Draghi renews call for operational ECB oversight
European Central Bank President Mario Draghi renewed his endorsement of setting up euro-area bank oversight by 2013, a day after German Chancellor Angela Merkel cautioned against rushing to install the new supervisor.
The ECB’s Governing Council welcomes an Oct. 19 pledge by European Union leaders to integrate euro-area financial systems and “in particular, the objective of agreeing on the legislative framework for a Single Supervisory Mechanism by 1 January 2013 with a view to the SSM becoming operational in the course of 2013,” Draghi told reporters on Friday.
European Central Bank President Mario Draghi has backed giving the ECB control over all banks, saying it would offset a tendency for banking problems to be “hushed up” by national regulators.
Negotiations to create an ECB-based bank supervisor have bogged down over disagreements on the regulator’s scope and setup. A German-led alliance this week sought to limit the supervisor to big banks and also called for wholesale changes to plans for managing oversight within the central bank.
The proposal from Germany, Finland, Luxembourg and the Netherlands contrasts with EU Financial Services (SXFPEX) Commissioner Michel Barnier’s plans to put the ECB in charge of all euroarea banks. All 27 EU leaders last month affirmed their pledge to establish ECB oversight of euro-area banks and set a Dec. 31 goal for political agreement on the new supervisor’s design. European Central Bank President Mario Draghi said the OMT announcement has led to “a series of improvements” on financial markets. Mario Draghi’s bond-buying plan has become the European Central Bank’s weapon of choice to reduce interest rates even before it has been activated.
Spanish Prime Minister Mariano Rajoy said on Nov. 6 he needs to know how much the ECB would push down Spain’s borrowing costs before his government asks for help and signs up to the conditions attached. Bond yields have already dropped and there’s no point seeking a bailout if they don’t fall any further, he told Cope Radio. ECB President Draghi yesterday praised the impact of the so-called OMT program in lowering borrowing costs, while playing down the prospect of further ECB rate cuts. “Market confidence has visibly improved on the back of our decisions as regards Outright Monetary Transactions,” he said. The announcement “by itself produced an easing of financial-market conditions.”
The OMT, unveiled on Sept. 6 in response to the threat of a euro breakup, aims to restore transmission of ECB rates by purchasing the bonds of countries like Spain if they apply for a European Union bailout and agree to conditions. While no country has yet done that, the mere threat of unlimited ECB intervention has reduced bond yields in troubled euro-area nations, assuming the job of the central bank’s traditional policy instruments as the economy lurches toward recession.
“The OMT’s signalling effect has a stronger easing effect than any rate cut or liquidity operation could currently have,” said Christian Schulz, senior economist at Berenberg Bank in London. The OMT’s “aim is to remove the tail risk of eurozone break up. But besides reducing tail risks, the OMT also supports the economy.” Draghi said the OMT announcement has led to “a series of improvements” on financial markets. “There has been a return of flows from the rest of the world, in particularly U.S. money-market funds,” he said. “Another positive sign is that there has been some limited bond placement by euro-area institutions. There have been a few issuances by Ireland and Portugal.”