MNI BRIEF: Bank Solvency Main FinStab Threat As ECB Tightens

Even in periods of high inflation, monetary policy stance considerations can be separated from financial stability concerns as long as the latter are attributable to market dysfunction and liquidity issues and not solvency concerns, ECB Executive Board member Isabel Schnabel said in a speech Friday.

The ECB can “do whatever is needed” to bring inflation back to 2% in a timely manner by raising rates to a sufficiently restrictive level and keeping them there for as long as necessary, she said. “At the same time, the ECB has the tools to provide liquidity to the euro area financial system, if needed to preserve financial stability and a smooth transmission of monetary policy.” (MNI INTERVIEW: Higher ECB Peak Means Faster To Cut-Simkus)

Banks and non-banks may in the future face additional headwinds arising from rising interest rates and a cooling economy, Schnabel said, highlighting the continued importance of government and macroprudential supervision. She expressed hope that the changing interest rate environment will hasten the completion of European banking union by exposing the problem of overbanking in the euro area.