Draghi re­news call for op­er­a­tional ECB over­sight

The Pak Banker - - Front Page -

FRANKFURT:

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.”

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