The President of the ECB, Mario Draghi, argued in favour of the completion of Banking Union in the Eurozone with the introduction of European Deposit Insurance Scheme (EDIS), during a monetary dialogue session with the European Parliament on Monday 9 July.
“With the right policy framework, risk-sharing and risk reduction are thus mutually reinforcing”, said Draghi. He observed that since the financial crisis, banking risks have reduced considerably: optimum-quality equity ratios (CET 1 capital) in the largest banks “are now 67% higher than they were ten years ago”. And risks are falling with the reduction in the stock of non-performing bank loans (NPL), he stressed.
He explained that the sharing of risks greatly helps the reduction of risks. He uses the example of the US FDIC agency, which resolved 500 banks after the financial crisis, whilst resolutions have concerned ten times fewer banks in Europe. He considers that this situation explains the “structural challenges” still facing the EU banking sector.
“In other words, if risk-sharing were to lead to an orderly management of the financial stability consequences derived from risk reduction, this reduction would proceed at a much faster pace”, stressed the former governor of the Bank of Italy. He went on to argue that an EDIS system “would avoid the risk of destabilising self-fulfilling prophecies in the form of bank runs. It would also reduce the risk of financial fragmentation”.
Draghi went on to praise the decision of the Eurozone summit to make the European Stability Mechanism (ESM), the permanent bailout fund of the Eurozone, into the common backstop of the Single Resolution Fund, the financial arm of banking union (see EUROPE 12052). He considers that this backstop should be set in place as soon as possible and its governance should allow rapid decisions.
Under the Franco-German agreement of Meseberg, the backstop cannot be in place until there has been a substantial reduction of banking risks, with no decision expected before 2020.
QE. The MEPs asked the ECB President few questions about the decisions made concerning the phasing-out of the 'quantitative easing' operation for the mass buyback of mainly public securities by the end of 2018, if macro-economic conditions permit (see EUROPE 12041).
He nonetheless stated that the ECB would carry out a viability analysis of the Greek debt in light of the debt measures agreed upon by the Eurogroup before taking position on its inclusion in the QE process. He acknowledged that increased transparency of the aggregated data on the beneficiaries of QE would be possible without certain players drawing undue benefit from this.
In reply to Gunnar Hökmark (EPP, Sweden), who asked him about the risk of maintaining an accommodative monetary policy for an extended period, Draghi said that the ECB was constantly monitoring the effects of the very low interest rates and monetary liquidity.
The ECB President did not agree with Pervenche Berès (S&D, France) that the European institution knew nothing about the case surrounding the Latvian central bank. He made the case for making this more about money laundering, reiterating that the ECB had referred the matter before the Court of Justice of the EU to guarantee appropriate decision-making until the Court returns its judgment (see EUROPE 11996).
Jakob von Weizsäcker (S&D, Germany) asked Draghi about the risks related to crypto-currencies. Draghi shared the concerns of the national authorities on investor protection, whilst considering that crypto-currencies are not a threat to financial stability due to their relatively low amounts and the low exposures of financial players.
Brexit. Neena Gill (S&D, UK) asked the ECB President about the risks to derivatives contract raised by the Bank of Germany on the grounds of a lack of preparedness on the part of Europe.
Draghi replied that as to amounts, it would depend on the volume of contracts maturing before March 2019. He added that it would be necessary to see whether the legislation is in place on both sides to reduce the problem, and that this would depend a lot on what private parties do to reduce the shock. (Original version in French by Mathieu Bion)