Banks must pass on liquidity to customers

Commercial banks must pass on to the rest of the economy the liquidity they have access to from the ECB, the central bank's president, Jean-Claude Trichet, said yesterday. He called on commercial banks to restructure where necessary and said governments still had large levels of capital earmarked to help lenders if they needed it. "We have been doing a lot for the commercial banks," Trichet told reporters, pointing to the central bank's recent €442 billion (Dh2.27 trillion) injection of 12-month funds. "Of course we are doing that with a view that the commercial banks are financing the real economy." Commercial banks deposited €287.7bn at the ECB's overnight facility – a 5-1/2 month high – on July 2, suggesting banks would rather park excess liquidity at the central bank rather than lend it on as they continued to mend their balance-sheets battered by the credit crisis. "We call on the commercial banks to restructure as much as possible where needed. We think it is good that they are recapitalising through private means where possible," he said. "We have still earmarked by governments a large level of capital that could be utilised for public recapitalisation of a number of banks in Europe," said Trichet. "It would be very appropriate, where needed, to speed up this process in order for our financial sector to be as able as possible to participate in the balancing of the European economy." Trichet said the risk of deflation has yet to materialise in Europe. Speaking at a conference in Aix en Provence, France, Trichet said the financial crisis had "validated" the Frankfurt-based central bank's focus on the medium-term and managing inflation expectations. "There has been an enormous change in view." Anchoring inflation expectations "has meant that until now the risk of deflation hasn't manifested itself", said Trichet. There is a "major risk" the nations would not co-ordinate their economic policies, he said. "There is a very big danger that major countries internalise their problems. It's important that we can reinforce surveillance of macro policy," he said. Keep up with the latest business news from the region with the daily Emirates Business 24|7 newsletter. To subscribe to the newsletter, please click here .