vitor constancio : interview in bankfokus interview with mr vitor constancio, vice - president of the european central bank, and bankfokus, conducted by mr par krause and published on 13 december 2016. * * * what will be required to strengthen the economy of the eu? what role does the banking industry play in strengthening growth and employment? the world economy faces a high degree of uncertainty and that can influence the european situation. we need more expansionary macroeconomic policies as well as reforms in competition and in the regulation of markets to foster the supply side of the economy. monetary policy has so far been the only expansionary macroeconomic policy to support the recovery. now, we also need a more visible contribution from other policies. it is also important to stabilise the european banking sector. the recovery requires strong banks that are able to increase credit to the real economy. at present, loans to the private sector are growing at only 2 % yearly. so we need support from the banking sector, and the banks must overcome the problems that affect their low level of profitability. does the ecb have a clear position in the ongoing discussion in the basel committee concerning restrictions on the use of internal models? do you see risks connected with further restricting the use of internal models? overall, the commitment is that there will be no significant increases in capital requirements on top of the last adjustments to the basel regulations. some restrictions on the use of internal models will come, and they are justified. the consensus view is that internal models were overused before the crisis, e. g. in the absence of sufficient data. reflecting this are two studies conducted by the european banking authority and the basel committee that showed large variability in risk - weighted assets across banks and countries for the same portfolio. the studies also showed that much of the variation in the risk assigned by banks was driven by differences in banking practices when using internal models rather than differences in risk in banks ’ portfolios. so some corrections are necessary and i hope we will reach an agreement in basel. apart from the many new regulations and a weak european economy, what are the biggest challenges for european banks? it ’ s difficult to generalise, but i think that there is a need for consolidation among european banks. we must have more pan - european banks and we need banking groups that are able compete in the investment bank segment. european banks have been losing out to american banks because of a lack of competitiveness. another challenge

expectations through the bank ’ s strong commitment and intelligible explanation. and lastly, we should enter a new phase of monetary easing both in terms of quantity and quality in order to underpin such a commitment. there is a reason to emphasize the qualitative aspect of monetary easing along with its quantitative aspect. while the bank of japan and other central banks in advanced economies have almost exhausted further declines in short - term interest rates, they now engage in policies to increase the size of their balance sheets as part of unconventional policy measures. there is now a broad consensus with regard to the effect of balance sheet expansion. that is, the central banks ’ purchases of government bonds and other assets from the markets have the effect of encouraging further declines in long - term interest rates and lowering risk premia of asset prices by absorbing risks – such as the one stemming from interest rate fluctuations. consequently, it becomes important to determine not only how much liquidity to supply but also how to supply that quantity. even with the same amount of liquidity, purchasing short - term t - bills produces different effects than in the case where the bank purchases other assets such as long - term bis central bankers ’ speeches jgbs and risk assets like exchange - traded funds ( etfs ). thus, it is important to work on two aspects of monetary easing, both in terms of quantity and quality. ii. introduction of the “ quantitative and qualitative monetary easing ” with this basic set of views, i assumed the governorship and attended the monetary policy meeting on april 3 and 4. following discussion with other policy board members and taking into account the staff view regarding practicalities, we came to a conclusion. the name of the quantitative and qualitative monetary easing that we introduced this time speaks for itself. this is indeed a new phase of monetary easing both in terms of quantity and quality. strong and clear commitment first, the bank decided – as i mentioned earlier – to convey a strong and clear commitment. the bank clearly announced in a statement that “ [ it ] will achieve the price stability target of 2 percent in terms of the year - on - year rate of change in the consumer price index ( cpi ) at the earliest possible time, with a time horizon of about two years. ” this is the decision of the bank ’ s policy board – namely, it expresses the will of the bank as an institution. new phase of monetary easing both in terms of quantity and quality next, the bank decided to embark on the quantitative