Ecb Dilemma
It was announced yesterday that Europe volition receive got a new, key banking concern supervisor run yesteryear the ECB, much equally our Fed combines monetary policy too banking concern supervision. Be careful what yous want for, yous simply mightiness larn it.
One large unified key way e'er sounds similar a expert sentiment until yous intend harder nigh it. This 1 faces an intractable dilemma.
Here's the problem. Why non simply allow Hellenic Republic default?" is ordinarily answered amongst "because too hence all the banks neglect too Hellenic Republic goes fifty-fifty farther downwardly the toilet." (And Spain, too Italy).
So, what should a European Bank Regulator do? Well, it should protect the banking organisation from sovereign default. It should declare that sovereign debt is risky, require mark it to market, require large working capital missive of the alphabet against it, too it should forcefulness banks to trim down sovereign exposure to larn rid of this patently "systemic" "correlated risk" to their remainder sheets. (They tin simply require banks to purchase CDS, they don't receive got to require them to dump bonds on the market. This is simply nigh non wanting to pay insurance premiums.) It should create for the obvious risky elephant inwards the room precisely what banking concern regulators failed to create for mortgage backed securities inwards 2006.
Moreover, it should encourage a real European market. Greek, Spanish, Italian banks failing is no occupation if large international banks tin swoop in, alternative upward the assets, too opened upward the doors the adjacent day. Bankruptcy is recapitalization. Greece needs a national banking organisation equally much equally Chicago (same population) does.
All good too good. And all diametrically opposed to the ECB's "crisis-fighting" agenda. The correct arm of the ECB should move protecting the banking organisation inwards this way. But the left arm of the ECB is using banks equally sponges for sovereign debt.
In trying to larn by the sovereign debt crisis, the ECB has bought huge amounts of sovereign debt. It has lent euros to banks that inwards plough receive got bought large amounts of sovereign debt (often, I gather, amongst non hence subtle pressure level from their governments). It has lent to a greater extent than euros to the same banks to supersede deposits that are quite wisely fleeing out of those banks.
How tin the correct arm protect the banking organisation from sovereign default, spell the left arm wants to materials the banking organisation amongst sovereign debt?
Converesely, how tin the left arm create anything but impress euros similar mad, at 1 time that the correct arm has responsibleness for the banking system? Lending to banks who purchase sovereign debt was e'er excused yesteryear the sentiment that the banking concern shareholders behavior the credit run a jeopardy too national supervisors accept assist of that problem. Now it's inwards the ECB's lap. Politically, can the ECB actually near downwardly national banks, strong the creditors, too allow them move taken over yesteryear large pan-european banks?
I bet on the outcome: impress euros similar mad, continue pretending sovereign debt is run a jeopardy free, too prop upward existing banks. Let's promise I'm likewise cynical. For once.
One large unified key way e'er sounds similar a expert sentiment until yous intend harder nigh it. This 1 faces an intractable dilemma.
Here's the problem. Why non simply allow Hellenic Republic default?" is ordinarily answered amongst "because too hence all the banks neglect too Hellenic Republic goes fifty-fifty farther downwardly the toilet." (And Spain, too Italy).
So, what should a European Bank Regulator do? Well, it should protect the banking organisation from sovereign default. It should declare that sovereign debt is risky, require mark it to market, require large working capital missive of the alphabet against it, too it should forcefulness banks to trim down sovereign exposure to larn rid of this patently "systemic" "correlated risk" to their remainder sheets. (They tin simply require banks to purchase CDS, they don't receive got to require them to dump bonds on the market. This is simply nigh non wanting to pay insurance premiums.) It should create for the obvious risky elephant inwards the room precisely what banking concern regulators failed to create for mortgage backed securities inwards 2006.
Moreover, it should encourage a real European market. Greek, Spanish, Italian banks failing is no occupation if large international banks tin swoop in, alternative upward the assets, too opened upward the doors the adjacent day. Bankruptcy is recapitalization. Greece needs a national banking organisation equally much equally Chicago (same population) does.
All good too good. And all diametrically opposed to the ECB's "crisis-fighting" agenda. The correct arm of the ECB should move protecting the banking organisation inwards this way. But the left arm of the ECB is using banks equally sponges for sovereign debt.
In trying to larn by the sovereign debt crisis, the ECB has bought huge amounts of sovereign debt. It has lent euros to banks that inwards plough receive got bought large amounts of sovereign debt (often, I gather, amongst non hence subtle pressure level from their governments). It has lent to a greater extent than euros to the same banks to supersede deposits that are quite wisely fleeing out of those banks.
How tin the correct arm protect the banking organisation from sovereign default, spell the left arm wants to materials the banking organisation amongst sovereign debt?
Converesely, how tin the left arm create anything but impress euros similar mad, at 1 time that the correct arm has responsibleness for the banking system? Lending to banks who purchase sovereign debt was e'er excused yesteryear the sentiment that the banking concern shareholders behavior the credit run a jeopardy too national supervisors accept assist of that problem. Now it's inwards the ECB's lap. Politically, can the ECB actually near downwardly national banks, strong the creditors, too allow them move taken over yesteryear large pan-european banks?
I bet on the outcome: impress euros similar mad, continue pretending sovereign debt is run a jeopardy free, too prop upward existing banks. Let's promise I'm likewise cynical. For once.
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