Vítor Constâncio: Presentation of the ECB's Annual Report 2011 to the
European Parliament
Introductory statement by Mr Vítor Constâncio, Vice-President of the European Central Bank,
to the European Parliament's Committee on Economic and Monetary Affairs, Brussels,
25 April 2012.
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Madam Chair,
Honourable members of the Committee on Economic and Monetary Affairs,
It is a great pleasure to present to you the European Central Bank's Annual Report for 2011
which forms a core part of our accountability towards the European Parliament. I will first
very briefly review the economic and monetary developments over the past year and explain
our monetary policy decisions. I will then touch upon the current fiscal challenges in the euro
area and progress made to reinforce the EU economic governance framework. Finally, I
would like to address issues related to financial stability and regulation, with which your
Committee deals extensively.
Before doing so, I should like to highlight an important event in 2011: the enlargement of the
euro area to a seventeenth member, Estonia. There is no better way to demonstrate the
pivotal role in the wider European integration process of the euro area, which is open to
those countries and economies that are fully compliant with the entry criteria in a convincing
and sustainable manner.
Economic and monetary developments in 2011
2011 continued to be an exceptional year, confronting the ECB again with rather challenging
economic and financial conditions.
In the earlier part of the year, the economic recovery in the euro area continued, supported
by global growth and strengthening domestic demand. Headline inflation rates rose
significantly in early 2011 due to energy and commodity price increases, and the balance of
risks to the inflation outlook shifted to the upside. To preserve price stability and retain
inflation expectations in the euro area firmly anchored, the Governing Council raised the key
ECB interest rates in April and July 2011 by 25 basis points on each occasion, after having
kept them at very low levels for almost two years.
As of mid-July, tensions in financial markets again intensified, fuelled mainly by market
participants' concerns about the evolution of public finances in several euro area countries.
The resulting tighter financial conditions and rapidly deteriorating economic confidence,
together with lower global demand, dampened euro area economic activity in the second half
of 2011. High financial market uncertainty together with deleveraging pressures on banks'
balance sheets also affected money growth, which diminished towards the end of the year. In
view of this, the Governing Council subsequently reduced the key ECB interest rates in
November and December by a total of 50 basis points. Since then, rates have remained at
the historically low level of 1.0%.
As financial market tensions adversely affected the monetary policy transmission
mechanism, the Governing Council also adopted a range of non-standard monetary policy
measures as of August 2011. These included the reactivation of the Securities Markets
Programme, the launch of a second covered bond purchase programme and measures to
provide liquidity in foreign currencies. Furthermore, the Eurosystem decided to maintain the
fixed rate full allotment procedure in all refinancing operations until at least the end of June
2012.
In December the Governing Council adopted additional enhanced credit support measures,
including the conduct of two longer-term refinancing operations with a three-year maturity,
increased collateral availability and a reduction in the reserve ratio to 1%. The main purpose
of these measures was to address the short-term funding needs of the euro area banking
sector so as to mitigate the effects of strains in financial markets on the supply of credit to
households and businesses.
Fiscal policies, bond markets and economic governance
The crisis has shown that ensuring sound public finances is a prerequisite for
macroeconomic and financial stability, as well as for the smooth functioning of monetary
union. In response to the sovereign debt crisis and negative spillover effects, and in order to
restore credibility, several euro area countries, including the most affected, implemented bold
fiscal consolidation and structural reform measures, and strengthened their budgetary
frameworks in 2011.
As a result, the aggregate general government deficit for the euro area fell significantly from
6.2% of GDP in 2010 to 4.1% of GDP in 2011. This reduction in the budget deficit was driven
both by consolidation measures (notably cuts in government investment and employment, as
well as increases in indirect taxes) and some favourable revenue developments stemming
from more supportive cyclical conditions. The improved fiscal situation was reflected also by
bond markets: on average, government bond yields declined in the euro area as a whole
between the start and the end of the year.
A key feature of the euro area government bond markets in 2011 was the diverging
development in yields across countries mainly as a consequence of the markets' perceptions
of the individual countries' fiscal fundamentals. The actions of Central Banks to support
liquidity in the global financial system contributed to ease tensions in the sovereign debt
markets. In the context of the Euro Area other measures operated also to reduce those
tensions. I am referring to the re-activation of the SMP programme in August 2011, the
outcome of the meeting of the euro area Heads of State or Government on 9 December,
which led to the adoption of the "fiscal compact", and finally to the ECB decisions to reduce
key interest rates and organize two 3 year Long Term Refinancing Operations.
Finally, progress has been accomplished to reinforce the economic governance framework of
EMU - both as regards crisis prevention and crisis resolution. The EU rules guiding the
design and implementation of national fiscal policies have been strengthened as well as in
the legal frameworks of Member States. A new macroeconomic surveillance framework has
been created. The new provisions included in the elements for EU fiscal governance
framework are important steps in the right direction. However, the devil lies in the details of
the implementation. Most notably, the 2012 European Semester should be used to enforce
rigorously the reinforced fiscal and macroeconomic surveillance mechanism.
The ECB will play a significant role in the crisis management framework. Together with the
Commission and the IMF, ECB staff will undertake a rigorous debt sustainability analysis of a
Member State requesting financial stability support in the context of the European Stability
Mechanism (ESM). The ECB will also be involved in the programme design and monitoring.
EFSF and ESM interventions in the secondary bond market will be performed on the basis of
an ECB analysis recognising the existence of exceptional financial market circumstances
and risks to financial stability. The ECB welcomes the Eurogroup's recent decision to
increase the total size of the euro area firewall to around 800 billion. However, let me be
clear on one point: no firewall will be high enough to be a substitute for the required fiscal
and structural adjustments in euro area Member States.
Financial sector issues
As regards the on-going financial regulatory reform, the EU has taken important steps in
2011. I would like to highlight three areas.
Let me start off with banking regulation. With the introduction of the CRD IV/CRR the
European Union will be among the first to implement the Basel III framework, a cornerstone
development for strengthening financial stability.
As the CRD IV is advancing towards finalisation, I would mention that the ECB strongly
supports the establishment of a single European rulebook for financial institutions
- mitigating regulatory arbitrage and competitive distortions - which at the same time allows
for flexibility at national level by Member States to apply more stringent prudential
requirements where systemic risks arise. To this aim, it is important that Member States are
able to tighten temporarily, i.e. while those specific risks remain, the quantitative ratios and
limits of some prudential policy requirements while leaving the definitions intact. The ECB
favours the inclusion in that list of instruments: the capital ratio, the large exposures, the
liquidity ratios and the leverage ratio, as expressed in our published opinion. This availability
of differential calibration of macroprudential tools is particularly important in the euro area
where the single monetary policy focused on average conditions does not allow member
countries to use monetary policy instruments to avoid specific excessive credit booms and/or
asset price misalignments.
I would hope that EU institutions will be able to reach an agreement on these and other
CRDIV matters by the summer of this year.
Let me now turn to the comprehensive reform of the EU framework for securities and
derivatives regulation, which gained momentum in 2011. The ECB welcomes the recent
agreement on EMIR, which will implement the G20 mandate to enhance the safety and
resilience of OTC derivatives markets and will establish common EU rules for Central
Counterparties and Trade Repositories. At the same time, the ECB sees a continued need
for monitoring inconsistencies of EU rules with the global CPSS-IOSCO principles. We will
also keep a close monitoring of potential risks to central bank independence arising from
future proposals on CCP access to central bank liquidity. Finally, there will be a need to
address potential divergences in the supervision and oversight of Trade Repositories, given
the lack of cooperation with central banks on TRs under EMIR.
Moreover, the ECB welcomes the review of the Markets in Financial Instruments Directive
and supports the objective pursued in the Commission's proposal on credit rating agencies.
Reducing reliance on credit ratings is of utmost importance. The Eurosystem itself does not
mechanically rely on these assessments, as it is aware of the limitations in terms of
methodologies. I would, however, add a strong word of caution against imposing legal
constraints on the use of ratings by the ECB in its collateral framework. The Treaty provides
the ECB with the exclusive competence to determine independently the conditions under
which credit operations should be conducted.
These regulatory initiatives to strengthen the Single Financial Market and its infrastructure
will be complemented by an important Eurosystem project, the Target2 Securities, the future
IT platform for securities settlement in central bank money. The development of the platform
is well on track and its go-live is set in 2015. After two years of negotiations, central
securities depositories (CSDs) have now been asked to sign - by June 2012 at the latest - a
binding legal contract to participate in T2S. This will mark a key milestone in the project.
Combined with the future legislation on CSDs and CCPs as well as MiFID, T2S will provide
the operational framework to stimulate competition in the post-trade environment.
Moving on to banking crisis management, we fully support the Commission's initiative to
introduce an EU bank recovery and resolution framework that should contribute to address
current obstacles to the effective crisis management of EU cross-border financial institutions.
Every Member State should have a broad set of tools, such as recovery and resolution plans,
asset separation and bridge banks. As regards more specifically bail-in, a right balance
needs to be struck between the need to comply with international standards (FSB Key
Attributes for Resolution) and the need to avoid undesired negative effects on bank funding
also in light of current market conditions. In this perspective any decisions about the use of
"bail-in-able" securities should be delayed for some years. At the same time, any mandatory
issuance of "bail-in-able" instruments should be reserved to systemically relevant institutions
at the national and European levels. Smaller institutions would have difficulties in placing
such securities in the market and are easier to resolve without such instruments. For
systemic institutions I see "bail-in-able" debt securities as an important tool being capable of
supporting the resolution process by absorbing losses with an efficient burden sharing within
the private sector thereby reducing taxpayers' support.
Another important dimension of the resolution regime refers to the desirable creation of
Resolution Funds that would be financed by the financial sector and would play an important
role, particularly in resolution of cross-border institutions. In this perspective, we said in the
ESCB opinion, published in May last year, that: "...the establishment of a network of national
funds should not exclude the possibility of establishing, at a later stage, an European
Fundof-Funds to address the issues which may arise in respect of cross-border banks. ... it
should also not be excluded to move the establishment of an European Resolution Fund up
in the agenda."
In view of the importance of the adoption of a clear resolution regime to banks and to
eliminate uncertainty, it would be important that the Commission's proposals are released
before the summer.
Finally, let me say a few words on the EBA Capital Exercise. We support the EBA's efforts to
strengthen the resilience of the European banking sector against the broader distress in
financial markets. We have taken note of the EBA's deliberations about banks' capital plans
to comply with the requirements of the exercise and are satisfied with the message that bad
deleveraging for the financing of the economy will be very limited. The actions of banks to
comply with the requirements by the end-June 2012 deadline should be closely monitored by
the relevant authorities.
Conclusion
Madam Chair, Honourable Members,
2011 has been undoubtedly once again a challenging year for the euro area, especially due
to the negative interplay between the sovereign debt problems and the financial sector. I trust
that the vast programme of economic governance and financial regulatory reforms that you,
as EU co-legislator, have been or are currently adopting will contribute to strengthen the
stability and resilience of the euro area. One crucial condition must, however, be met to reap
the benefits of all these legislative reforms: their swift and faithful implementation. I am
confident that the European Parliament will fully play its role for the rigorous achievement of
that goal.
Thank you for your attention.