Mario Draghi, the president of the European Central Bank (ECB) has indicated once again that the institution's bond buying programme is "neither eternal nor infinite", and called for banks to cut back on bonuses and dividends, rather than sell assets, in order to raise capital.
Speaking at the Ludwig Erhard Foundation in Berlin, Draghi warned that banks were under pressure as they struggled to raise capital to meet new regulatory requirements.
The international regulations are aimed at ensuring that banks have suitable cash buffers in the event of unexpected shocks - such as sovereign defaults - and preventing them from becoming conduits for contagion during crises. Banks are expected to build up reserves of money or liquid assets, but, due to the weakening economic environment, they are struggling to find sources for that capital.
There is a fear that rather than try to raise money in difficult markets, banks will sell assets and cut back on lending, restricting the money supply to the real economy and acting as a drag on growth.
"The plan to strengthen their capital bases is an attempt to reinforce their standing in financial markets, but this is not an easy process. There are essentially three options for banks to pursue to raise their capital ratios as demanded by the European Banking Authority: they can raise their capital levels, sell assets or reduce their provision of credit to the real economy," Draghi said.
"The first option is much better than the second, and the second option is much better than the third. Selling assets is less preferable and curtailing credit to the real economy is even worse. Therefore, public authorities ought to cushion the impact on the real economy and banks should consider restraining dividends and ad hoc compensation to strengthen buffers."
This is why, Draghi said, the ECB had decided to cut its main interest rate from 1.25% to 1%, which, in normal conditions, would be expected to encourage banks to lend by making saving less attractive. However, given the intense stresses on the markets and economies, the institution also added measures to make it easier for banks to refinance through the ECB.
Speaking about the December 9 summit plan, Draghi said that concerns about national budgets had "haunted" the EU for the past 12 years, despite the Stability and Growth Pact, which was supposed to prevent governments from running up large deficits.
"Yet the implementation of the Stability and Growth Pact has not been good enough. As the Federal Chancellor of Germany recently remarked, the Pact has been broken 60 times over the past 12 years. So we clearly have work to do to prevent this happening again," Draghi said.
"The new set of rules for economic and fiscal surveillance known as the six-pack - which was approved by the European Parliament earlier this year - will certainly strengthen the implementation of the rules. But while these changes were being planned, the entire fiscal cohesion and credibility of the euro area was weakened."
New fiscal rules were needed, including mechanisms to punish countries that failed to meet them. This is the core of the December 9 plan, he said.
Leveraging up the European Financial Stability Facility (EFSF), the bailout fund - which will now be run using the ECB's infrastructure and expertise - is critical in reassuring markets, as was the promise that private holders of sovereign debt will no longer face "haircuts" on their assets in the event of debt restructuring, as happened with Greece, Draghi added.
He concluded: "The decisions of the European Council summit, together with the six-pack approved recently by the European Parliament, are a breakthrough for clear fiscal rules in our monetary union. However, the crisis has not ended yet. It is now important not to lose momentum and to swiftly implement all those decisions that have been taken to put the euro area economy back on course."