Benoît Coeuré: Reviving credit growth in the euro area
Speech by Mr Benoît Coeuré, Member of the Executive Board of the European Central Bank,
at the Paris Europlace International Financial Forum "Growth and investment opportunities in
Europe", Paris, 11 July 2013.
* * *
I wish to thank Jean-Francois Jamet for his contributions to this speech. I remain solely responsible for the
opinions contained herein.
Ladies and Gentlemen,
I would like first to thank Paris Europlace for inviting me to speak today.
Every year, this conference offers the opportunity to take a closer look at the challenges for
the European financial sector that have been thrown up by the crisis.
They come under three headings: deleveraging, fragmentation, recession. And all three are
interrelated.
As banks, households and governments deleverage, some economies in the euro area are
being affected more than others. Financial conditions across the monetary union have
diverged significantly, and resulted in large cross-country dispersion in loan dynamics.
Financial fragmentation, uncertainty and a subdued macro environment have also
manifested themselves in a contraction of investment, which is currently the most important
drag on growth in the euro area. In the first quarter of 2013, investment in the euro area was
22 % below its pre-crisis level in 2007 Q2. This year, the European Commission expects
investment to further contract by 2.6%, or 0.5% of euro area GDP.
So, if the principal answer to the crisis is a return to growth, a core concern has to be how to
revive credit provision in all parts of the euro area.
I will today discuss in turn the role of three key factors in that respect: monetary policy,
Banking Union and financial market structure.
The role of monetary policy
Let me start with the role of monetary policy.
Throughout the crisis, the ECB has played an important role to ensure, within its price
stability mandate, the proper financing of the euro area economy in a context of subdued
credit dynamics.
First, we have reduced our main interest rates to historic lows. We have narrowed the
interest rate corridor to 50 basis points which helps reduce fragmentation between banks that
rely on ECB liquidity and those that can borrow in the interbank market. And last week,
unanimously, the Governing Council took the important step to introduce forward guidance
within our two pillar monetary strategy. We expect the key interest rates to remain at present
or lower levels for an extended period of time. Consistently, liquidity will remain ample.
Second, we have introduced a series of measures to ensure that banks can pass on these
low interest rates in the real economy, in particular where they are needed the most. These
include providing as much liquidity as they need to euro area banks, reviewing our collateral
framework, lengthening the maturity of our operations to three years when euro area banks
were facing severe funding stress, and removing redenomination risks in financial markets
through our announcement of Outright Monetary Transactions (OMT).
These measures have resulted in a significant reduction of financial fragmentation in
practically all market segments.
For example, since the OMT announcement, spreads on investment grade corporate bonds
fell by 70 basis points in the euro area, while spreads on high-yield corporate bonds
decreased by around 300 basis points1. The cost of both deposit and bond funding for banks
has also fallen significantly. In addition, banks' reliance on Eurosystem funding has
decreased, as reflected in the repayments to date of 60% of the circa EUR 500 billion
injected in net terms into the banking system by our two very long-term refinancing
operations. Target2 balances have been reduced by EUR 320 billions, or nearly 30%, since
their peak level of July 2012.
However, the improvement in financial conditions has not yet been fully reflected on the real
side of the economy. Loans to households are stagnating and credit to non-financial
corporations is receding. There is still significant heterogeneity between financing conditions
in stressed and non-stressed countries. While the ECB cut it main refinancing rate by
50 basis point in the twelve months before end-May 2013, the rate charged by banks on
nonfinancial corporations went down by 25 basis points in Spain and less than 20 basis points in
Portugal.2
This reflects the fact that monetary policy is only one factor that matters for financing of the
real economy. Another crucial factor is confidence in the banking sector.
The role of Banking Union
Euro area large and complex banking groups have increased their median core Tier 1 capital
ratio from 8.3% at the end of 2009 to 9.6% at the end of 2011 and 11.1% in the first quarter
of this year, and their leverage has improved considerably, mainly through capital increases.
Yet, price-to-book ratios remain less than 1 for many institutions. This reveals persistent lack
of trust by financial market participants in their true solvency positions and their underlying
asset quality.
Banking Union is a key part of restoring that trust.
How governments intervene in systemic banking crises is critical. Bank restructuring
measures that provide banks with incentives to liquidate or restructure bad loans, while
allowing for sufficient recapitalisation, significantly accelerate the recovery from recessions
related to banking crises.3
This suggests that Banking Union can help boost credit provision through two key channels.
First, by increasing transparency over the quality of banks' assets, which is key to distinguish
strong from weak banks and hence remove the concerns hanging over the whole banking
sector.
Second, by ensuring that banks that are not in position to lend can be restructured or
resolved without creating financial instability.
These two channels correspond to the two main elements of Banking Union: the Single
Supervisory Mechanism (SSM) and the Single Resolution Mechanism (SRM).
The SSM should be established later in 2013 and start operating twelve months later as a
single system, with a common supervisory manual applying to all participating banks, and the
ECB directly supervising larger banks. Generally, the SSM should reduce concerns over
hidden losses by creating common oversight of risks in the euro area banking sector and
reducing regulatory forbearance.
Specifically, before the ECB takes over its tasks as single supervisor, it will undertake a
rigorous balance sheet assessment of the banks it will directly supervise, including an asset
quality review. The assessment will be undertaken together with national supervisory
agencies and, as needed, with external consultants. In case it reveals capital shortfalls, it is
the responsibility of the banks to raise capital themselves. As acknowledged by the
European Council, public backstops will ensure that any remaining shortfalls are filled. Such
backstops can be provided at national or, as last resort, at euro area level.
Regarding the SRM, the legal framework for resolution contained in the Bank Recovery and
Resolution Directive (BRRD) creates a stronger set of tools for winding down failing banks in
the future. By ensuring that bail-in must precede bail-out, the BRRD achieves a level playing
field and reduces financial fragmentation linked to the strength of national budgets.
Moreover, in the transition to the BRRD, and as of next month, new State aid rules will
require the burden-sharing of losses by shareholders and creditors, if resolution actions
involve public funds. This will ensure that shareholders and creditors are the first to bear
losses, and not the taxpayers.
But it is key, particularly for cross-border banks, that there is a strong central authority that
can use these tools in a swift and impartial manner. The ECB has been clear that we need a
single European resolution authority and a single resolution fund as a fundamental
complement to the SSM. I welcome the proposal of the European Commission in this respect
and will assess it in detail. The plan that the SRM comes into force in 2014 and can start its
operations as from January 2015, when the BRRD enters into force, is also welcomed.
Banking Union is about restoring the single market for capital. European companies should
be able to tap a single pool of savings to fund their global expansion.
Banking Union will ensure that the funding cost of a bank depends on the quality of its
assets, not on the jurisdiction in which its headquarters are located. There might be
fundamental reasons why Portuguese SMEs do not borrow under the same terms as
German SMEs. But they should borrow under the same terms from Portuguese and from
German banks.
The role of market structures
across
However, even if Banking Union can reduce financial fragmentation countries, it may
not, by itself, be sufficient to reduce it within countries - as epitomised by the significant
mark-up on loans paid by SMEs compared with larger firms.
Indeed, according to the results of the ECB survey on the access to finance of SMEs in the
euro area, conducted in February-March 2013, 16% of SMEs (that is more than 2 million)
report access to finance as their main problem. Furthermore, interest rate spreads on SME
loans compared with those for large non-financial companies have widened to an average of
40 basis points since 2010.
This links to the third factor in restoring credit provision: improving market structures, in
particular to help specific sectors like SMEs.
The ECB has supported the EIB and European Commission in examining the constraints
hindering the development of securitisation instruments for SME loans and the revival of the
ABS market.
We welcome the on-going work by the Commission and the EIB on joint risk-sharing
instruments to support SME lending, which would combine the EU budget resources with the
EIB and the EIF lending capacity4. The European Council has supported this initiative and
called for these instruments to begin operating in January 2014. In parallel, a more balanced
regulatory treatment for ABS, acknowledging the past credit performance of these
instruments, would ensure a level playing field with other securities regarding risk, rating and
maturity.
The ECB can support the revival of the ABS market, provided that the risk to the Eurosystem
is controllable, and the underlying instruments are simple and transparent. But it cannot be a
substitute for market mechanism, nor can it subsidise risk taking of market participants.
Concluding remarks
Let me now conclude.
Reviving credit growth is one of the most pressing challenges for the euro area today, but it
can only be achieved by all actors playing their part.
The role of banks has been reduced after the crisis, and the euro area will probably move
towards a more balanced financing mix, with a greater role for arms' length finance based on
capital markets. Being more balanced, this model would be more resilient. But the euro area
is and will remain a bank based economy. In fact, there are essential constituencies, namely
SMEs and households that still obtain credit almost exclusively from banks. Accordingly,
there can be no sustained recovery without a healthy, competitive and prudent banking
system. Cleaning up the banks, as was done at an early stage in the US, is not merely
desirable, it is a condition to finally emerge from the crisis and move on.
The ECB can help reduce divergences in bank funding. But governments have to ensure that
banks are properly capitalised and that their balance sheets are cleaned up.
Similarly, the ECB can help support the economy and improve the macroeconomic outlook.
But governments have to introduce the structural reforms that are essential to open up
investment opportunities, and without which banks will not sustainably alter their risk
assessments.
Low interest rates and improved financial market conditions may give a sense that reforms
can be deployed over extended periods of time. But reforms are a matter of urgency.
Deleveraging, fragmentation and recession weight on the most vulnerable in society, in
particular on the youth. Time lost increases the risk of a permanently lower rate of growth
and of a lost generation.
In other words, the key to reviving growth and investment in the euro area is for each
stakeholder to take responsibility for what it can change, within its mandate - and then just
do it.
Thank you for your attention.