Tags: Nowotny | Europe | lending | rates

ECB's Nowotny Says Better to Revive Bank Lending Than Cut Rates

Tuesday, 28 May 2013 11:51 AM

The European Central Bank is looking at ways to boost banks' liquidity rather than cutting interest rates, ECB policymaker Ewald Nowotny said in an interview with Reuters.

Sitting in his wood-panelled office at the Austrian central bank in Vienna, the ECB Governing Council member said he expected the economy to brighten eventually.

"Concerning the economy in Europe, I think it ... will improve in the second half of this year," Nowotny said.

With rates already "very low" the focus, he said, should be on giving banks easier access to liquidity, for example by reviving the asset-backed securities market in Europe and by lowering the mark down on such assets when used as collateral at the ECB.

Such a step could help unblock lending to small- and medium-sized enterprises, a major headache for the ECB, because these companies are a key growth driver but are struggling as banks have made it harder for them to get loans.

"My own priority is with regards to structural aspects of liquidity provision like for instance ABS structures and this side of liquidity provision is more important than the interest rate side," Nowotny said.

"One should not overestimate the effects of interest rates at the low level that we have," he said.

ECB policymakers Peter Praet and Christian Noyer said last week the ECB was looking at expanding its policy toolbox to tackle differences in financing conditions across the bloc.

Federal Reserve official James Bullard suggested last week the ECB should consider a European form of quantitative easing.

But Nowotny said the ECB had to stick to its remit.

"We have a different legal basis than the Fed and we do have to take this into account ... for instance we are not allowed to buy government bonds directly, which is of course the ultimate barrier that you have in this situation."

But he made clear the ECB was prepared to keep rates low for some time.

"The U.S. has a more stable growth perspective compared to the euro zone so therefore I think that for the euro zone, at least from my point of view, it is quite obvious that our monetary policy will remain accommodative," he said.

Asked for how long, he said: "For the time being, as long as needed. These are extraordinary measures but as long as we have this very anaemic growth perspective and on the other hand as we have declining rates of inflation, there are very good arguments for maintaining the policy perspective that we have just now."


The ECB cut its main interest rate to a record low of 0.5 percent at its May policy meeting and said it would act again should the economy require it. Since then, leading economy Germany has shown some signs of improvement.

Nowotny said there were "quite a number of positive signals" from the euro zone's largest economy, which would also help other countries such as Austria. Some countries in neighbouring central and eastern Europe were also stabilizing.

"Overall we expect for 2013, unfortunately, that we will have negative growth for the euro zone as such, and positive growth for countries like Germany, Austria and Slovakia," Nowotny said.

Annual inflation eased to 1.2 percent in April, departing from the ECB's target of below, but close to 2 percent. Nowotny said the ECB had to take seriously prospects for undershooting its target.

"We would have to look at developments but if there are strong developments of a long-term undershooting this is a further argument of staying in this more expansive monetary policy," he said.

Asked about chances for further easing he added: "It will not be easy to think about additional measures on the monetary policy side."

Instead, Nowotny said the ECB was thinking about lowering the haircuts, or write-downs in valuation, it puts on ABS when accepting them as collateral in its refinancing operations, which can be up to 32 percent.

"On the one hand it would of course help funding flows especially with regard to SMEs, on the other hand I think it is also important to create accepted high-quality structures for this kind of instruments," Nowotny said.

"I think this would be a role that would go beyond specific ECB funding but would have an impact on markets themselves."


The European regulatory review of the quality of bank assets could throw up questions about how well the lenders are capitalized and how potential shortfalls can be handled, he said.

Supervisors across the European Union will examine the way that top banks classify and value loans and other assets to ensure that the stress tests they conduct do a better job of finding any problems.

The European Banking Authority said this month it will set out guidelines for the review, which will delay the bloc's next round of stress tests until 2014.

Nowotny said the first line of defense for banks that need shoring up would be to tap capital markets directly, as Deutsche Bank has done and Commerzbank is doing, rather than cutting assets, or deleveraging, to boost their capital ratios.

He urged progress on giving the ECB the required tools when it takes over a role of supervising euro zone banks next year. A new European Commission directive on bank resolution this summer should help fill a gap, he said.

© 2019 Thomson/Reuters. All rights reserved.

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The European Central Bank is looking at ways to boost banks' liquidity rather than cutting interest rates, ECB policymaker Ewald Nowotny said in an interview with Reuters.
Tuesday, 28 May 2013 11:51 AM
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