Pascal Lauener/ReutersMario Draghi, the president of the European Central Bank, at the World Economic Forum in the Swiss resort of Davos on Friday.
5:21 p.m. | Updated
DAVOS, Switzerland — The European Central Bank said on Friday that more banks than expected planned to pay back some low-interest three-year loans early, signaling that at least some banks are now healthier and able to raise money on their own.
The central bank said 278 banks would pay back 137 billion euros ($183 billion) out of a total of 489 billion euros ($652 billion) they borrowed a year ago. Banks borrowed 530 billion euros ($707 billion) more in a second installment last February, bringing the total to more than 1 trillion euros ($1.33 trillion).
Banks could borrow the money at the central bank’s benchmark interest rate, now at 0.75 percent. But some may have felt that there was a stigma attached. Even though the central bank does not disclose borrowers, banks may have been concerned about appearing weak in its eyes. In addition, banks needed to post bonds or other assets as collateral, and some may now prefer to deploy the assets elsewhere.
World Economic Forum in Davos
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The cheap loans provided a life raft for the region’s banking sector, which ran into difficulty in the Continent’s debt crisis. During the period of uncertainty, financial institutions refused to lend to one another. Many feared the banks, particularly in Southern Europe, would not be able to repay the short-term loans.
But Europe’s largest financial institutions just sat on the cash instead of pumping the money into local economies and providing funds to other banks. Instead, banks returned the money to the European Central Bank for safekeeping, even though it did not pay interest on the deposits. As politicians, business leaders and the general public fretted about the fate of the euro zone last year, European banks continued to break records for deposits at the central bank, with firms handing over more than $1 trillion at certain points in 2012.
And even as credit conditions started to improve late last year, many banks refused to open their coffers to new lending. European banks said they had imposed tougher lending conditions on companies and consumers during the third quarter of 2012, the latest figures available from the central bank, adding that demand for loans was expected to fall even further during the last three months of the year.
At an appearance at the World Economic Forum here, Mario Draghi, the president of the central bank, said that its measures last year had prevented a banking crisis. And he also praised government leaders for steps they took to strengthen the currency union, for example agreeing to put the central bank in charge of supervising banks — a change that will be phased in over the next year.
But he also expressed concern that calm on financial markets had not yet led to economic growth and better lives for European citizens.
“To say the least, the jury is still out,” Mr. Draghi said. “We haven’t seen an equal momentum on the real side of the economy. That’s where we have to do some more.”
The euro zone economy has stabilized at a very low level, he said, and should begin to recover in the second half of 2013.
Looking ahead, Mr. Draghi described 2013 as a year when the central bank and governments would begin carrying out decisions they made last year.
The central bank will begin assuming authority over banks, he said, and governments will carry out changes intended to improve their ability to respond to crises and police one another’s spending. As principal supervisor, the central bank is expected to be more willing than national regulators to force sick banks to confront their problems.
Mr. Draghi defended the central bank’s position that euro zone governments must continue to work to get spending under control. Austerity — a word Mr. Draghi said he did not like — has been a de facto condition for measures the central bank has taken to contain the crisis and give governments space for economic reforms.
“Fiscal consolidation is unavoidable,” Mr. Draghi said during onstage questioning by John Lipsky, a former first deputy managing director of the International Monetary Fund. “There can’t be any sustainable growth, any sustainable equity achieved through an endless creation of debt.”
But Mr. Draghi conceded that budget-cutting could push countries into recession, and he said governments should cut spending on operations rather than curtailing outlays for infrastructure projects like bridges and roads.
Asked by Mr. Lipsky whether the central bank would follow the Federal Reserve in setting benchmarks for unemployment that would prompt the central bank to lower rates or take other action, Mr. Draghi said no.
In what could signal a subtle shift in the central bank’s thinking, Mr. Draghi suggested that the bank could pursue economic growth as part of its prime mandate to defend price stability.
“We have given plenty of evidence we can do so within the existing framework,” he said.
Jack Ewing reported from Davos, Switzerland, and Mark Scott from London.
Article source: http://dealbook.nytimes.com/2013/01/25/despite-calm-draghi-raises-economic-concerns/?partner=rss&emc=rss