UPDATE 1-Not ECB's job to fix "addicted banks" problem-Draghi

Published 10/01/2010, 02:03 PM
Updated 10/01/2010, 02:08 PM

* Draghi warns many euro zone banks weaker than appears

* Says "zombie banks" must be identified for ECB exit

* Noyer says ECB mandate should not include asset prices

* Orphanides says financial stability increasingly a focus

(Adds comments by Draghi, Noyer, Orphanides, background)

By Gavin Jones and James Mackenzie

ROME, Oct 1 (Reuters) - The serious problem of banks that have become too dependent on liquidity provided by the European Central Bank must be resolved by national authorities and not by the ECB, Governing Council member Mario Draghi said on Friday.

Speaking at a conference in Rome, Draghi warned many euro zone banks are much weaker than appears from their balance sheets because the very low level of interest rates understates the worsening of their financial situation.

"The problem of addicted banks should not be addressed by the ECB but by financial authorities," said Draghi, who is president of the Financial Stability Board and governor of the Bank of Italy.

These "zombie banks" need to be identified by national authorities either before or at the same time as the ECB implements its exit strategy from non-conventional liquidity measures, Draghi said.

"We think there is a serious exposure of many banks to the risk of a sudden rise in interest rates, which given the overall funding conditions is something at which one should look with great attention," he added.

Draghi later stressed that he was not warning of imminent disaster for any bank, but said there was no doubt that there remained generally an excessive dependence on ECB liquidity.

"When you exit, and there is no doubt that we will exit, you want a monetary policy that is free of these constraints," he said.

WEIGHING EXIT

Monetary sources have told Reuters that Draghi has urged the ECB to discuss the problem of addicted banks as it considers how to implement its exit strategy.

The ECB must avoid the risk of leaving too much liquidity for too long, which could sow the seeds of a future crisis, Draghi said, but it is also bearing in mind that the situation of the real economy has "improved but remains fragile".

Weighing these two concerns means the ECB must be "extra careful" at the current juncture, he said, adding that the question is "continuously discussed in the governing council."

Draghi said he saw no reason to change the ECB's mandate for price stability, a position also expressed by other governing council members at the conference, Christian Noyer and Athanasios Orphanides.

Bank of France Governor Noyer said the idea that the ECB's mandate should include asset price stability as well as consumer price stability was "sub-optimal to say the least".

Sound economic theory taught that monetary policy should not pursue multiple objectives with a single policy instrument, he said.

Orphanides, who heads the Cypriot central bank, said that the ECB's mandate should remain the same, but the crisis had nonetheless shown "the increased importance of financial stability."

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