Draghi Marks One Year of Banking Supervision but Euro Falls

Peter Taberner

Mario Draghi, the president of the European Central Bank (ECB), has celebrated the one year anniversary of the Single Supervisory Mechanism (SSM) , during a speech at the ECB forum on banking supervision held in Frankfurt.

Draghi highlighted then when the idea was first made public in 2012, the SSM received many dissenting voices, and still remains a target for negative comments.

Although he warned in his speech that the establishment of the SSM, “was neither the start, nor the end of the suite of institutional reforms that we must undertake to restore in Europe the stability that is the premise for a return to prosperity. But it was a crucial step and in many ways it was the key to going further.”

Draghi said that in the early years of the euro, monetary union was merely an illusion, and for the euro to be a true single entity, there had to be a single and unified banking system.

In particular, deposits, which are the most widespread use of money transactions, have to inspire the same level of confidence, wherever they are located.

To ensure that those deposits are safe, Draghi said that there had to be independent jurisdiction if a bank fails, that has authority across the European Union (EU).

The SSM places the ECB as the central supervisor, where it is the overseer of the largest banks. The remainder of the smaller banks are monitored by national banking authorities.

Non euro EU members can also join the SSM if they wish.

Interest Rates Outside of ECB Control

In another address in Frankfurt, Draghi explained why he believes that interest rates are being driven by factors outside of the ECB’s control.

Returns on savings are really influenced by the productive capacity of the real economy, he said. A capacity that he argues is weak, due to low economic activity, and an aging population in the euro area.

The remedy is reforms that will make economies embrace innovation, and to become  more inclusive and flexible.

Draghi also said that he would review the level of monetary stimulus currently needed, at the next governing council meeting in December.

Euro Falls to Dollar and the Pound

The markets did not react well to what could be considered a softer approach from Draghi to the euro area’s economic problems.

The Euro was just over the 0.714 mark yesterday morning, but has fallen strongly to 0,708 today.

Against the dollar the Euro followed a similar pattern, falling to 1.092 from the 1.102 mark yesterday morning.

At the end of this week, employment figures are due to be released from the United States, which could prompt a decision on an interest rate rise in December, forcing downward pressure on the euro.

Fitch Ratings Say ECB Targeted Long-Term Refinancing Operations (TLTRO)

Provide Only Modest Surplus

Meanwhile Fitch Ratings have said that the ECB sponsored TLTRO’s are failing to create the stimulus for EU bank loan growth.

A total of EUR400bn of TLTROs have been issued since their launch in September 2014, but the stock of lending to euro area non-financial corporations has remained flat over the past year, the ratings agency said.

Euro area banks initially borrowed heavily under the TLTRO auctions, but used the funds primarily to repay maturing three-year long term refinancing operation  borrowings, taken out in 2011 and 2012.

Fitch said the northern European banks have been more successful in injecting the TLTRO funds into corporate lending growth.

This despite a lower take up of the funds compared to southern European banks, particularly from Italy and Spain.

Fitch’s baseline GDP growth forecast for the euro area is 1.6% in 2015-2017.

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