“By encouraging creative destruction in the banking sector, we can facilitate creative destruction in the wider economy and support the recovery.” Deleveraging in the financial system was necessary, since too much debt has been built up in the run up to the crisis, but the question is what form this deleveraging should take, and at what speed it should be allowed, or encouraged, to take place.
What we want to achieve, Mr Draghi said, is a “good” form of bank deleveraging, where equity is built up, where deposits rise and where balance sheet reduction takes the form of swift asset clean-up, rather than a slow scaling back of the loan book while rolling over bad loans. The ECB’s monetary policy is helping this process.