Transcript of interview with ECB's vice-president Vitor Constancio

How can you best use all that data which you collected now? It is a vast amount of data.

It is. And indeed these will go into the program for the SSM to start its supervision. And for instance, just to give you an example, there were these 25 banks that have some shortfall in the test, but if you count for instance, the next interval for the banks that had in the end capital ratios between 5.5 and 6.5, you have 10 more banks. And I'm sure of course that my colleagues as supervisors will put those banks in their program to look more in-depth if indeed there may be some other problems to be addressed. So this information will provide the basis for supervision that go well beyond the banks that just showed some shortfalls.

What are you planning on doing with the banks who just made it, who just did not fail?

As I just said, I mean, they, they did not fail, so that is the rules of the game. But indeed I am sure that the supervisors will look after November, when they start supervising, to those banks, to see if there are potential other problems or if it is advisable for them to reinforce their situation, in spite of the fact that they passed the test. So that's a matter for supervisory action, which will follow.

I'm sure you haven't followed the Twitter, all of the tweets already around. There is talk about whitewashing. There is talk about not enough capital requirement. Just 10 billion euros for 150 banks. It's not a lot. So why?

I explained during the press conference that it has to do also with the starting point. The banks front-loaded measures last year. And as a result, they arrived in December 2013 with a common equity capital ratio of 11.9 percent, which for 130 banks, average, is a lot. And let me remind you that the regulatory minimum right is 4. It will be 4.5, but it's 4 now. So they have practically 12. They wanted to be ready for the exercise. And that's why, I also quoted in my initial statement that the latest two investment banks that published forecasts for the results indeed had, for smaller samples, that's their exercise. But they come up with the result in one case that only three banks would fail, and that the shortfall, considering what the banks had already done, would be 2.7, and for the other big investment bank, American, by the way, it was zero banks failing, and zero capital requirements additionally. So that is certainly something that deserves quoting because it shows that okay the results are the results. And what has to be acknowledged is indeed the massive and demanding nature of this exercise.

As a result of the AQR and the stress test, the capital of the banks would come down by 263 billion. And in spite of that, most of the banks stayed above 5.5. So, I think the severity of the exercise, and the high starting point for the bank, explain, of course the results, which are fully credible, and I just end with this, because this exercise was not just an official exercise. We had involved in the exercise almost 5,000 experts from private firms conducting the exercise on the field. So I think that this exercise can only be considered as a very credible one.

Do you think that exercise now, if the market will think it's credible, it's also a starting point that the valuation of banks is getting better here in Europe?

Well, it's already happening, because if you take the development of the stock prices of European banks since the beginning of 2013 until now, they have increased more than the average of the market. And in 2013 alone, they have increased by 41 percent. So, there was already in the markets already the recognition that the low profitability that the banks had in 2012 and 2013 was indeed very much affected by cyclical factors, in particular the comprehensive assessment that was coming, and was leading them to increase provisions, so that after the exercise, profitability will tend to increase, and the market valuations and the development of stock prices was already anticipating that. And it will continue, to fully answer your question.

Let us look at one of the profitability potential sources of banks, that is, lending. Do you think that this will really be a catalyst, or the stress test release will be a catalyst to lending in Europe?

Well, as I said, and I was very precise in what I said, this exercise will reduce any credit supply restrictions that the banks may have. The banks were being cautious before this exercise. We always said this exercise would have a pro-cyclical negative impact on their behaviour. It was normal. Now we just ended, so this will reduce any sort of restrictions coming from their decisions.

But what is in the end lacking is sufficient aggregated demand in Europe. And that is what we are trying to correct with our monetary policy, and other policies that we expect European governments will take indeed to correct this situation of very low, weak demand in the euro area.

One of your recent interventions when talking about monetary policies, also, the targeted LTRO, it also has to do with the health of the banks, the willingness of the banks to give credit to SMEs. Why on earth do you think banks are going to take on more risk on their balance sheet after they just made that test here?

Because their profitability will benefit if they do use this facility and if they do extend credit. Because as you said at the beginning of your question, precisely they make profits by extending credit. So we hope that the new environment created by the conclusion of this exercise and our monetary policy will be more favourable for the banks to feel more comfortable to take their credit decisions.

What do you think, do you think that the take-up, I mean, the first take-up of the TLTRO wasn't really great, I mean it was ahead of the stress test, of course, do you think take-up of the TLTRO will increase, will be better in the next month?

Personally, I expect that. I see no reason why the banks would not use this facility more. It is explainable why they didn't so in the initial first take-up. So I personally expect that the second will be bigger because there is indeed no downside for the banks to come. There is no stigma this time. In 2011 and '12, we did also a special three years liquidity facility, but that was in a moment when there was lack of liquidity in the market. So the banks that came more, run the risk of being seen as being weak in terms of their liquidity position, so there was some stigma associated with coming. This time, that does not exist, and I don't see any downside for the banks to come to this facility in December.

Another program, of course, is the ABS, also something you might take from the banks to make them healthier, make them better fit for purpose. But there's also discussion that you might expand that into corporate bonds. Is that true? Are you discussing buying corporates?

Well, that was not discussed in the governing council, so it is not in the table, on the table. There were all of these rumours in the media. But indeed the decisions we took are the decisions we took, and we want to see how they work before we may have to do any rethinking. But right now we stick with the measures that we have taken.

Talking about additional measures, of course you need to wait until those finally will change something or not, but looking at the deterioration trend in deflation, or inflation I should say, because the 5-year inflation expectation is dropping, so what's the plan? Are we seeing QE next year?

Well, this decline in inflation expectations is a matter of great concern to us. Any central bank is always very concerned if inflation expectations are unanchored, because then we know, all central banks know, they are then difficult to correct. So the, why we took measures in September, after taking measures in June, it was precisely as a result of having seen these inflation expectations going down. So we hope that our program will change the overall perception in the market, and that we can indeed normalise inflation expectations and inflation itself.

The last question on the Bundesbank and the ECB. Angela Merkel stepped out after the European Council on Friday in Brussels saying the ECB is responsible for ensuring the stability and growth pact. Is that a sign that we are seeing a vote of confidence from the German government in the governing council and Mario Draghi's policy?

I don't want to speculate or interpret the words of Madame Merkel, so I really have no comment to that. But indeed I think that the ECB has proved to be, and our president, have proved to be a very trustworthy institution in the challenges that Europe faces.

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