benoit cœure : reviving credit growth in the euro area speech by mr benoit cœure, 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. bis central bankers ’ speeches 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