BRUSSELS Dec 17 New European Central Bank
powers to oversee euro zone banks will help restore confidence
in the sector and revive interbank lending, its president, Mario
Draghi, said on Monday.
Ministers clinched a deal last week to give the ECB powers
to supervise the currency bloc's banks from 2014, embarking on
the first step in a new phase of integration to help underpin
Although the central bank will only have automatic oversight
of around 150 of the bloc's 6,000-odd banks, it will have the
authority to intervene in smaller banks if there are signs of
"The single supervisory mechanism will contribute to
restoring confidence in the banking sector across the euro area.
It will help revive interbank lending and cross-border credit
flows, with tangible effects for the real economy," Draghi told
the European Parliament's Economic and Monetary Affairs
Bank-to-bank lending has never recovered from the onset of
the global financial crisis in 2007 and many banks rely on the
ECB for their liquidity needs while others hoard their cash
rather than lend it on.
"Combined with possible direct recapitalisation of banks by
the European Stability Mechanism and an envisaged single
resolution mechanism, the single supervisory mechanism will go a
long way towards breaking the vicious feedback loops between
sovereigns and banks," Draghi said.
Once ECB supervision is in place, the euro zone's rescue
fund -- the European Stability Mechanism -- will be allowed in
principle to recapitalise banks directly.
For now, euro zone governments have had to shore up their
banks, adding further to public debt and creating a vicious
circle between weak banks and states.
More profound mechanisms such as a resolution structure to
wind up failing banks and a deposit guarantee fund are a long
way from being implemented.
The ECB warned on Friday that there was no room for
complacency following early signs of easing strain on financial
Draghi also said the medium-term outlook for the euro zone
economy remained "challenging".
At its last policy meeting earlier this month, the ECB
forecast a bleak 2013 for the euro zone economy which it said
would probably shrink again. It left the door open to a further
reduction in interest rates -- already at a record low 0.75
percent -- in the early months of next year.