Europe Economy

More cheap loans for Europe's banks?

Mario Draghi, President of the European Central Bank
Daniel Roland | AFP | Getty Images
Key Points

European Central Bank President Mario Draghi said Monday that another round of cheap loans could be provided to banks if needed to keep borrowing rates low and support the recovery.

Draghi told the European Parliament in Brussels the 17-nation euro zone's economic revival still "needs to be firmly established."

To help, the ECB is ready not only to keep its benchmark interest rate low for "an extended period of time" but also to offer a new round of so-called LTRO loans to banks "if needed," Draghi said.

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The previous two Long Term Refinancing Operations, issued in 2011 and 2012, helped push down money market interest rates and ease Europe's debt crisis by giving banks almost 1 trillion euros ($1.3 trillion) in three-year loans. That reduced fears that banks might collapse and bring down the public finances of weak states like Spain or Italy.

(Read more: What Greece is considering to avoid third bailout)

Draghi said it was a welcome sign that banks are now increasingly paying back these LTRO loans ahead of schedule. But he warned that might also result in higher market rates.

The ECB is therefore "ready to use any instrument, including another LTRO if needed, to maintain short-term money market rates," Draghi said.

He insisted, however, that there is a limit to what the central bank can do to help the recovery. He urged governments to push ahead with the creation of a banking union—the euro zone's key policy to restore financial and economic stability.

As a first step in that plan, the ECB will take over supervision of the bloc's biggest banks next year after carrying out a thorough stress test of the lenders' assets to identify possible capital shortfalls.

(Read more: Merkel wins: And now for the hard part)

That will strengthen the confidence in European banks, which "in turn would reduce banks' funding costs and lower the cost of credit for firms and households," Draghi said.

But the banking union's next big building bloc—a joint European authority to unwind or restructure banks that also has the financial firepower to conduct bailouts—still faces numerous legal and political hurdles.

EU governments are trying to reach an agreement by the year's end. Draghi called its establishment "a key priority" and reiterated that institution should be operational by January 2015.

The Associated Press

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