The European Central Bank should not have relaxed collateral rules to give money to banks because of higher default risks, ECB Governing Council member Klaas Knot was quoted as saying on Friday, warning cheap ECB money could create zombie banks.
Knot, who is also Dutch central bank president, told a Dutch newspaper he agreed with his German counterpart Jens Weidmann, who warned ECB President Mario Draghi in February of the risks of accepting a broader range of collateral.
I had rather wished we hadn't done this at all, Knot was quoted as saying in Dutch daily newspaper De Volkskrant.
Knot and Weidmann were not the only ones who had doubts about lowering collateral demands to give credit to banks, Knot told the paper.
The ECB's decision to give cheap low-interest three-year loans, known as LTROs, to banks in December and February was a unanimous decision but came with the risk of supporting bad banks, Knot said.
If we give liquidity support to 800 banks you cannot rule out there are perhaps a few of them who prove not to be viable in a few years' time and which, with hindsight, should not have been given liquidity support, Knot was quoted as saying.
He said that if uncertain market conditions delayed the ECB from rolling back its various support programmes, there was a risk of creating zombie banks, making banks dependent for too long on the ECB's drip (feed).
In the euro zone, a number of central banks wanted looser collateral rules, allowing individual loans to small and medium-sized companies (SMEs) to be accepted as collateral.
As a result, seven euro zone countries allowed acceptance of individual SME loans with a default risk of 1.5 percent at the most, while the other 10 stuck to the rule of only accepting bundled SME loans with a default risk of 0.4 percent maximum, Knot said.
He declined to speculate about whether the ECB should act again, for instance with a third round of three-year loans, when asked if high Spanish bond yields warranted new measures.
That the yield is rising again is unpleasant. The last few weeks, markets have become nervous again. That has surprised me, and not in a positive sense, Knot said.
(Reporting by Gilbert Kreijger. Editing by Jeremy Gaunt.)