FRANKFURT (MNI) – The recent increase of the European Central
Bank’s balance sheet to “unprecedented levels” has not contributed to
inflationary pressures in the Eurozone, former ECB Executive Board
member Lorenzo Bini Smaghi said in the Financial Times.
Rather, the ECB’s provision of cheap liquidity “has prevented a
sharp contraction in banks’ liabilities, which would have induced a
drastic deleveraging and possibly a credit crunch,” Bini Smaghi said in
an opinion piece published Wednesday evening.
“Money and credit statistics in the euro area confirm that there
are no inflationary pressures, while aggregate demand growth is expected
to be modest, if not negative; and below potential for some time,” he
added.
However, Bini Smaghi did underscore a “more serious concern”: that
the ECB’s three-year funding operation could lead to banks becoming
addicted to easy central bank funding and having less incentive to make
the necessary adjustments to their balance sheets.
“This can be prevented only if supervisors put sufficient pressure
on bank managers and shareholders to continue adjustment, and to use
central bank funds only as a temporary, exceptional source of
financing,” Bini Smaghi wrote. “However, supervision in the Eurozone is
implemented at national level, with little incentive to pursue these
objectives rigorously and on a level playing field.”
The former central banker urged a greater role for the ECB in both
coordinating and supervising the Eurozone’s banking system. “The euro
area needs a supervisory and regulatory compact, as much as – if not
more than – a fiscal compact,” he said.
— Frankfurt bureau: +49-69-720 142; email: frankfurt@marketnews.com —
[TOPICS: M$$CR$,M$X$$$,M$$EC$]