Frankfurt/Paris: European Central Bank (ECB) president Jean-Claude Trichet said a drop in the supply of credit to euro-area companies and consumers could undermine the banking system if it continues.
“While falling credit flows are partly due to a drop in demand, they may also reflect supply-side factors and tight financing conditions associated with a phenomenon of deleveraging,” Trichet said in a speech to European securities regulators in Paris on Monday. “If such a behaviour became widespread across the banking system, it would undermine the raison d’etre of the system as a whole.”
He also said hedge funds, credit rating agencies and all other important market players should be subject to regulation based on a global approach.
“The current crisis is a loud and clear call for extending regulation and oversight to all systemically important institutions—notably hedge funds and credit rating agencies—as well as all systemically important markets—in particular the over-the-counter derivatives market,” Trichet said. “What is currently under discussion is the precise way in which these elements should be integrated within an overall regulatory framework.”
The global financial crisis that’s pushed Europe into its worst recession since World War II has made banks more reluctant to lend as well as curbing demand from companies and households for credit. Loans to euro-area residents excluding government fell 0.4% in December from November, the first decline since records began in 1991.
“Trichet’s comments are important because it’s the clearest recognition to date that they are starting to see evidence of a credit crunch,” said Jacques Cailloux, chief euro-area economist with Royal Bank of Scotland Group Plc. in London.
The Frankfurt-based ECB has cut its benchmark interest rate by 2.25 percentage points since early October to 2%. Still, Trichet has said he doesn’t want to follow the example of the US Federal Reserve (Fed) and lower rates to zero. He’s also been reluctant say whether ECB can follow the Fed and use unconventional measures to help revive lending and economic growth, such as buying government bonds or commercial paper.
“Today’s comments are the first acknowledgment that there is a credit crunch since the crisis started,” said Laurent Bilke, an economist at Nomura International in London. “It can justify further credit-easing measures, such as intervention by ECB to selectively ease credit conditions on some markets.”
Global regulatory reform tops the agenda for a summit of the Group of Twenty rich and big emerging economies in London in April. Several leaders from the 27-country European Union (EU) met in Berlin at the weekend to prepare a common EU position for the summit. The Berlin meeting agreed that no key financial player should escape regulation but stopped short of giving precise details.
The EU is adopting a draft law to introduce mandatory registration and oversight of credit rating agencies and will make proposals on hedge funds and private equity in coming weeks. The credit rating agency measure has raised concerns in the US as it would impinge on the operation of US agencies such as Standard and Poor’s and Moody’s.
“Let me stress that both initiatives on rating agencies and hedge funds warrant strong international coordination,” Trichet said, adding that the ECB stood ready to play a role in macro prudential supervision of banking risks.