Mersch Says ECB Policy Decisions Leaves Onus Now on Banks

European Central Bank Executive Board member Yves Mersch said the institution’s latest policy decisions have shifted the responsibility to financial institutions and governments for rekindling euro-area lending.

“It is now up to the banks making use of the favorable financing condition that we provide, passing this on to households and firms to ultimately revive the flow of credit,” Mersch said in the text of a speech in Frankfurt today. “The ball is in the court of the private sector and the euro-area governments.”

The ECB cut its key interest rate to a record low of 0.25 percent this month and extended unlimited liquidity provision to euro-area banks through mid 2015. The decision, which came one month before updated economic forecasts are available, fueled speculation about which tools the ECB could deploy next if economic growth falters and deflation risks materialize.

“The ECB should ensure that its liquidity smoothly flows to the banking sector,” Mersch said. “Excess-liquidity policy, however useful and necessary it has been -– and still is -- should not become a permanent feature. It should be limited in time to avoid dressing-up non-performing loans or ever-greening bad assets that would undermine incentives to restructure or to address structural weaknesses in banks’ balance sheets.”

The ECB started a three-stage probe into bank-balance sheets this month to identify capital shortfalls before it takes over supervisory powers next year. The ECB sent out templates for data collection on Nov. 18, Mersch said.

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