Draghi Says Growth Fears, Not Regulation, Driving Bank Turmoil

  • Region's lenders would be more fragile without recent revamp
  • Working through bad-loan stock takes time, ECB President says

Could a Capital Markets Union Fix Europe’s Banks?

The volatility playing havoc with European bank stocks in recent weeks is primarily due to market nerves about the slowdown in global growth rather than misperceptions about the direction of financial regulation, European Central Bank President Mario Draghi said.

“Current market developments appear to be more related to general factors concerning weakening economic activity,” Draghi said during a hearing at the European Parliament on Monday.

Measures by regulators to reduce risk and bolster capital levels have had “the effect of making the banks stronger,” he said. “If we had these fluctuations before the crisis, I am pretty sure the whole system would have been much more fragile than it is today.”

In testimony lasting more than two hours, the ECB president was peppered with queries from parliamentarians over the struggles besetting the region’s lenders, from the application of new bail-in rules to progress in working through the legacy of bad loans from the financial crisis. In his introduction, Draghi signaled the ECB would be ready to take action if it became evident that snags in the banking sector were impeding monetary stimulus from reaching the economy.

Fled Banks

Investors have fled bank stocks from Italy to Germany this month. The Stoxx Europe 600 Banks Index, a gauge of 47 regional companies involved in the banking sector, has lost more than 20 percent since the start of the year, and measures of risk on banks and insurers in Europe have hit the highest since at least 2013.

“Market sentiment has become more volatile and susceptible to rapid change,” Draghi 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.”

Draghi stressed that the region’s nascent banking union works better when the same rules are applied across countries when lenders are failing. Diverging treatment of bondholders in Italy and Portugal last year, just before new regulations on applying losses took effect on Jan. 1, may have contributed to sell-offs.

Banking Union

“Equal implementation across the euro zone will give the creditors certainty that they are being treated equally,” Draghi said. “We talk a lot about banking union, but if we don’t have equal treatment under the application of the bail-in rules, we will be far from a banking union. That’s where improvement is needed.”

Draghi sought to assuage lawmakers’ concerns over Italy’s non-performing loans, another ailment plaguing the European financial industry. He denied reports the ECB was considering purchasing the Italian debt and said the non-performing loans clogging up Italian bank balance sheets were “adequately provisioned for” after being identified in the ECB comprehensive assessment, a procedure intended to ensure banks across Europe are sufficiently capitalized.

The solution, however, isn’t coming anytime soon, he warned. “The ECB is well aware that to deal with the NPL issue, one needs time.”

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