Greece Vs Puerto Rico In Addition To What's Systemic.
How is a Greek default dissimilar from a Puerto Rican default?
Answer: because Puerto Rico doesn't receive got its ain banking system. It can't nigh downward banks. Banks inwards Puerto Rico are non loaded upwards on Puerto Rico debt, in addition to thus depositors are non inwards danger if the province authorities defaults.
Puerto Rico, similar Greece, uses a mutual currency. But at that spot is no inquiry of PRexit, that people wake upwards i forenoon in addition to their dollar depository financial establishment accounts are of a abrupt PR Peso depository financial establishment accounts. So they receive got no ground to run in addition to larn cash out.
Banks inwards New York are too non loaded upwards on Puerto Rico debt. USA depository financial establishment regulators haven't said that those banks tin pretend Puerto Rico debt is adventure free.
If a Puerto Rican depository financial establishment fails, whatsoever large USA depository financial establishment tin rapidly accept it over in addition to choke on it running.
Influenza A virus subtype H5N1 Puerto Rican authorities default volition live a mess. Just similar the default of a large employment organisation inwards Puerto Rico. But it volition non hateful a depository financial establishment run, crisis, in addition to economical paralysis.
So hither is a large lesson of the Greek debacle: In a currency union, sovereign debt must live able to default, without shutting downward the banks, only equally corporations default. Banks must non live loaded upwards on their country's sovereign debt. Bank rule must process sovereign default only similar corporate default. It tin happen, in addition to banks must diversified in addition to capitalized to live on it. Banks must live gratis to move across borders. A mutual currency needs a theatre commitment that it volition non live abandoned.
In financial regulation, the large ground rages over what is "systemic," with the latest absurd regard to extend that designation to equity asset managers. (More later.) All that intelligence starts alongside statements that sovereign debt or anything backed past times sovereign debt or sovereign guarantees is condom in addition to per se non "systemic." Sovereign debt all the same counts equally adventure gratis inwards well-nigh all banking regulation.
Hellenic Republic should reinforce the lesson: Sovereign debt is a prime number rootage of "systemic" danger. That is peculiarly truthful of modest governments inwards a currency union. Influenza A virus subtype H5N1 authorities is only a highly leveraged financial establishment in addition to insurance company.
Wrong answers:
- Fiscal union. The USA is non necessarily going to bail out Puerto Rico. Or Illinois. Or their creditors. People choke on proverb a currency wedlock needs financial union, but it is non so.
- National deposit insurance is actually non cardinal either. The banks operating inwards Puerto Rico are non inwards danger, in addition to thus they don't ask deposit insurance protection.
Update: A colleague pointed me to this fantabulous article on banks asset their ain sovereign debt past times Lucrezia Reichlin in addition to Luis Garicano.
Answer: because Puerto Rico doesn't receive got its ain banking system. It can't nigh downward banks. Banks inwards Puerto Rico are non loaded upwards on Puerto Rico debt, in addition to thus depositors are non inwards danger if the province authorities defaults.
Puerto Rico, similar Greece, uses a mutual currency. But at that spot is no inquiry of PRexit, that people wake upwards i forenoon in addition to their dollar depository financial establishment accounts are of a abrupt PR Peso depository financial establishment accounts. So they receive got no ground to run in addition to larn cash out.
Banks inwards New York are too non loaded upwards on Puerto Rico debt. USA depository financial establishment regulators haven't said that those banks tin pretend Puerto Rico debt is adventure free.
If a Puerto Rican depository financial establishment fails, whatsoever large USA depository financial establishment tin rapidly accept it over in addition to choke on it running.
Influenza A virus subtype H5N1 Puerto Rican authorities default volition live a mess. Just similar the default of a large employment organisation inwards Puerto Rico. But it volition non hateful a depository financial establishment run, crisis, in addition to economical paralysis.
So hither is a large lesson of the Greek debacle: In a currency union, sovereign debt must live able to default, without shutting downward the banks, only equally corporations default. Banks must non live loaded upwards on their country's sovereign debt. Bank rule must process sovereign default only similar corporate default. It tin happen, in addition to banks must diversified in addition to capitalized to live on it. Banks must live gratis to move across borders. A mutual currency needs a theatre commitment that it volition non live abandoned.
In financial regulation, the large ground rages over what is "systemic," with the latest absurd regard to extend that designation to equity asset managers. (More later.) All that intelligence starts alongside statements that sovereign debt or anything backed past times sovereign debt or sovereign guarantees is condom in addition to per se non "systemic." Sovereign debt all the same counts equally adventure gratis inwards well-nigh all banking regulation.
Hellenic Republic should reinforce the lesson: Sovereign debt is a prime number rootage of "systemic" danger. That is peculiarly truthful of modest governments inwards a currency union. Influenza A virus subtype H5N1 authorities is only a highly leveraged financial establishment in addition to insurance company.
Wrong answers:
- Fiscal union. The USA is non necessarily going to bail out Puerto Rico. Or Illinois. Or their creditors. People choke on proverb a currency wedlock needs financial union, but it is non so.
- National deposit insurance is actually non cardinal either. The banks operating inwards Puerto Rico are non inwards danger, in addition to thus they don't ask deposit insurance protection.
Update: A colleague pointed me to this fantabulous article on banks asset their ain sovereign debt past times Lucrezia Reichlin in addition to Luis Garicano.
No comments