Trichet: ECB has prepared exit strategy for banking sector support measures

   Nearly a year after the collapse of Lehman Brothers sent shockwaves through the global f

inancial services sector, European Central Bank (ECB) president Jean-Claude Trichet said that the institution had prepared its exit strategies from the unprecedented support measures it offered lenders in Europe, but said that it was too early to do so.

Speaking at the ECB Watchers Conference in Frankfurt on September 4, Trichet said: "As of today, we do not have all the information necessary to decide which exit path will be desirable or optimal from the perspective of tomorrow. But we have developed a set of criteria that will guide our future decisions.

"In this sense, exit considerations are subject to the same qualification that I always make when I speak on behalf of the Governing Council on monetary policy matters: we are not pre-committed."

Trichet said that the ECB was not committed to a particular timing or sequence of actions for the exit phase, but emphasised that the central bank's future decisions would not not be arbitrary and would be based on a framework developed by the bank.

"In my view, four cornerstones have to be considered in our approach to exit from non-standard measures: the link to our monetary policy strategy; the forward-looking initial design of the measures; our technical and institutional ability to act; and our reputation for swift and decisive action when it is require," he said.

Government support has been widely hailed as decisive in softening the blow to the financial sector and the economic recovery, but the question of the timing of cutting off stimulus is expected to be at the top of the G20 summit later this month.G20 governments are calling for a co-ordinated exit from the emergency stimulus measures.

Banks were hoarding the cash borrowed from the ECB, instead of giving it out as loans. "This attenuates the automatic link between the provision of central bank liquidity and broad money [supply]. And, as a consequence, it attenuates the inflationary potential of the Eurosystem’s outstanding credit to banks," Trichet said.

"The exit strategy, in the end, will need to be invoked at the precise time in which the traditional link between broad money and our provision of liquidity to the banking system will re-establish itself," he said.