ECB chief: parts of Europe banking system 'face challenges'

AP News
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Posted: Feb 15, 2016 10:53 AM
ECB chief: parts of Europe banking system 'face challenges'

FRANKFURT, Germany (AP) — European Central Bank head Mario Draghi says some eurozone banks "face challenges" but that the system is more resilient due to oversight that was strengthened after the global financial crisis.

Draghi said Monday that thanks to new supervision at the European Union level, banks were in a position to bring down the amount of bad loans burdening their finances "in an orderly manner over the next few years."

His comments in the European Parliament follow a week of violent swings in the stock prices of major European banks including Deutsche Bank and Societe Generale. Draghi said some banks faced challenges from litigation and restructuring costs as well as working off soured investments.

"Clearly, some parts of the banking sector in the euro area still face a number of challenges," Draghi said at a meeting of the parliament's economic and monetary affairs committee in Brussels.

The ECB carried out a wide-ranging check of bank finances in 2014 that sought to identify loans that banks were holding that had little hope of being repaid. Draghi said the check had forced banks to take steps to strengthen their finances.

Europe moved more slowly than the United States to clean up bank finances after the financial crisis that deepened with the bankruptcy of U.S. investment bank Lehman Brothers in 2008 and led to a global recession. Banks are key to the wider economy because they supply the credit needed for companies to expand.

The recent sharp drops in stock prices reflected fears banks might be exposed to risks in commodity producing markets, companies and countries. Commodity prices have dropped amid fears about the health of the global economy.

Draghi said the situation was "amplified" by perceptions that banks may have difficulty adjusting to an economy with lower growth and lower interest rates. Low interest rates, in part the result of central bank policies, have squeezed bank earnings by narrowing the difference between the rate at which they borrow and the rate at which they lend.

The ECB is to discuss whether to expand its stimulus measures at its next meeting March 10. Draghi said there were "a variety of instruments" the ECB could employ if it decided more is needed. It could increase its 60 billion euros in monthly bond purchases with newly printed money, a step aimed at driving down already low interest rates and raising inflation that remains too low at 0.4 percent.

He expressed some frustration with the extent to which governments have not used budget policy to help the economy at a time of economic weakness, or taken pro-growth measures to cut regulation. He urged governments that are in better shape financially to spend more on public investment that would increase grow and to avoid excessive taxation.

Monetary policy from the central bank "is the only truly stimulative policy over the past four years," he said. ECB officials have warned governments not to rely just on central bank stimulus to boost the modest eurozone recovery.