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, for the
Hearing at the Committee on Economic and Monetary Affairs of the European Parliament,
Brussels, 17 November 2014.
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Mr Chairman,
Honourable Members of the Economic and Monetary Affairs Committee,
Ladies and Gentlemen,
It is a pleasure for me to be back again in this committee for the last hearing of 2014. This
year has once again been a year of profound change for the euro area and for the Union as
a whole. It was a year of legislative and institutional progress on many fronts, as 2014 saw
the birth of banking union with the agreement of the Single Resolution Mechanism, the start
of the Single Supervisory Mechanism and the successful conclusion of the comprehensive
assessment of banks' balance sheets. And it was indeed a challenging year for monetary
policy, which saw the ECB take a wide range of measures to respond to the risks emanating
from an increasingly sobering economic outlook.
You have chosen two topics for today's hearing, the relationship of financial fragmentation
and monetary policy as well as the Eurosystem's collateral framework. I will touch on both
these issues, but let me first run you through our current assessment of the economic
outlook.
Economic and monetary developments
The euro area growth momentum has weakened over the summer months and most recent
forecasts have been revised downwards. At the same time, our expectation for a moderate
recovery in 2015 and 2016 remains in place. Demand should be supported by a number of
factors. Among them are our monetary policy measures and progress made in fiscal
consolidation and structural reforms in some countries. At the same time, high
unemployment, sizeable unutilised capacity, and the still ongoing and necessary balance
sheet adjustments are likely to dampen the recovery.
Risks to the economic outlook continue to be on the downside. In particular, the weakening
in the euro area's growth momentum, alongside heightened geopolitical risks, could dampen
confidence and, in particular, private investment. In addition, insufficient progress in
structural reforms in euro area countries constitutes a key downward risk to the economic
outlook.
Inflation in the euro area remains very low. In October, it stood at 0.4%. We expect it to
remain at around current low levels over the coming months, before increasing gradually
during 2015 and 2016. Looking forward, we closely monitor risks to price developments.
The latest monetary data point to subdued underlying growth in broad money. Its annual
growth rate has increased moderately over recent months. It appears that the turning point in
credit growth is now behind us, and credit growth rates, while remaining negative, are
gradually improving.
Monetary policy and financial fragmentation
Let me turn to financial fragmentation, the first topic you suggested for today's hearing.
Fragmentation in various segments of the financial market has been a major obstacle to the
smooth conduct and transmission of monetary policy, and ultimately to our ability to deliver
on our mandate. Also owing to determined actions the ECB has taken, fragmentation has
receded significantly since the height of the financial crisis. Unsecured money market rates
are trading again at reasonable spreads over their secured counterparts. Sovereign bond
spreads in the euro area decreased significantly from their peaks in 2012. Together, these
developments reflect the gradual return of confidence among investors in the euro area.
Yet, we still face a situation where our very accommodative monetary policy stance does not
sufficiently reach some final borrowers in the euro area. This is because credit markets in
some parts of the euro area are still impaired and show only timid signs of recovery. As a
result, credit growth continues to contract and credit conditions - while having eased recently
- remain overall tight from a historical perspective. Importantly, costs of bank funding have
improved, but are still relatively high in some Member States. Where they are lower, they are
not passed on in full to the real economy.
The monetary policy measures decided in June and September this year, the Targeted
Longer-term Refinancing Operations and the purchase programmes for asset-backed
securities and covered bonds, are designed to overcome these obstacles. They will enhance
the transmission of monetary policy, support the provision of credit to the euro area economy
and, as a result, provide further monetary policy accommodation. We see early indications
that our credit easing package is delivering tangible benefits. Since the beginning of June,
forward money market rates have shown steep declines across the maturity spectrum. Now,
the forward curve consistently lies below zero over a two-year horizon. EONIA is not
expected to exceed 25bps before well into 2018. The 3-month EURIBOR rate, which is an
important conduit of monetary policy impulses to lending rates, dropped to all-time lows and
now stands close to zero. And the policy decisions, in particular those announced in
September, triggered a compression of spreads across other asset classes, including ABS,
covered bonds and sovereign bonds. But more time is needed for the full materialisation of
the positive effects of the most recent set of measures.
In this context, let me emphasise that we are committed to scale the total magnitude of our
measures - lending operations as well as outright purchases - up to a size that can deliver
the intended support to inflation and the recovery of the euro area economy. All these
measures will have a sizeable impact on our balance sheet, which we expect to move
towards its early 2012 dimension. This will ensure that our accommodative monetary policy
stance will contribute to a gradual recovery and a return of inflation rates in the medium term
to levels closer to our aim of below but close to 2%.
Nonetheless, we need to remain alert to possible downside risks to our outlook for inflation,
in particular against the background of a weakening growth momentum and continued
subdued monetary and credit dynamics. We therefore need to closely monitor and
continuously assess the appropriateness of our monetary policy stance. If necessary to
further address risks of too prolonged a period of low inflation, the Governing Council is
unanimous in its commitment to using additional unconventional instruments within its
mandate. In this context, we have also tasked relevant ECB staff and Eurosystem
committees with the timely preparation of further measures to be implemented, if needed.
Such measures could include further changes to the size and composition of the Eurosystem
balance sheet, if warranted to achieve price stability over the medium term.
Monetary policy alone - however - cannot overcome financial fragmentation in the euro
area. Fragmentation across national borders also reflects underlying national imbalances
and institutional deficiencies.
Overcoming these require determined structural reforms on the side of national governments
to improve the business environment and setting incentives to invest, with the aim to boost
productivity, create new jobs and raise the growth potential of the economy.
Reducing financial fragmentation also requires tackling remaining shortcomings in economic
and financial integration. As already mentioned, substantial progress has been made this
year. Banking union should now be completed following the finalisation of the
Comprehensive Assessment and the SSM taking on supervisory responsibility. This means
in particular completing the SRM, enhancing the borrowing capacity of the Single Resolution
Fund and thereby delivering on the commitment to establish a credible backstop.
Moreover, looking forward, a greater integration of financial markets - also referred to as a
Capital Markets Union (CMU) - would be warranted to further reduce fragmentation of
financial markets, improve funding to SMEs, enhance the transmission of the ECB's
monetary policy, and overall benefit economic growth. We look forward to the detailed
elements that the Commission will announce in the course of 2015 and I have no doubt that
the European Parliament as co-legislator will again play a decisive role in this regard.
The collateral framework of the Eurosystem
Let me now say a few words on the second topic you have chosen, our collateral framework.
Since the very beginning, the Eurosystem collateral framework had been designed to
achieve two goals at the same time: First to protect the Eurosystem from incurring losses, as
it is explicitly required by the Statute of the ECB/ESCB; second to ensure that Eurosystem
credit operations can be carried out smoothly by making sufficient collateral available.
The past and recent experience has shown that such a dual set-up of the Eurosystem
collateral framework has been indeed very effective. So far, the Eurosystem has never had
to recognise a loss stemming from the Eurosystem credit operations. In the few cases where
counterparties have defaulted, for instance in the case of a subsidiary of Lehman Brothers,
the Eurosystem was able to fully cover its exposure by seizing the posted collateral. At the
same time, the collateral framework ensured that banks were able to obtain sufficient
amounts of central bank liquidity throughout the crisis. This became most visible in the
context of the two Very Long Term Refinancing Operations that the ECB conducted in 2011
and 2012. In these operations banks obtained collateralised central bank liquidity in the order
of EUR 524 billion within only 10 weeks.
This basic set-up of the collateral framework has remained the same since the beginning of
monetary union; the three constituent parts of the Eurosystem collateral framework,
i.e. (i) the counterparty framework, (ii) the basic eligibility criteria for underlying assets and
(iii) the risk control measures, have remained largely unchanged. The Eurosystem maintains
a broad counterparty framework and its eligibility criteria are still based on the same
principles as at the beginning. This shows that the design of the Eurosystem collateral
framework is in general very robust.
However, some changes were necessary to guarantee a smooth implementation of monetary
policy at times of financial market stress that led to a general reduction in access to market
funding. A collateral framework must never act in a pro-cyclical manner: Restricting banks'
access to liquidity in a crisis - for instance, by introducing more restrictive criteria for
collateral - might pose a risk not to only to the most vulnerable banks, but to the whole
financial system. Ultimately, this would increase the risk for the central bank's balance sheet
rather than protecting it. Hence, in order to enable that a wide range of the counterparties
could continue participating in the refinancing operations, the Eurosystem temporarily
relaxed some of the eligibility criteria for underlying assets. This was done on several
occasions. For instance, from 2008 to 2011 and again as of 2012, we accepted foreign
denominated marketable assets. In 2012 we created the Additional Credit Claims framework.
Credit standards have been changed by accepting lower rated assets compared to those
accepted at the beginning, notably for ABS that fulfill certain criteria. However, these
accommodative measures were coupled with a stronger-scrutinised counterparty framework
and with more stringent risk control measures. As a result, the total amount of eligible
collateral increased. Thus, an enhanced participation of counterparties in the refinancing
operations was enabled, while at the same time the risks for the Eurosystem expanded only
moderately.
The Eurosystem collateral framework has been quite complex from the very beginning, not
the least because of the variety of national frameworks preceding it. With the onset of the
monetary union, the goal was to provide access to Eurosystem credit operations to a broad
range of counterparties, in contrast to some other central banks which rely on a few
counterparties. Therefore, the collateral framework had to take into account the various
national banking systems and financial markets. Some national central banks, for example,
accepted credit claims as collateral, while others did not. Some countries had developed
covered bond markets, while others only started to set up a respective covered bonds law
later, and the same could be said for ABS. For a collateral framework, a common standard
had to be found which embraces these national characteristics, while at the same time
ensuring that sufficient collateral is available. Several of the measures taken in the crisis
have added to this complexity. Therefore a challenge going forward is to make the collateral
framework simpler and more transparent, without impacting the ability of counterparties to
access our refinancing operations. I am confident that we will achieve this.
Conclusion
Ladies and gentlemen,
2014 has been a year of profound change. But what has been achieved so far is not enough.
2015 needs to be the year when all actors in the euro area, governments and European
institutions alike, will deploy a consistent common strategy to bring our economies back on
track. Monetary policy alone will not be able to achieve this. This is why there is an urgent
need to agree on concrete short-term commitments for structural reforms in the Member
States, on a consequent application of the Stability and Growth Pact, on the aggregate fiscal
stance for the euro area, on a strategy for investment, and to launch work on a long-term
vision to further share sovereignty ensuring the sustainable and smooth functioning of EMU.
On that note, I am looking forward to our discussion.