Bundesbank President Jens Weidmann has expressed his support for the European Central Bank’s (ECB) recent proposals to reduce the volume of non-performing loans on the balance sheets of credit institutions in the euro area. “Non-performing loans [...] weigh on financing conditions and, ultimately, growth prospects in the member states concerned,” said Weidmann before an audience of around 300 industry representatives at the European Banking Congress in Frankfurt am Main. For this reason, he believes that banks must reduce existing non-performing loans, and that rules need to be established that ensure the prudent management of non-performing loans in the future as well. “The proposals that were recently made by the ECB in this regard strike me as a sensible way forward,” said Weidmann.

In his opinion, solving this problem is a precondition for a potential common deposit insurance scheme in the euro area. The Bundesbank President explained that insurance always covers future damage, not damage that already exists. Hence, in order to be eligible for a common deposit insurance, banks in the euro area have to either fully provision for non-performing loans or divest them.

Weidmann went on to say that another precondition for a European deposit insurance scheme is that the size of government bond portfolios that banks hold on their books is limited. “Loans to sovereigns should not be treated any differently from loans to enterprises or individuals,” he added. A deposit insurance scheme without these limitations would set the wrong incentives, as member states themselves would still be able to decide freely and independently on the level of government expenditure and taxes: “Finance ministers would see less of a need to pay adequate attention to the sustainability of public finances,” said the Bundesbank President.

Weidmann in favour of less accommodative monetary policy stance next year

Weidmann emphasised that, given the subdued price pressure in the euro area, an accommodative monetary policy stance remains appropriate at present. However, he continued that the economic recovery has progressed further than inflation figures currently suggest, and that domestic inflationary pressures will gradually increase in keeping with a path towards the ECB’s definition of price stability of just under two per cent. “This is why, in my view, a less distinct loosening of monetary policy in the next year and setting a clear end date for net asset purchases could have been justified – also against the backdrop of increasing risks and side-effects, the longer monetary policy remains ultra-loose,” said Weidmann.

According to the Bundesbank President, euro-area monetary policy will remain highly accommodative even after net purchases under the asset purchase programme (APP) have been discontinued. This, he explained, is because it is not so much the amount of monthly additional purchases that is crucial for the overall effect of the APP, but, above all, the total outstanding volume of assets on central banks’ books, especially considering that the Governing Council of the ECB has decided not to raise interest rates until well after the net purchases have ended. “Setting a clear end date to net asset purchases would have merely meant refraining from pushing down on the accelerator even further – not putting the brakes on monetary policy,” said Weidmann.