The European Central Bank must be mindful of the risks posed by assets held on its balance sheet as ultimately taxpayers will bear the burden of any losses, a senior member of the central bank said on Wednesday.
There is no shortage of collateral in the euro zone financial market and the priority is to make better use of it to ensure smooth financial transactions, ECB Executive Board member Benoit Coeure said.
Coeure's comments come as the ECB has been forced to defend its unconventional policy of buying an unlimited amount of debt from struggling euro zone members. The decision has played a crucial role in easing global market tensions over Europe's sovereign debt crisis, but could expose the ECB to financial losses.
"We have to care about the risk portfolio of our balance sheet," Coeure said in a seminar held in Osaka, western Japan.
"We are at a time when the euro area capital markets are very fragmented because of the crisis. This should not last long," he said, adding that the ECB will do anything it can in terms of financial infrastructure to unite the region's capital markets.
Spain's parliament will invite ECB chief Mario Draghi to discuss the conditions under which the bond-buying programme can be implemented as investors and euro zone policymakers pressure Madrid to seek to prevent a three-year old debt crisis from worsening any further.
The ECB head last week gave a robust defence of his bond-buying plan in a two-hour closed-door meeting with sceptical German lawmakers. It was a rare appearance for an ECB leader in a national legislature.
The ECB, which has already agreed to accept a wider range of collateral in lending operations and cut its benchmark interest rate to a record low of 1 percent, is trying to balance the need to stabilise financial markets with the risks that aggressive central bank moves could instil a moral hazard by make some government officials more complacent about Europe's crisis.
"Don't expect the ECB to be very forthcoming in further extending its collateral moves. We've done a lot already," Coeure said.
"The euro as a currency is solid and long-lasting as diamonds ... and difficult to break as diamonds."
Coeure was in Osaka to participate in the Sibos conference, a gathering of the world's banking and financial leaders to discuss interbank money settlement systems and financial regulation.
(Editing by Michael Watson & Kim Coghill)