Trichet Warns of Sustaining Risks in Banking System in EU Parliamentary Hearing

Wednesday, September 10, 2008

ECB president Jean-Claude Trichet warned EU parliamentarians on Tuesday that inflations risks were still to the upside. In his crusade against inflation Trichet repeated his warnings already covered after the ECB council meeting last Thursday.
In a new twist the ECB president emphasized the possibility of serious disruptions in the financial system, implicating the wave of liquidity problems could swamp more financial institutions. He restated that bank credit was still easily available, a hidden hint that the ECB will keep the taps open but stressed that there is no room for any complacency in an environment of unexpected balance sheet changes, meaning more losses may be in the pipeline.
Trichet's own words:
Let me now turn to the developments as regards financial stability. Recent developments suggest that the balance of risks in the ECB financial stability assessment remains tilted towards the downside. This is because the persistent, although moderating, decline in US house prices is leading to a rise in loan delinquencies and losses, and commensurate further declines in mortgage backed securities prices. Also in the euro area, economic growth has slowed down and credit risks could have increased in some housing markets and related corporate sector loans. At the same time, however, there is little evidence to suggest that the availability of bank credit in the euro area, as a whole, has been until now significantly affected by the financial market tensions.
That said, as we already emphasised, the persistence of the financial market tensions may have made the financial system more vulnerable to the crystallisation of other pre-existing risks. These include the possibility of a more broad-based turn in the global credit cycle, disorderly developments owing to global imbalances, and the financial stability implications of volatile energy prices.
More generally, the outlook for euro area and global financial stability will increasingly depend on the interaction between macroeconomic developments and the financial system, and on how banks respond to a challenging operating environment. The financial market correction could be gradually changing its nature and scope and evolve into a more traditional credit-cycle downturn. In such circumstances, it is more likely that the adjustment process will not abate as key participants in the financial system continue their efforts to strengthen their liquidity and capital positions. In an environment where balance sheet conditions change unexpectedly, there is no room for complacency.
Central Banks Meet Bi-Monthly at BIS
According to the ECB chief central bankers from both sides of the Atlantic are rubbing shoulders significantly more often since the beginning of the solvency crisis in August 2007.
As I already mentioned before, central bank staff and Governors of industrialised countries as well as of emerging countries meet every two months under the auspices of the Bank for International Settlements in Basel. Presently, I happen to be the Chairman of the Global Economy Meeting and I can tell you that this meeting in particular is important for all central banks. In a very frank and direct fashion and with a high degree of mutual confidence we compare notes, exchange all necessary information so as to be duly enlightened on the analysis and diagnosis that other central banks are making of their own domestic economies and on their perception of the global issues.
Against the backdrop of the serious market correction recorded since summer 2007, monetary authorities on both sides of the Atlantic have been cooperating to help ensuring a smoother functioning of inter-bank markets and help alleviating liquidity drying up in some market segments.
Euro member states are certainly happy to see the recent reversal in Federal Reserve Notes (FRN) as it may help to buffer exports in the Eurozone. It is also welcome by all holders of FRN debt who may at least book currency revaluation "balance sheet changes" in the current quarter, to paraphrase Trichet. But as we are only talking about the different speed both fiat currencies are debased at this is a competition of relative weakness, not strength.


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