Interbank markets may need bolder steps: ECB

Rome: Restoring confidence in markets quickly may require new, 'bolder' steps, including measures to strengthen interbank markets, European Central Bank (ECB) Governing Council member Mario Draghi said on Friday.

Draghi, who heads the Bank of Italy and the Fin-ancial Stability Forum, said rate cuts and recapitalising distressed groups had been crucial in avoiding a major financial disruption, but had limited effect on interbank interest rates.

"Liquidity and counterparty risks continue to be major drivers in money markets, which remain impaired with abnormally high spreads between secured and unsecured lending," Draghi said in a speech at Bocconi University in Milan. "We cannot rule out that further and even bolder steps may be needed in the near future to quickly restore confidence, including actions to strengthen interbank markets."

Plans to recapitalise banks and make government guarantees or insurance available could help, but he said it was important to implement them in a coordinated manner to avoid creating uneven conditions for financial institutions in Europe.

Acting together

But Draghi also urged countries to resist the urge to go it alone. "In difficult times, our paradigms may change dramatically and the temptation to go in isolation may be understandable but may prove to be disruptive," he said.

Stressing that international co-ordination was essential in reshaping fin-ancial system rules, he called on Europe to step up efforts to erase differences in supervisory practices and work toward a harmonised set of regulations.

The comments came as interbank lending rates for dollars, euros and sterling fell on Friday, with declines in short-term rates suggesting central banks' liquidity provisions are thawing frozen money markets.