Governor's speech at the 26th Annual Economist Government Roundtable


5-7 July 2022 | Athens


Boosting Europe’s Growth and Resilience: The Role of the Central Banks


  • The post-covid challenges for the European banking system
  • Socially responsible banking in times of unpredictability


Distinguished co-speakers and guests,

Thank you for the opportunity to contribute to this important topic today.

If I were to sum up the lessons learnt over the last couple of years, I would limit myself in two key takeaways. Firstly, that ensuring a robust, resilient and sound banking system is pivotal in addressing the effects of a crisis and safeguarding the ability to finance SMEs, households and hence economic growth. Secondly, that the coordinated actions of policymakers and supervisors can separately mitigate, to the extent possible, the negative effects of a crisis and also support growth.

The banking sector has been walking the path to financial integration since the launch of European Monetary Union back in 1992. This road has not been an easy ride and certainly, we have not yet seen the end. Year 2022 marks the 10th year of the banking union, as proposed at the June 2012 European Council.

Just think of the considerable de-risking achieved through the massive reduction of the non-performing loan ratios of Euro Area significant banks: from 8% in 2014 to 2% 2021, the significant enhancement of the banks’ loss absorption capacity and the improvement of their governance. As a result, banks entered the Covid-19 crisis in a relatively healthy financial position and hence they were able to timely and adequately respond to the financing needs of viable businesses and households minimising the effects of the pandemic and facilitating the recovery in economic growth.

In parallel, the supervisory response to the economic downturn provoked by the pandemic was immediate and coordinated. By creating the necessary capital headroom to banks it enabled them to provide lending and support the economy during the pandemic. These measures, in tandem with the fiscal and monetary actions, contained the overall economic downturn from the pandemic and enabled the immediate economic recovery seen on 2021 and 2022.

Zooming further down into the micro-supervisor world, a number of challenges remain.

First of all, banks need to emerge from the pandemic healthy. It is yet unknown when the new variant waves will stop and the health crisis will reach the end in order to manage the full assessment of the effects of the pandemic. In addition, the effects of the Russian invasion in Ukraine are not yet fully evident. Therefore, banks need to closely monitor the most vulnerable sectors to timely address any deterioration of their clients’ financial situation and credit risk.

Secondly, structural weaknesses of the banks need to be addressed via effective digitalisation strategies and enhanced governance in order to ensure the medium term sustainability of the industry and the transition towards a more socially responsible banking model. It is imminent, in this rapidly changing and competitive environment, with the FinTech and BigTech players joining the game, that banks address their cost inefficiencies, through their digitalisation transformation, which in order to be effective and sustainable, needs to be steered by appropriate and adequate governance arrangements, from skilled staffing to overall risk management framework.  

Finally, emerging risks, such as climate and environmental risks and cyber risk, need to be tackled. And in doing so, emerging risks need to be identified, assessed, measured and fully incorporated in the banks’ risk management frameworks, policies and procedures.

The geopolitical crisis front-loaded the need, of not only the banking sector but of the wider economies, to address in a speedier manner the climate and environmental risks combined with the evident energy reliance risks. Managing the effects of the green transition and climate change will certainly be one of the most prominent issues for all of us in the years ahead. The need and consequent ongoing effort to green European economies raises risks and uncertainties via a plethora of channels, with bank exposures to sectors with heavy environmental footprint and to areas susceptible to physical hazards being perhaps the most immediate ones. Banks must intensify their efforts to this regard by incorporating climate and environmental factors in their business strategies and risk frameworks, adopting in that way a more socially responsible operating norm. However, this is not enough. Once again, a coordinated action by all European bodies is also required in order to introduce where needed the necessary reforms that would steer the financial sector in the direction of properly managing climate risk in a transparent way. Unless the necessary legislation is in place to force the various stakeholders towards green transition, with possibly certain governmental grant or subsidy schemes or other incentives to smooth out the costs involved for such a change, businesses and customers may not see the benefit for an immediate response and adoption of climate related factors in their operating model. Consequently, banks will not be in a position to have the necessary raw data from their customers to appropriately monitor, assess and disclose climate risk.

Now, zooming out of the micro world, and looking at the big picture, a further deepening of EMU can help enhance further the resilience of the banking sector and address future shocks while boosting economic growth. And an essential element to that front is the completion of the Banking Union, which as per the statement issued by the Eurogroup in June 2022 ‘further progress is needed to allow the banking sector to fully contribute to Europe’s economic resilience and sustainability’. The completion of the banking union will mark the establishment of a truly single European banking market in which cross border economic transactions will take place freely. It will also act as a safeguard against possible fragmentation initiatives or actions as these were evidenced during the Great Financial Crisis.

In addition to their supervisory role, as explained above, central banks, through their policy actions also play an important role to safeguard growth and resilience. In essence, the contribution of monetary policy to long-term growth results from its primary objective of price stability. Theory and empirical findings in economic literature imply that low and stable inflation rates are connected with long-term sustainable growth. In contrast, excessive inflation harms economic sentiment, performance and wellbeing in the long-run and also hinders investment decisions and long-term planning of businesses. For these reasons, central banks employ and adjust their monetary policy tools to ensure medium-term price stability.

These considerations guide the ECB monetary policy, which is currently being adjusted and formulated to alleviate the undesirably high inflation in the euro area. Unfortunately, the war in Ukraine has disrupted world trade and supply chains, on top of the disruptions brought by Covid related restrictions, raising in turn the cost of energy and commodities and hence overall inflation. It is expected that the euro area's high inflation will persist in the near term. As a result, since last December, at the Governing Council of the ECB, we have followed a path of policy normalisation, with optionality and flexibility, in response to the rising inflation and its dynamics. Moving away from unconventional monetary policy measures, last week marked the end of net asset purchases under APP. For the first time after eleven years, we intend to increase our official rates by 25 basis points in July, and if inflation outlook persists or deteriorates, a bigger increase will be considered for September. Incoming inflation data and the outlook assessment will determine the pace with which we will continue to gradually normalise our monetary policy beyond September, in order to deliver on our two per cent medium-term inflation target. Broader and intensified inflation pressures that would threaten to de-anchor inflation expectations could require quicker rate moves. Euro area headline inflation reached a new record high in June, reaching 8.6 percent compared to 8.1 percent in May, strengthening the case for further increases as the rising prices continue to erode economic sentiment in the euro area.

We must, of course, maintain the orderly transmission of our stance across the euro area. But under this extraordinarily uncertain economic environment, monetary policy turned into a challenging balancing act, aiming to reduce inflation without hurting too much economic growth recovery in 2023. However, acting too little and too late could necessitate acting more aggressively which could impact future growth.

At the same time, along with ending up our unconventional monetary policy measures and normalising monetary policy, we need to remain attentive of unwarranted upward pressures in the sovereign yields of euro area jurisdictions. To this end, we have recently decided, as a first line of defence, to apply flexibility in the reinvestments under PEPP as of July 1st. Furthermore, at the Governing Council, we have mandated the ECB competent committees to accelerate the completion of the design of a new anti-fragmentation tool, which can serve as a backstop preventing any unwarranted fragmentation risks. These are measures that work towards price stability and smoothly operating policy transmission mechanisms, that safeguard economic growth and resilience.

Let me now conclude.  In this ever-changing global terrain, it rests to us to come through these challenges stronger and wiser. The world is changing in fundamental and lasting ways. We need to be proactive, flexible, transparent and fast in our decisions and actions in a coherent and coordinated manner. As the Ionian philosopher Heraclitus said, “Nothing is constant except change itself” - “Τίποτα δεν είναι μόνιμο, παρά μόνο οι αλλαγές”.