The Czech central bank sees risks in incomplete proposals for a European banking union that may change national supervisory powers over the financial industry, board member Lubomir Lizal said.
Lizal commented on Europe’s debt crisis, Czech economic developments and the monetary-policy outlook in an interview in Prague yesterday.
On debt crisis and banking union:
“The main goal of efforts in Europe is to install a credible lender of last resort, because the governments in the troubled countries cannot fulfill this function.
‘‘This means more involvement in public budgets. If this cannot be performed directly by the governments, what is needed is to find another possibility of doing it from public budgets.
‘‘The primary goal is to break the link between the banking sector holding problematic government debt, and the public sector which, because of its own problems, isn’t able to rescue the banking sector.
‘‘The risks from proposals for a banking union are that they’re not presented in a complete form. The proposal addressing the issue of relations between the home and host regulators include potential risks. For instance, the European regulator is seen having different powers than the national regulators, while the national regulators will still carry the fiscal responsibility for eventual problems.
‘‘Our view is that the proposal should be presented in a complete form to allow analysis of all potential benefits, risks and costs.
‘‘Unequal positions of the regulatory authorities inside and outside the euro zone could create situations in which the monetary-union bloc could outvote those outside the bloc.
‘‘Moreover, views of what are systemically important banks will differ in a small, open economy and in a larger economy. If there is an institution that might not be seen as systemically important for the European regulator, its subsidiary may be seen as systemically important in the Czech Republic or some other similar country.
‘‘What I consider crucial for financial stability is that the banking group not only meets the requirements overall, but that it also meets the requirements in every country where it has operations.’’
On Czech economy and monetary policy:
‘‘We are trying to communicate that the economic situation isn’t as pessimistic as may be perceived by the public or the companies.
‘‘The latest step to lower the interest rates was reflected in the market interest rates. To me, the effect was there, and the transmission mechanism is working even with the current low rates.
‘‘Our decision was in line with the central bank’s forecast, and the effect was also in line with the impact that was assumed in the forecast.
‘‘The current forecast assumes another rate reduction. I don’t think the next forecast will be dramatically different from the current one. This means there shouldn’t be a change in the trend, although there may be a change in the timing.
‘‘If the new forecast isn’t very different from the previous one, then more relaxed monetary conditions will probably be warranted.
‘‘The transmission mechanism has been working so far, so I don’t see a reason not to use interest rates again, if we agree that it is needed. For me, zero rates aren’t a problem. It is neither a psychological nor a technical barrier.
‘‘My perception is that extra policy measures should be used when the main tool cannot be used anymore. And we still can use it.
‘‘The foreign-exchange channel seems to be the next most effective instrument in terms of an impact on prices and in terms of relaxing monetary conditions. It is also an instrument that we know the best, an instrument that is the easiest to monitor and regulate.
‘‘Inflation expectations are anchored near the inflation target, which reflects the credibility of the monetary policy.’’
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