “Refinancing from the central bank should therefore not lead to the situation that structural problems in the banking sector remain unsolved.”

Euro-area lenders face a year of balance-sheet checks and a stress test conducted by the ECB before it takes over supervision duties next year. The Frankfurt-based central bank pumped more than one trillion euros ($1.3 trillion) into the financial system from the end of 2011 into early 2012 in the form of three-year loans to ward off a credit crunch loomed. Now, as banks have begun to repay those funds, policy makers have debated whether more such operations are needed.

“Refinancing in the euro area is also taking place over very long maturities,” said Weidmann, who leads Germany’s Bundesbank. “We therefore have to watch out that liquidity is made available to the banks and not that the capital markets are usurped.”

The ECB this month cut its benchmark interest rate to a record low of 0.25 percent and extended until the middle of 2015 a policy of giving banks as much cash as they need.

“The goal of liquidity provision should be also to make credit available to the private sector,” Weidmann said. Warning of a situation where banks are too closely entwined with national governments, he added that central-bank funds shouldn’t be used to stock up on government debt.

In the euro-area’s crisis countries, these stocks “have constantly risen over the past two years, instead of being reduced,” he said.

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