Governor Erkki Liikanen
An interview with the CNBC, Geoff Cutmore, conducted on Saturday 10 October in Lima
Published on 12 October
Transcript excerpts


Governor Liikanen on banking sector:

CNBC: Is there any room do you think to review the capital requirements that are likely to be imposed on the banks by the ECB’s regulatory function and I ask this because the Commission is now saying that regulation shouldn’t get in the way  of the opportunity for growth. And we know that the bankers themselves are crying foul and are worried that they are going to be less competitive compared to the U.S. or other parts of the world. Is there perhaps a need to review the capital requirements that the ECB us going to impose.

Governor Liikanen:  We, of course, follow the international rules which have been set out by Basel committee where everybody’s in and it’s very important that we respect those rules. But there are some details that we need to look through. One is of course complexity. Second is, I give you one example, about SMEs. When we went through the reform and we assessed the capital requirements on the basis of the risk-weighted assets which means that housing has very low-risks weights and SMEs very high-risk weights. But if you look at the experience of the crisis, housing has been the biggest source of risk weights problems. So perhaps there is something wrong there because you should be able to diversify risks: You have many SMEs you finance but housing you must be careful because bubbles are very heavy because they have deep impact on the whole population. I think we must be able to look at the details but let’s not open the whole Pandora box. We are the generation that has gone through the worst financial crisis since the 1930s. We trusted too much on the self-regulation. There must be rebalancing. Owners must put capital into the banks. Banks must have the liquidity. But of course if there are evident complexities that don’t serve the main purpose then of course you must need to look at it.

CNBC: So I just want to understand that very clearly because I think it is a very important point. Are you saying that maybe a blanket approach on risk-weighted assets is not the right approach?

Governor Liikanen: I said on this particular issue on the SMEs. So that we say that housing risk weights are very small, low. For SMEs very high. In that particular issue it doesn’t work in the right way. It wasn’t our purpose to make funding of the SMEs more complicated and perhaps make it easier to create a bubble in the housing market. It should be perhaps more balanced. I just want to show that if there is a problem as this has been identified, we must be able to look at it.

Governor Liikanen on monetary policy:

CNBC: I can’t let you go without asking how the board currently sees conditions. We talked a bit about growth -- less so about inflation. The market seems to be drawing its own conclusion that, at some point, there will be another move to deepen or to some extend the current QE program. Is the market wrong in jumping to these conclusions already?

Governor Liikanen: When we took the important step in January, that we started this broad-scale asset purchases, we were very careful with our communication. And what is critical for me is the long-term commitment. We will continue the program as long as needed to get inflation back in a sustainable way so that it respects our target for price stability which is below but close to two in the medium term. So this long-term commitment is most important. Of course the first part of the sentence is we buy 60 billion per month until the end of September next year. If we compare that to a marathon, we have just passed 15K. But most important is the commitment even beyond if needed. Our commitment is linked to our strategic price stability target.

CNBC: And just so I can understand how the council is considering the risks at the moment. Obviously oil and deflation and the consequences of that and have been understood and I think discussed clearly.  But here at this meeting so much of the focus has been on the new threat of leverage in emerging markets. Can you help us understand how much that is coming into council considerations as you think about what might be triggered for further action?

Governor Liikanen: The impact of the emerging economies is perhaps more important on the growth. Still it has been marginal, perhaps the revision has been only 0.1 percent but it has been bigger there. But the second point is when the growth in China has been more limited than before and the supply of oil is more abundant. Oil price has been going down. These of course have impact on the growth and the inflation outlook. But still today it is perhaps too early to say if this impact is transitory or temporary or if it’s having a long-term impact. The change in energy prices is not a major concern. Concern comes if there is a secondary effect later. And we meet in Malta later and that’s the moment to see the issue - whether it’s transitory or it is having a lasting impact. 

CNBC: And on that issue of transitory. Oil is back at $50 a barrel. Do you think that the decline will in fact turn out to be transitory  and very low inflation expectations are excessively low at the moment?

Governor Liikanen: There are two issues. One is the change in relative prices like the oil prices and second is impact on the inflation outlook, for instance if there is secondary impact on rate formation or its impact on rate expectations. I would say that the first is easier and with the second part one must be extremely careful, monitor closely, take into account every single aspect and then see whether we need to take decisions. But anyhow, I just want to make it very clear: If needed, if warranted, we are able to act within the present program and if needed able to continue beyond September. But it is not the time yet. We will assess that every meeting when we meet.