Benoît Cœuré: Financing the economy of the euro area – the European Central Bank’s role Speech by Mr Benoît Cœuré, Member of the Executive Board of the European Central Bank, at the Association Française des Tresoriers d’Entreprises (AFTE), Paris, 11 April 2012. *  *  *  I wish to thank Simone Manganelli for his contributions to the speech. I remain solely responsible for the opinions contained herein. Ladies and gentlemen, It is a pleasure for me to be here at the Association Française des Trésoriers d’Entreprise. The topic I have chosen for my address today is the role that the ECB has played – and will play – in ensuring that the real economy of the euro area continues to receive the funding it needs to function properly and how this is linked to the ultimate objective of maintaining price stability in the medium term. I will focus in particular on the latest round of non-standard measures – the three-year refinancing operations which were conducted in December and February. I will start by describing the risks that the euro area economy was facing in the last quarter of 2011. At that time the banking system had funding difficulties, and we were on the brink of a credit crunch. If a crunch had occurred, it could have had devastating consequences for many firms and households; their access to financing would have been restricted.
The decline in credit to the private sector was accompanied by an increasing reluctance on the part of the euro area private sector to invest in financial assets; it severely hampered banks’ access to financing via the secured money market, due to an increase in haircuts and a deterioration of the available collateral. While market-based funding was becoming ever scarcer for banks in the euro area (as investors were growing increasingly nervous about the escalation of the sovereign crisis), banks were also facing regulatory and market pressures to strengthen their capital position. In short, back in December 2011, even though there was significant cross-country heterogeneity, the overall picture was rather gloomy. There were clear signs that supply-side factors were making banks less willing to lend to the non-financial private sector, and that banks may have entered a vicious circle which could compromise their ability to supply credit to the economy, both in the short and the long run. The additional negative impact on banks’ balance sheets of rapidly declining sovereign bond prices made the situation even worse. Banks typically have three ways to adjust to pressures on their funding and capital positions: they can sell assets, raise capital or reduce lending. Let’s look at each of these options in turn. In an environment of extreme uncertainty and high risk aversion, risky assets can only be disposed of at very low prices, possibly considerably below their book value.