UPDATE 1-Praet says ECB could offer more liquidity if needed -FT
FRANKFURT Dec 12 (Reuters) - The European Central Bank could offer lenders more liquidity if upcoming bank tests crimp their lending, ECB Executive Board member Peter Praet was quoted as saying on Thursday.
Praet told the Financial Times that the bank stress tests before the ECB takes over supervision of the currency bloc's banks next year will help liquidity provision as they will look at the risk in banks' government bond holdings as well.
The two rounds of ultra-long term liquidity the ECB provided in late 2011 and early 2012 resulted in banks taking more than 1 trillion euros of cheap three-year money and spending much of it on government bonds instead of lending to the real economy.
EU banking regulations use an exception in Basel banking regulations that allows them to assign a risk-free status to domestic government bonds.
ECB President Mario Draghi earlier this month lamented the fact that the money flowed mainly into government debt, saying any new liquidity operations would have to ensure this does not happen again.
"Banks will be wary of the constraints placed on sovereign debt by the stress tests to which they are subject," Praet told the Financial Times in an interview.
If the stress tests cause problems, the ECB would be able to act "without hesitation and being reassured that the side effects of a liquidity injection that we have seen for the 2011-2012 operations would be minimised," Praet said, referring to concerns banks may be less willing to lend ahead of the bank assessment as they try to clean up their balance sheets.
Praet did not outline how exactly government bonds will be treated in the stress tests.
ECB Executive Board member Yves Mersch has said the ECB would treat government bonds as risk-free in its balance-sheet assessment, following EU banking regulations, but that the inclusion of market risk and the forward-looking nature of the stress tests would mean that government bonds are not handled completely without risk.
Praet also told the FT that were the ECB to inject more liquidity to the market, the way of doing so would depend on the situation.
"You want to make sure that when you provide liquidity against adequate collateral, it doesn't reduce the incentive to restructure the banking sector," Praet told the newspaper.
- Co-pilot spoke last words heard from missing Malaysian plane |
- Crimeans vote over 90 percent to quit Ukraine for Russia |
- Crimea asks to join Russia after Soviet-style vote |
- Stocks near one-month low as western sanctions on Russia loom |
- Ukraine, Russia agree Crimea truce until March 21-Ukraine minister