Peter Praet: Repairing the bank lending channel – the next steps Speech by Mr Peter Praet, Member of the Executive Board of the European Central Bank, at the European Macro Conference, organised by Credit Suisse, London, 17 November 2014. *  *  *  I would like to thank Marie Hoerova and Kirstin Hubrich for their contributions to this speech. Summary The effectiveness of monetary policy in the euro area depends on a well-functioning banking sector as it operates through the bank lending channel. In recent years, efforts have been made to repair this channel. Policymakers agreed to establish Banking Union and the ECB assumed supervisory responsibilities within it. Against that background, we expect the monetary policy initiatives we adopted in June and September to gain pace in the coming months, thus incentivising lending to the real economy and ultimately bringing inflation closer to 2%. Indeed we have already observed a considerable easing of the effective monetary policy stance. We sustain that these measures will have a sizeable impact on the Eurosystem’s balance sheet, which is expected to move towards the dimensions it had at the beginning of 2012. But as banks adjust to a new business environment, it is essential to ensure that they continue to have microeconomic incentives that coincide with our desired macroeconomic objectives, while we keep developing a banking landscape that is sufficiently efficient and diversified to sustain credit supply.

Moreover, as such assessments necessarily contain a degree of uncertainty, policymakers need to continuously monitor how new regulations are actually affecting incentives in practice, and adapt them accordingly where unintended consequences appear. We have seen this, for example, with the Liquidity Coverage Ratio. Another example is securitisation. It is now widely acknowledged that regulatory initiatives aimed at preventing a replay of the sub-prime crisis may have indiscriminately affected all ABS, including simple and transparent structures that can play an important role for SME financing. In line with on-going work at the international level, this is now in the process of being addressed through the amendments to the Solvency II (for insurers) and Capital Requirements Directives (for banks), recently published by the Commission. As part of this agenda, we also need to ensure that regulations are mutually consistent. For example, a well-functioning SME ABS market requires banks that can market and trade securitised products. This depends in turn on their capacity and willingness to absorb temporary demand-supply imbalances. Thus, we should be careful to ensure that new regulations, for instance aimed at separating the banking and trading arms of universal banks, do not have negative consequences for market-making activities that are not justified by significant risks, in particular in less liquid markets. In all these ways – cyclical, legacy, regulatory – setting the right microeconomic incentives for the banking sector can have significant macroeconomic consequences. They are therefore areas where, if we want to sustainably repair the banking lending channel, the attention of policymakers is warranted.