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Draghi leaves rates on hold amid concerns for Europe's banks

Central banks were in focus on Thursday after European Central Bank President Mario Draghi discussed the Brexit vote and the parlous state of the European banking industry and the governor of the Bank of Japan ruled out using "helicopter money" in a radio interview.

In his regular media conference Thursday, following the bank's decision to keep its main interest rates on hold, Draghi said he did not want to underplay the challenges facing the euro zone, including high levels of bad loans in the banking sector and geopolitical instability relating to the U.K.'s vote to leave the European Union and terrorism.

"I'm pretty confident that the strong supervision and robust regulation and better communication by the supervisory agencies… will still improve the situation … and our perception in the world's eyes," he told reporters in Frankfurt.

Draghi added that a public backstop for banks - whereby countries would have to pay to prop up their faltering lenders - might help manage the problem of high levels of non-performing loans (NPLs) in the Italian banking sector.

Such a measure could prove highly unpopular, with citizens in many countries still angry at having to "bail out" banks following the global financial crisis of 2007-08.

"A high level of NPLs makes banks especially vulnerable to the markets as we have seen recently," Draghi said.

The ECB kept the rate on the main refinancing operations at 0.0 percent on Thursday, the marginal lending facility rate at 0.25 percent and the deposit facility at -0.40 percent. As previously, the bank said it planned to keep rates at present or lower levels for an "extended period of time."

The headquarters of Banca Monte dei Paschi di Siena SpA, the oldest surviving bank in the world and Italy's third-largest bank.
Matt Clinch | CNBC
The headquarters of Banca Monte dei Paschi di Siena SpA, the oldest surviving bank in the world and Italy's third-largest bank.





'Encouraging resilience'

Overall, financial markets had "weathered the spike in uncertainty with encouraging resilience," following the U.K.'s unexpected decision to quit the European Union in a vote on June 23, he said.

He described the Brexit vote as a headwind for the euro zone economic recovery, along with the sluggish path of structural reforms in the region and subdued growth prospects in emerging markets.

"All we can say is that it is a risk that has materialized and it is a downside risk," Draghi said.

He added that the failed coup in Turkey and subsequent turmoil in the country was unlikely to have a major impact on the euro zone economy in the near term.

The euro fell slightly against the U.S. dollar to around $1.102 as Drahgi spoke, from roughly $1.105. The pan-European STOXX 600 index pared losses to trade around 0.1 percent down on the day.

More QE? Draghi gives nothing away

Investors are keen to know if the ECB will extend quantitative easing past the soft deadline in eight months' time, but Draghi provided no new clues on Thursday.

In his speech, he said: "We confirm that the monthly asset purchases of 80 billion euros are intended to run until the end of March 2017, or beyond, if necessary, and in any case until the Governing Council sees a sustained adjustment in the path of inflation consistent with its inflation aim."

In addition, some investors believe the ECB may yet alter the capital criteria for its expanded asset-purchase program. This is because the fall in German Bund yields since the U.K. referendum has hit the pool of assets eligible for purchase by the ECB, whose rules say assets' yield to maturity must be above its deposit facility rate at the time of purchase.

On Thursday, Draghi said there was no cause to fear a shortfall in eligible assets, hinting at the possibility of changing the eligibility criteria for the program.

"Proper attention should be given to ... our ability to exploit the flexibility that the design of our program gives us," he said.

The German Bundesbank needs to purchase 253 billion euros of debt by the end of July, but only 216 billion euros of assets are currently eligible, according to Naeem Aslam, chief market analyst at ThinkMarkets.

Yields on benchmark 10-year German Bunds rose slightly after the ECB rate announcement, before falling back to 0.004 percent.

Meanwhile, the ECB agreed to lower the amount of emergency liquidity assistance that Greek banks could borrow from the domestic central bank by 1.4 billion euros to 57.2 billion euros on Thursday. The move reflected Greek banks' improved liquidity, the Bank of Greece said.

Yen leaps on BBC interview

In a BBC interview broadcast earlier on Thursday, Bank of Japan Governor Haruhiko Kuroda ruled out using "helicopter money" to underwrite Japan's budget deficit.

The Japanese yen rose as high as 107.47 against the US. dollar on the interview.

The BBC said the interview was conducted in mid-June.