FRANKFURT — The president of the European Central Bank said on Thursday that euro zone banks faced a period of “creative destruction” that would be healthy for the economy, and he praised the banks that were moving more aggressively to deal with their problems.
The remarks in Vienna by Mario Draghi, the central bank’s president, came two days after UniCredit, Italy’s largest lender, reported a fourth-quarter loss of 15 billion euros, or nearly $21 billion, as it acknowledged the diminished value of its holdings and set aside more money to cover bad loans.
Mr. Draghi did not mention UniCredit by name, but the bank’s action was widely seen as a response to plans by the E.C.B. to scour banks’ books to uncover problems that lenders may have been trying to keep hidden.
Pressure from the central bank, which plans to complete its review of banks by October, is expected to prompt many other lenders to follow UniCredit’s lead.
“Just the prospect” of E.C.B. scrutiny, Mr. Draghi said in a prepared text released ahead of his speech, “has already caused banks to raise new capital and to shed noncore or nonprofitable exposures. This is very welcome: Corrective action does not need to wait until the end of our comprehensive assessment. It is to everybody’s benefit that it takes place preemptively.”
“By ‘cleaning up’ and repairing bank balance sheets, we are creating the conditions necessary for resources to flow once more to the firms that use them most productively,” Mr. Draghi said. “And in this sense, by encouraging creative destruction in the banking sector, we can facilitate creative destruction in the wider economy and support the recovery.”
Mr. Draghi made the comments while accepting a prize named for Joseph Schumpeter, the Austrian economist who coined the term creative destruction. The phrase refers to the free market process by which companies that are the most innovative and efficient displace those that are less so.
Some bankers have argued that they will have trouble lending as they undergo a period of onerous scrutiny by a central bank that is exercising new oversight powers. Mr. Draghi argued that the opposite was true. Banks that roll over bad loans, rather than writing them off, keep the weak ones alive and deny credit to entrepreneurs. Exposing such “zombie” banks will help credit flow to the companies that can make the best use of the money, Mr. Draghi said.
The E.C.B. assessment of banks “will shed light on bank assets, ensure that problematic assets are fully recognized and prompt timely corrective action in the form of bank restructuring and capital replenishment,” Mr. Draghi said.
“Firms that no longer have a viable business model should go into insolvency,” he said.