1

Frank MossDirector General (European Central Bank) *

(* speaking in a personal capacity)

The financial crisis and its fallout for the ECB’s monetary policy

conduct

The sovereign debt crisis: towards fiscal union in Europe? Brussels, 7 June 2012

2

The unfolding of the crisis – 5 phasesSpreads between 12-months Euribor/Libor and OIS swap rates; percentages per annum

Note: Spreads are the difference between 12-month Euribor/Libor and Overnight Index Swap rates in percentages per annum.Source: Bloomberg and ECB calculationsLatest observation: 29 May 2012

0

0.5

1

1.5

2

2.5

3

3.5

4

Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12

EUR USD GBP

September 2008: Intensification of crisis

August 2007: Origin of crisis

December 2009: Initiation of phasing-out

Spring 2010: Sovereign debt crisisSpring 2010: 1st phase of the sovereign debt crisis

Summer 2011: 2nd phase of the sovereign debt crisis

3

Government bond spreads in selected euro area countries during the crisis (basis points)

Note: 10 year government bond spread against the German bund.Source: Datastream and ECB calculationsLatest observation: 1 June 2012

0

500

1000

1500

Jan-08 May-08 Sep-08 Jan-09 May-09 Sep-09 Jan-10 May-10 Sep-10 Jan-11 May-11 Sep-11 Jan-12 May-12

AT

ES

FR

GR

IE

IT

PT

NL

BE

FI

4

Consumer price inflation in the euro area during the crisis (annual percentage change)

Source: Eurostat.Latest observations: May 2012 for HICP (Flash estimate) and April 2012 for HICP excluding

food and energy.

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

2007 2008 2009 2010 2011 2012

HICP HICP excluding food and energy

5

ECB standard monetary policy during the crisis …(percentages per annum)

Source: ECBLatest observation: 29 May 2012

0.0

1.0

2.0

3.0

4.0

5.0

6.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

Jan 07 Jul 07 Jan 08 Jul 08 Jan 09 Jul 09 Jan 10 Jul 10 Jan 11 Jul 11 Jan 12

overnight interest rate (EONIA)Main refinancing rate/minimum bid ratedeposit rate

marginal lending rate

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… and non-standard monetary policy action

I. Measure to improve bank funding and liquidity conditions

• Fixed-rate full allotment mode in all refinancing operations (since October 2008)

• Lengthening the maturity of the refinancing operations (1, 3, 6, 12 and 36 months)

• Extending the list of eligible collateral (and not fully relying on rating agencies)

• Extending liquidity directly in foreign currencies (USD and CHF)

• Reducing reserve requirements

II. Measures to provide depth and liquidity in malfunctioning financial market segments

A. Covered bond markets

• Covered Bond Purchase Programme 1 (CBPP1) EUR 60 bn purchased from July 2009-July 2010; CBPP 2 under way for EUR 40 bn (until November 2012)

B. Sovereign bond markets

• Securities Markets Programme (launched in May 2010); EUR 212 bn outstanding

7

Comparing the action of central banks in advanced economies

Evolution since 2007 (2007=100) In % of GDP

0

50

100

150

200

250

300

350

400

450

Index

(Jan2

007=

100)

Eurosystem

Federal Reserve

Bank of England

Bank of Japan

0%

5%

10%

15%

20%

25%

30%

as %

of GD

P

Eurosystem

Federal Reserve

Bank of England

Bank of Japan

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Using the window of opportunity to break the vicious cycles operating in the crisis

Financial sector repair

Growth repair Fiscal repair

Tighter financial conditions

Bailout costs

Calls for fiscal tightening

Lower tax receipt; higher expenditure

Reduced loan supply Credit

losses

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Action is being taken on the three legs, but time lines are different ….• The financial (banking) sector repair agenda

adequate provisioning for sovereign risk exposures (EBA), adequate capitalisation (Basel III), orderly deleveraging (national supervisors and ESRB), credible financial backstops

• The fiscal repair agendareinforcing euro area fiscal frameworks (6-pack, 2-pack, Fiscal Compact, national frameworks), growth-friendly fiscal consolidation, credible euro area/international financial backstops

• The economic growth repair agendagrowth-promoting structural reforms under the European Semester, Macroeconomic Imbalances Procedure

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… and more needs to be done to break the vicious cycles

The trend towards financial disintegration in the euro area has started

If unchecked, it risks fundamentally tilting the balance of costs and benefits of Economic and Monetary Union

To reverse the trend, the close link between national sovereigns and national banking systems needs to be weakened in order to build a genuine financial market union in the euro area

A financial market union as part of a stronger economic union will enhance the effectiveness and benefits of monetary union

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A euro area financial market union needs a banking union at its centre, requiring 4 essential components

• A harmonised supervisory rule book with unified supervisory practices for banks that are systemically important for the euro area

• A single supervisory authority with the power to impose recapitalisation on individual banks that are deemed systemically relevant for the euro area

• A unified deposit insurance system for all euro area depositors, financed by the banking system (with initial public sector contributions commensurate with the strength of national banking systems and deposit insurance schemes)

• A common bank resolution system, initially backed up by credit lines available to national governments through the ESM, but eventually financed by a common bank levy

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… but a euro area banking union is only one part of a reinforced euro area economic unionA euro area banking and financial market union can bring back the lost gains of financial integration and add to them

But it needs to be part and parcel of a closer economic policy integration effort that will build a closer union

The vision of which has to materialise soon, to convince both euro area citizens and financial markets

Its first building blocks have to be in place soon to help arrest the spiralling vicious cycles

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Thank you for your attention