Draghi’s Hesitation

In a Hearing at the European Parliament’s Economic and Monetary Affairs Committee, ECB president Mario Draghi said the “ECB will Not Hesitate to Act“.

In December, Draghi disappointed the market by cutting interest rates to -0.3%. Economists say Draghi did not do enough to boost ECB asset purchases and/or he did not cut rates negative enough.

Since December, Draghi has twice given speeches promising further action. However, talk is cheap. By not doing anything but instead yapping about it twice, Draghi has already hesitated.

Draghi Speech Excerpts

In order to make the euro area more resilient, contributions from all policy areas are needed. The ECB is ready to do its part. As we announced at the end of our last monetary policy meeting in January, the Governing Council will review and possibly reconsider the monetary policy stance in early March. The focus of our deliberations will be twofold. First, we will examine the strength of the pass-through of low imported inflation to domestic wage and price formation and to inflation expectations. This will depend on the size and the persistence of the fall in oil and commodity prices and the incidence of second-round effects on domestic wages and prices. Second, in the light of the recent financial turmoil, we will analyse the state of transmission of our monetary impulses by the financial system and in particular by banks. If either of these two factors entail downward risks to price stability, we will not hesitate to act.

Health of Banks

In regards to the health of European banks, Draghi opted for a whitewash of the problems.

We have to acknowledge that the regulatory overhaul since the start of the crisis has laid the foundations for durably increasing the resilience not only of individual institutions but also of the financial system as a whole. Banks have built higher and better-quality capital buffers, have reduced leverage and improved their funding profiles. … central bank governors and heads of supervision indicated that they are committed to not significantly increase overall capital requirements across the banking sector.

There is a subset of banks with elevated levels of non-performing loans (NPLs). However, these NPLs were identified during the Comprehensive Assessment, using for the first time a common definition, and have since been adequately provisioned for. Therefore, we are in a good position to bring down NPLs in an orderly manner over the next few years. For this purpose, the ECB’s supervisory arm is working closely with the relevant national authorities to ensure that our NPL policies are complemented by the necessary national measures.