Friday, July 31, 2015

Frances Coppola — In defence of the (conflicted) ECB

It is the conflict of interest between ECB-as-creditor and ECB-as-liquidity-provider that makes the ECB ineffective as a lender of last resort. And because NCBs are controlled and restricted by the ECB, they too cannot act as lenders of last resort. So the Eurozone banking system effectively has no lender of last resort. The lack of a lender of last resort is terribly dangerous, since it vastly increases the likelihood of devastating systemic runs. Deposit insurance helps, but since that too is dependent on sovereign solvency there is a gaping hole in the infrastructure supporting the Eurozone financial system.

How to resolve this? The "doom loop" between sovereigns and banks must be broken: the funding of banks must be separated from the solvency of sovereigns, as must the funding of deposit insurance. That means full banking union, common deposit insurance and the issuance of Eurozone-level bonds that can be used by banks as safe assets. The ESM is a step in the right direction, but the current "banking union" is utterly inadequate. Much more needs to be done if the Eurosystem is to become effective as both lender and dealer of last resort.
Frances examines EZ structure and law. The EZ is set up without a lender of last resort, which all but guarantees serious breakdowns.

Coppola Comment
In defence of the (conflicted) ECB
Frances Coppola


Random said...
Krugman on top form. LOL :b

Ryan Harris said...

Simply following good governance practices and rule of law would be a good start for the EU. If rather than tying ELA availability to whether elected leaders are friendly to the regime controlling the EU Commission, Bundesbank, and Germany, they rather just followed the existing rules and laws, the ECB wouldn't be a conflicted mess.
At high levels of government, where people make the laws, they don't see the laws as the same sturdy, inflexible guide post, that enshrine our values into human systems, as we do. They see the laws as spongy, and changeable on whim, more useful as weapons of destruction than tools of order and planning.

They frequently squeeze out and marginalize adversaries, as they did with the Greek banking system when the politics grew difficult.

It is absolute lawlessness and corruption, no different than any city in US Midwest where corruption and racism reign or a place like Nigeria.

Matt Franko said...

Ryan in other words textbook libertarianism 101....