MNI POLICY: Loose Policy Has Raised Risks: Lautenschlaeger

By Luke Heighton

     FRANKFURT (MNI) - Ten years of loose monetary policy, abundant liquidity

and solid economic growth have left the global financial system facing

significant risks, European Central Bank executive board member Sabine

Lautenschlaeger said on Tuesday.

     Action needs to be taken to make financial institutions more resilient to

shocks, said Lautenschlaeger, who is also vice-chair of the Supervisory Board of

the Single Supervisory Mechanism, as she admitted she was "worried" by the loss

of momentum in implementing Basel III banking regulations.

     Here are the key points from her speech in Nassau, Bahamas:

     -- As we get further from the last crisis, "rules are softened, banks are

"freed", the economy grows, and the seeds for the next crisis are sown - because

such growth cannot be sustained in the long run".

     Basel III banking regulation needs to be implemented on a global scale. "I

am a bit worried that we are losing momentum on this front. There seems to be

less and less drive to follow through on the reforms that were agreed in Basel".

     -- Implementing rules unevenly enables banks to "go wherever the rules are

softest. In the worst case, some countries might try to turn this into a

business model. But let me assure you: light-touch regulation is not a viable

business model".

     -- Maturity optimisation strategies are being used to dress up quarterly

reports. "Artificially reducing the regulatory maturities of transactions

through the use, or restructuring, of derivatives," need to be "kept a close eye

on". "It might well be a good idea to switch to daily average reporting, at

least for some components of the leverage ratio," she said

     -- In addition to downside risks from trade tensions, Brexit and

non-performing loans, "we should also consider risks coming from a long period

of loose monetary policy, low interest rates, abundant liquidity and solid

economic growth. All this may have come to feel normal, but it isn't. There are

many things that could trigger a sudden change."

     -- Banks should not attempt to compensate for low interest rates by

embarking on a search for yield and taking on too much risk, while shadow

banking needs to be brought out of the shadows and forward risks - such as those

deriving from technological change - should be better understood.

--MNI London Bureau; +44208-865-3829; email: Jason.Webb@marketnews.com

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