ECB Situation Different to Fed on Rates: Bini Smaghi

The European Central Bank is in a very different situation to the U.S. Federal Reserve, which has cut interest rates almost to zero, ECB executive board member Lorenzo Bini Smaghi said in an interview published on Sunday.
Asked by the Rome daily Il Messaggero if the ECB is considering following the Fed's lead on rates, Bini Smaghi said the lending situation in the United States was worse than in Europe and warned about the risks of a too lax monetary policy.
"The United States' situation is very different from Europe's ... the (U.S) transmission mechanism works less well," Bini Smaghi was quoted as saying.
He pointed out that lending rates to businesses and consumers in the United States had remained as high as in the euro zone even though official Fed rates stand at just 0.00-0.25 percent compared with the ECB's key rate of 2.5 percent.

"We must not forget that the current crisis was caused by a period of interest rates taken to a very low level for too long," he added.
Bini Smaghi said financial markets showed signs of "slowly and gradually settling down" but said inter-bank lending rates needed to come down more quickly toward official ECB rates.
However, he expressed doubt that Euribor, the reference inter-bank lending rate, was a "transparent" and accurate reflection of inter-bank transactions.
He also urged banks to make loans more readily available to customers to limit the impact of the financial crisis on the real economy and called on banks to accept offers of public capital to improve confidence in the banking system.

"To reassure markets, the banks should increase their capital above prudential requirements, also by accepting public contributions," Bini Smaghi said.
He warned that survey data suggested banks plan to further tighten credit conditions and said this would be "self-harming" for the banks themselves as well as for the economy.

He called for the ECB to be given a greater role in financial supervision in Europe by increasing coordination between supervision over single institutions and vigilance over credit markets as a whole, which is in central bank hands.
The ECB should be given a role in the colleges charged with supervising big banking groups, he said.
Looking back over public policy in 2008, Bini Smaghi said that allowing the failure of U.S. investment bank Lehman Brothers had been a mistake and its consequences had been underestimated.
However, he defended the ECB's often criticized decision to raise interest rates in July, saying it was justified by inflation rates and expectations at the time and had also contributed to the subsequent sharp drop in inflation.

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