​Governor Erkki Liikanen
Interview in Handelsblatt, by Michael Maisch and Jan Mallien
Published on 27 April 2015
an edited transcript of the interview


Mr. Liikanen, the biggest problem for the euro zone right now is Greece. The Greek finance minister recently said that there will be a deal and that the opinions are converging. Is he right?

We all hope so. It very much depends on Greece. They need to deliver and then there will be a solution. The issues that need to be solved are domestic issues. They had a positive trend in the economy last year. The current uncertainty has caused problems.

Your colleague Benoît Coeure just said, a Grexit isn’t an option. But isn’t the situation so serious, that the ECB should prepare for a worst case scenario, just to be on the safe side?

We are a rules based institution, and the emergency liquidity the national central bank is providing for the Greek banking system is a tool covered by those rules. I do not make any further comments.

The other big topic on the agenda for the Eurozone is QE. The markets have reacted quite strongly on the program. Did this come as a surprise for you?

The purchases are going well. We should not focus too much on short term effects. For me the asset purchase programme is like a marathon. There are ups and downs, but the target must be clear.  Our aim is to achieve price stability. The important thing when running a marathon is: You have to be stable and you must not get excited.   

The IMF has revised upwards its growth forecasts for some Eurozone countries. How much is that due to QE?

There were some other positive events at the same time. The falling oil prices are of course helping the European economy.  One side effect of the monetary policy is the lower exchange rate of the euro. But also on fiscal consolidation many European countries have made progress. There’s less need for radical budget cuts. And there have been some structural reforms.

Do you think there would have been a possibility to avoid QE?

No. The programme was important because we had this very low inflation for a very long time. If low inflation turns into a negative spiral it is very difficult to turn. We acted at the right time, we were well prepared and the execution was well handled. But we must remember the marathon. The first kilometers are easy.

Some economists are already demanding a reduction of the bond purchases. Does the ECB need an exit strategy?

If we start to hesitate, that would be the worst solution of all. We have built up expectations and now have to deliver. We need to be firm to fulfill our commitment. For us price stability is the target and we haven’t achieved that yet.

Are you concerned that QE might lead to dangerous bubbles in the capital markets?

We certainly have to be careful. If interest rates remain very low for a long time, that can create risks.  Therefore the discussions about what we central bankers call macroprudential policies are very important.  We have to set regulatory and supervisory rules to prevent risks.  We must be firm if needed.

Is the ECBs mandate for macroprudential policy strong enough?

We should have an open mind to reinforce the set of tools and to ask for more, if needed. There is a need to learn as we go. One problem that concerns me is linked to the capital requirements for banks which are based on risk weighted assets.

What exactly is the problem?

If a bubble starts to develop, it is often linked to housing prices. If you want to fight the bubble you would raise the capital requirements for bank lending. But the risk weighting for mortgages is very low, while the risk weighting for credits to SMEs is rather high. So banks might be tempted to limit their lending to SMEs instead of cutting mortgages.

You are one of the most prolific experts on banking regulation. Aren’t these happy times for you? Big banks like Deutsche Bank, Barclays or HSBC are all getting smaller and less dangerous.

We have been certainly doing a lot in Europe. We are implementing the stricter capital and liquidity rules under Basel III, there has been this massive comprehensive balance sheet assessment and the European Banking Union with its resolution rules.

So does this mean that the problem of banks that are too big to fail has been finally solved?

If it comes to banking regulation we are much further in our marathon, than for example with the asset purchase programme. I would say we have passed the 30 kilometer mark. But if we want to complete this journey we also have to deal with the structural problems in the banking markets. That means we have to avoid that bigger banks which still profit from an implicit state guarantee are taking excessive risks.

You prepared a report for the European Commission on that topic. You and your team came to the conclusion that banks of a certain size should separate their riskier activities especially in proprietary trading from the rest of the business. Now it looks like your proposals might be watered down.

I think nobody is contesting our analysis, the problem still exists. Our conclusion was, if these risky positions become very big, they should be funded by the market not through deposits or any form of funding enjoying an implicit government guarantee. We came up with two proposals: Either we would ask the banks for more capital for the trading book or we would suggest a mandatory separation. 

But the EU parliament and the Council are now discussing different options.

That’s true one option is that the supervisors would under certain conditions have the right to separate a bank. Where they will draw the line between these powers and a mandatory separation one will see. I will make my comment when the product is finished.

The new EU Commissioner Jonathan Hill seems sometimes more concerned about the possible negative impact of new regulation on growth than about the further stabilization of the financial system. Does that concern you?

Two remarks on that. First: The previous commission was fighting against a very severe crisis. This crisis is the crisis of our generation and it has been bad for growth. We simply had to fix those problems. And secondly, the regulators should always justify themselves, they should always assess the impact of the new rules as well as possible.

The ECB is now responsible for the supervision of the bigger banks in the Eurozone. Isn’t there an inherent conflict of interest between this task and monetary policy?

That is a very good question. Here in Finland banking supervision and monetary policy are separated, but they belong to the same family. The benefits are, they are sharing the same administration, the same IT services and people are rotating between the two institutions, but there is still a separation. If we could find a similar long term solution for the ECB and the banking supervision in the Eurozone it wouldn’t be bad.

Why wasn’t the banking supervision set up like this right from the start?

The European Treaty allows the EU to delegate tasks only to existing institutions. But don’t get me wrong. There might be some imperfections, but in my view the Banking Union is the biggest step in the European Integration since the introduction of the euro.