European Central Bank President Jean-Claude Trichet on Friday warned that banks risk becoming addicted to cheap cash provided by central banks in their efforts to get them lending again.
Although it was “too early to say the crisis is over,” it was time to unwind some of the measures that propped up the banking system during the financial crisis, Trichet said in a speech at the European Banking Congress in Frankfurt.
“Emergency treatment and strong medicines are sometimes necessary. But, if their use is prolonged, they can lead to dependence and even addiction,” he said.
“Eventually, the administration of painkillers must be stopped if patients are to get back on their own two feet,” he said, also warning that the ECB would have to take away its support “promptly and unequivocally” if it posed an inflation risk.
He said the ECB would soon start withdrawing some of its “extraordinary measures” to ensure they do not cause higher inflation.
The central bank is expected to provide details on how its stimulus will be scaled back at its meeting on Dec. 3. Policymakers are meeting on Thursday for discussions ahead of the decision.
Responding to criticism against over-regulation as financial markets start recovering, Bundesbank President Axel Weber said regulators must press ahead with reform to “make the system more resilient.”
The worst financial crisis since the Great Depression has sparked calls for a radical overhaul of banking supervision.
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