Draghi says ECB monetary policy fragmented

A fragmented financial market in Europe has led to the fragmentation of the European Central Bank’s single monetary policy, ECB President Mario Draghi said on Tuesday.

“As you will be aware, the disruptive effects of severe fragmentation in the single financial market have tangible consequences, such as diverging funding costs for banks,” Draghi said in the text of a speech for delivery in Frankfurt.

“This has resulted in the uneven transmission of our interest rate reductions to firms and households across the euro area. For this reason, the ECB has had to identify the most effective policy tools for repairing these disruptions, while remaining within its mandate,” Draghi added in opening remarks at a conference on the integration of financial markets.

Draghi said last month the ECB’s top priority is to enhance the transmission of its monetary policy across the eurozone.

At present, households and businesses in countries on the periphery of the eurozone face higher borrowing costs than those in the core of the bloc despite a single official interest rate for the 17-member currency area.

The ECB’s main rate is at a record low of 0.75 percent.

Draghi said eurozone central banks were working to improve the possibilities for banks’ access to collateral for use in the ECB’s lending operations, which provide banks with liquidity – a key factor in their ability to lend.

“Work is also in progress at the Eurosystem level to improve the possibilities for the cross-border use of collateral for Eurosystem credit operations, which will increase efficiency,” he said.

Emil Paulis, a director at the European Commission, told the conference that due to the financial crisis and new regulations there is a need for more and better quality collateral.

“There is a growing consensus that there are probably enough potential assets that could as collateral to meet this demand, however, there is also the potential for collateral scarcity to develop,” Paulis said.

“Scarcity is beginning to change market practices … These practices have the potential to create hidden leverage, increase interconnectedness and disguise where the risk really lies in the system,” Paulis added. [Reuters]

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