Mario Draghi: Hearing at the Committee on Economic and Monetary
Affairs of the European Parliament
Introductory statement by Mr Mario Draghi, President of the European Central Bank, before
the Hearing at the Committee on Economic and Monetary Affairs of the European Parliament,
Brussels, 15 February 2016.
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Mr Chairman,
Honourable Members of the Economic and Monetary Affairs Committee,
Ladies and Gentlemen,
The first weeks of this year have shown that the euro area and the Union at large face
significant challenges. A strong effort by all policy makers will be needed in the months ahead
to overcome them. I am therefore grateful to be back before your committee to discuss these
challenges and how the ECB can contribute to tackling them.
In my remarks today, I will address in turn the global economic context, recent financial
developments and the state of the euro area recovery. I will conclude by briefly presenting our
most recent decision to disclose the Agreement on Net Financial Assets - or ANFA - as I know
this topic is of concern to some of you.
The state of the global economy
Let me start with the state of the global economy. In recent weeks, we have witnessed
increasing concerns about the prospects for the global economy. Activity and trade data have
been weaker than expected, turbulence in financial markets has intensified and commodity
prices have declined further.
Slowing growth in emerging market economies is a focal point for this uncertainty. In the early
years of this century, many emerging economies expanded at a rapid pace. They benefited
from increasing integration with the global economy and the tailwinds of buoyant financial
markets. As these factors diminish, many countries have to adjust to a new reality. In several
economies the slowdown has revealed and exacerbated structural problems which are
increasingly restraining growth. A continuation of the rebalancing process is needed to secure
sustainable growth over the medium term. This could imply some headwinds in the short term,
which will require close monitoring of the related risks.
One consequence of this adjustment is the divergence of economic cycles. While the recovery
in advanced economies is gradually proceeding, the growth momentum in emerging market
economies has weakened.
Weaker global demand has also contributed to the recent fall in the price of oil and other
commodities, which in turn may have aggravated fiscal and financial fragilities in some
commodity-exporting economies. Countries that have suffered worsening terms of trade have
seen a sharp decline in activity, while investment in their energy sectors has contracted.
Recent financial developments
Since early December, a general deterioration in market sentiment has taken root and has
gathered pace over the last week. This initially appeared closely linked to concerns regarding
weakening economic activity around the globe - notably in emerging markets - and to potential
adverse signals from falling commodity prices. Over time however, market sentiment has
become more volatile and susceptible to rapid change. In this environment, stock prices
significantly declined and bank equity prices were particularly hit, both globally and in Europe.
The sharp fall in bank equity prices reflected the sector's higher sensitivity to a weaker-than-
expected economic outlook; it also reflected fears that some parts of the banking sector were
exposed to the higher risks in commodity-producing sectors. The bulk of euro area listed
banks, although they have relatively limited exposure to emerging markets and commodity
producing countries, are currently trading well below their book values.
The fall in bank equity prices was amplified by perceptions that banks may have to do more to
adjust their business models to the lower growth/lower interest rate environment and to the
strengthened international regulatory framework that has been put in place since the crisis.
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. Banks have built higher and better-quality capital
buffers, have reduced leverage and improved their funding profiles. Moreover, the Basel
Committee on Banking Supervision noted that substantial progress has been made towards
finalising post-crisis reforms and that the remaining elements of the regulatory reform agenda
for global banks are being finalised. The clarification of these elements will provide regulatory
certainty on the stability of the future framework. This will support the banking sector's ability
to make long term sustainable business plans into the future. In fact, central bank governors
and heads of supervision indicated that they are committed to not significantly increase overall
capital requirements across the banking sector.
In the euro area, the situation in the banking sector now is very different from what it was in
2012. Perhaps most importantly, euro area banks have significantly strengthened their capital
positions over the past few years, notably as a consequence of the Comprehensive
Assessment conducted in 2014. For significant institutions, the CET1 ratio has increased from
around 9 to 13%, making them more resilient to adverse shocks. In addition, the quality of the
banks' capital has also been substantially improved.
With the 2015 Supervisory Review and Evaluation Process (SREP), the ECB has outlined the
steady-state Pillar 2 supervisory capital requirements. This means that, all things equal, capital
requirements will not be increased further. Hence, the banking sector can now conduct much
better capital planning. Moreover, in 2015, the banks under ECB supervision further increased
profits relative to 2014. This allows banks to have appropriate distribution policies while still
meeting regulatory capital requirements and buffers, and to support lending to the economy.
In addition, the ECB's monetary policy actions continue to support banks' financing conditions
and, more broadly, economic activity.
Clearly, some parts of the banking sector in the euro area still face a number of challenges.
These range from uncertainty about litigation and restructuring costs in a number of banks to
working through a stock of legacy assets, particularly in the countries most affected by the
financial crisis. There is a subset of banks with elevated levels of non-performing loans (NPLs).
However, these NPLs were identified during the Comprehensive Assessment, using for the
first time a common definition, and have since been adequately provisioned for. Therefore, we
are in a good position to bring down NPLs in an orderly manner over the next few years. For
this purpose, the ECB's supervisory arm is working closely with the relevant national authorities
to ensure that our NPL policies are complemented by the necessary national measures.
The state of the euro area recovery and the role of economic policies
Against the background of downward risks emanating from global economic and financial
developments, let me now turn to the economic situation in the euro area. The recovery is
progressing at a moderate pace, supported mainly by our monetary policy measures and their
favourable impact on financial conditions as well as the low price of energy. Investment
remains weak, as heightened uncertainties regarding the global economy and broader
geopolitical risks are weighing on investor sentiment. Moreover, the construction sector has so
far not recovered.
In order to make the euro area more resilient, contributions from all policy areas are needed.
The ECB is ready to do its part. As we announced at the end of our last monetary policy
meeting in January, the Governing Council will review and possibly reconsider the monetary
policy stance in early March. The focus of our deliberations will be twofold. First, we will
examine the strength of the pass-through of low imported inflation to domestic wage and price
formation and to inflation expectations. This will depend on the size and the persistence of the
fall in oil and commodity prices and the incidence of second-round effects on domestic wages
and prices. Second, in the light of the recent financial turmoil, we will analyse the state of
transmission of our monetary impulses by the financial system and in particular by banks. If
either of these two factors entail downward risks to price stability, we will not hesitate to act.
In parallel, other policies should help to put the euro area economy on firmer grounds. It is
becoming clearer and clearer that fiscal policies should support the economic recovery through
public investment and lower taxation. In addition, the ongoing cyclical recovery should be
supported by effective structural policies. In particular, actions to improve the business
environment, including the provision of an adequate public infrastructure, are vital to increase
productive investment, boost job creations and raise productivity. Compliance with the rules of
the Stability and Growth Pact remains essential to maintain confidence in the fiscal framework.
The Agreement on Net Financial Assets
Let me conclude by turning briefly to the recent decision to publish the Agreement of Net
Financial Assets, also known as ANFA. This is another step to live up to our commitment to
be accountable and transparent, both towards you as Parliament and towards the public at
large.
The ANFA is an agreement between the ECB and the euro area National Central Banks - the
NCBs. It ensures that monetary policy is unaffected by NCB operations related to their national,
non-monetary policy tasks.
The right to perform such tasks dates back to the start of Economic and Monetary Union. At
that time, the founding member states decided to centralise only central bank functions and
tasks that are necessary to conduct a single monetary policy. All other tasks remained with the
NCBs. Such national, non-monetary policy tasks include managing the NCBs' remaining
foreign reserves - including gold - after the transfer of foreign reserves to the ECB, managing
some non-monetary policy portfolios including those related to pension funds for their
employees, or providing payment services to national governments.
When the NCBs hold portfolios not related to monetary policy as part of their national tasks,
these portfolios are financed either by central bank money provided by the NCBs or by
nonmonetary liabilities. This does not interfere with monetary policy as long as it is limited to less
than the amount of banknotes needed by the public. This limit ensures that banks still have to
borrow from the Eurosystem at the monetary policy rate set by the Governing Council.
Here is where the ANFA comes in. Its purpose is to limit the size of the NCBs' non-monetary
policy portfolios, net of the related liabilities, and thus to ensure that the Eurosystem can
effectively implement the single monetary policy.
Of course, when performing national tasks, the NCBs must comply with the Treaty including
the prohibition of monetary financing. Moreover, if these tasks were to interfere with monetary
policy in any other way, they can be prohibited, limited or have conditions placed on them by
the Governing Council.
The publication of the previously confidential ANFA text was a unanimous decision of the ECB
and the NCBs in the Eurosystem to live up to our commitment to be transparent. This
publication should resolve misunderstandings about ANFA. In particular, it clarifies that the
sole purpose of ANFA is to set limits for non-monetary policy operations related to national
tasks of the NCBs, which they are allowed to conduct according to the Treaty. Nothing more
and nothing less. These limits ensure that the NCBs' operations do not interfere with the
objectives and tasks of the Eurosystem and, in particular, with the single monetary policy.
Finally, complementing the information on ANFA, the ECB also published data on the
Eurosystem's aggregate net financial assets. The NCBs will follow suit and disclose their
respective net financial assets when publishing their annual financial accounts. These data
provide factual information to the public as to which part of central bank money demand is
provided by non-monetary policy operations.
Thank you for your attention, and I look forward to your questions.