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Mario Draghi Plays Up Health of Eurozone Banking System
The president of the European Central Bank, Mario Draghi, says that some eurozone banks "face challenges" but that the system is more resilient because of stronger oversight after the global financial crisis.
Mr. Draghi said on Monday that thanks to new supervision at the European Union level, banks were in a position to reduce the amount of bad loans burdening their finances "in an orderly manner over the next few years."
He made his comments at a meeting of the European Parliament's Economic and Monetary Affairs Committee in Brussels, a week after significant swings in the stock prices of major European banks, including Deutsche Bank and Société Générale.
Mr. Draghi said some banks faced challenges from litigation and restructuring costs as well as from soured investments.
"Clearly, some parts of the banking sector in the euro area still face a number of challenges," he said.
Seeking to identify loans that had little hope of being repaid, the European Central Bank carried out a wide-ranging check of bank finances in 2014. Mr. Draghi said the check had forced banks to take steps to strengthen their finances.
Still, Europe moved more slowly than the United States to clean up bank finances after the financial crisis. Banks are critical to the economy because they supply the credit needed for companies to expand.
The recent sharp drops in stock prices reflect fears that banks might be exposed to risks from countries and companies that have an outsize dependence on the production of commodities. Prices have dropped because of fears about the health of the global economy.
Mr. Draghi said the situation was amplified by perceptions that banks might have difficulty adjusting to an economy with lower growth and interest rates. Low interest rates, in part a 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 European Central Bank is expected to discuss whether to expand its stimulus measures at its next meeting on March 10.
Mr. Draghi said there were "a variety of instruments" that the central bank could employ if policy makers decided more stimulus measures were 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 had not used budget policy to help the economy at a time of economic weakness — or had not taken pro-growth steps to cut regulation.
He urged governments that were in better shape financially to spend more on public investment, which would help growth, and to avoid excessive taxation.
Monetary policy from the central bank has been "the only truly stimulative policy over the past four years," he said.
[Source: The New York Times, AP, 15Feb16]
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