No Need to Revamp Bank Rules

The global banking sector needs to be well regulated and measures already decided should not be rolled back, European Central Bank President Mario Draghi said on Friday as concerns grow that the new US administration would ease bank rules.

Bank regulation needs to enter a period of stability and there is no need to redesign the rules, Draghi told a conference, arguing that excessive deregulation was the chief cause of the global financial crisis, news outlets reported.

Donald Trump’s presidential election win has increased hopes by some and concerns by others that many of the bank sector rules rolled out in the past decade would be scrapped, giving banks more breathing space but potentially increasing systemic risks.

“The focus should be on implementation, not on new design,” Draghi said. “Regulatory measures should be implemented in a balanced way that ensures a level playing-field globally.

“And while marginal adjustments are possible, there should be no rolling back on what has been decided,” said Draghi, whose bank supervises the eurozone’s biggest banks.

Reregulation has led to improved bank solvency and asset quality, also helping Europe start a drive to reduce non performing loan levels.

A new wave of bank rules known as Basel III is due to be finalized in January and come into force in 2019 after years of hard fought negotiations.

 Focus on Recovery

Having unveiled unprecedented stimulus over the past several years, Draghi said his policy focus is now on whether a recovery in eurozone inflation can sustain itself even if the ECB’s exceptional monetary stimulus is reduced.

“Going forward, our assessment will depend on whether we see a sustained adjustment in the path of inflation towards that objective,” Draghi told a conference in Frankfurt.

“And that means that inflation convergence towards 2% is durable, even with a reduction in monetary accommodation. Inflation dynamics, in other words, need to be self-sustained.”

Despite the recovery in growth and employment, the persisting output gap is still keeping inflation dynamics weak. The October inflation rate stood at 0.5%. While this marks the highest level recorded in almost two years, it remains far below the ECB’s objective (of below, but close to 2%).

“And while we expect headline inflation to continue rising over the coming months, much of this increase will be driven by statistical factors related to the mechanical unwinding of the extreme oil price declines a year ago. We do not yet see a consistent strengthening of underlying price dynamics,” he said.

Draghi said recovery in the eurozone’s economy was still underpinned by support from the central bank.

“The eurozone recovery still relies to a considerable degree on accommodative monetary policy. The recovery in credit is being facilitated by a more resilient banking sector, but the impetus comes from our monetary policy.”

The eurozone’s economy grew by 2% in 2015, and the International Monetary Fund is predicting growth of 1.7% this year followed by 1.5% in 2017.

 Bad Signal

A collapse in talks on revamped global capital rules for banks would be a serious mistake, a senior eurozone supervisor said as differences among major banking powers threaten to scupper a deal.

“Failure of the agreement, or a postponement, would send a very bad signal,” Ignazio Angeloni, a member of the ECB’s supervisory board, said in an interview with Bloomberg in his Frankfurt office on Thursday. While declining to comment on the outcome of a meeting of rule-makers in Santiago this month, he said negotiations aimed at putting an end to the post-crisis regulatory overhaul are “very uncertain and difficult.”

Regulators will meet from Nov. 28-29 in the Chilean capital to put the final touches on a set of international capital standards, known as Basel III, ahead of a year-end deadline.

Germany’s Bundesbank has threatened to withdraw from the talks unless key demands are met.