ECB's Paramo: Banks May Become Dependent On ECB Cash
03.09.10, 16:45 Uhr
FRANKFURT -(Dow Jones)- European Central Bank executive board member Jose Manuel Gonzalez-Paramo warned Friday that banks could become addicted to the easy money offered by the ECB.
"The danger exists that the support offered to the financial system at a time of stress morphs into a lasting dependence of banks on central bank financing," Gonzalez-Paramo told a conference in Limassol, Cyprus.
"Such support may also increase the direct financial and balance sheet risks of the central bank itself," he added.
He also said that the excess liquidity created may add to inflation if it isn't withdrawn "in a timely and effective manner once broader economic conditions normalize."
Gonzalez-Paramo was speaking a day after the ECB decided to extend its provision of unlimited liquidity at its one-week and three-month operations until year end at the earliest, and for "as long as is necessary".
At his regular post-meeting press conference, ECB president Jean-Claude Trichet had faced direct criticism that the policy, by helping to keep unviable banks afloat, was obstructing a clean-up of the banking sector and generating extra costs for taxpayers, notably in Ireland.
Trichet rebutted the criticism, arguing that the Irish government was responsible for the banks it had assumed direct control of. He said financial markets are only gradually returning to normality and that the extraordinary measures taken during the crisis remain temporary.
Paramo said one way to ensure that the liquidity supports are withdrawn when no longer needed is "to price them at a premium that makes them unattractive once market conditions normalize."
The ECB's current 1% interest rate on refinancing operations is over 60 basis points more expensive than overnight funding rates on the market, and between 10-15 basis points more expensive than three-month interbank rates.
The ECB recently said it would cut the amount it is willing to lend against low-grade collateral from next year. The move may reduce low-rated asset-backed securities that banks, unable to find buyers for them in the market, are currently pledging as collateral at the ECB. At that time, the ECB warned it may make special rulings to stop individual banks pledging too much collateral that it considers low-grade.
"Discretionary measures to restrict undue collateral practices must be part of the central bank's toolbox if it generally accepts a wide collateral set," Gonzalez-Paramo said.
Gonzalez-Paramo heads the ECB's markets division and is chiefly responsible for overseeing the collateral practices of the banks that borrow from the ECB.
The ECB is currently opposing draft legislation from the EU parliament that would allow ABS to be repackaged as collateral for covered bonds, a step that it fears may undermine trust in covered bonds.
Market demand for ABS hasn't recovered from the crisis, due to the prominent role of subprime mortgage-backed securities in the instrument.
"Such support may also increase the direct financial and balance sheet risks of the central bank itself," he added.
He also said that the excess liquidity created may add to inflation if it isn't withdrawn "in a timely and effective manner once broader economic conditions normalize."
Gonzalez-Paramo was speaking a day after the ECB decided to extend its provision of unlimited liquidity at its one-week and three-month operations until year end at the earliest, and for "as long as is necessary".
At his regular post-meeting press conference, ECB president Jean-Claude Trichet had faced direct criticism that the policy, by helping to keep unviable banks afloat, was obstructing a clean-up of the banking sector and generating extra costs for taxpayers, notably in Ireland.
Trichet rebutted the criticism, arguing that the Irish government was responsible for the banks it had assumed direct control of. He said financial markets are only gradually returning to normality and that the extraordinary measures taken during the crisis remain temporary.
Paramo said one way to ensure that the liquidity supports are withdrawn when no longer needed is "to price them at a premium that makes them unattractive once market conditions normalize."
The ECB's current 1% interest rate on refinancing operations is over 60 basis points more expensive than overnight funding rates on the market, and between 10-15 basis points more expensive than three-month interbank rates.
The ECB recently said it would cut the amount it is willing to lend against low-grade collateral from next year. The move may reduce low-rated asset-backed securities that banks, unable to find buyers for them in the market, are currently pledging as collateral at the ECB. At that time, the ECB warned it may make special rulings to stop individual banks pledging too much collateral that it considers low-grade.
"Discretionary measures to restrict undue collateral practices must be part of the central bank's toolbox if it generally accepts a wide collateral set," Gonzalez-Paramo said.
Gonzalez-Paramo heads the ECB's markets division and is chiefly responsible for overseeing the collateral practices of the banks that borrow from the ECB.
The ECB is currently opposing draft legislation from the EU parliament that would allow ABS to be repackaged as collateral for covered bonds, a step that it fears may undermine trust in covered bonds.
Market demand for ABS hasn't recovered from the crisis, due to the prominent role of subprime mortgage-backed securities in the instrument.
Website: http://www.ecb.int
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