ECB dilemma

It was announced yesterday that  Europe volition guide maintain a novel , cardinal banking concern supervisor run past times the ECB , much every bit our Fed combines monetary policy as well as banking concern supervision. Be careful what you lot wishing for , you lot merely powerfulness teach it.

One large unified cardinal way ever sounds similar a expert sentiment until you lot intend harder almost it. This i faces an intractable dilemma.

Here's the problem. Why non merely allow Hellenic Republic default?" is normally answered amongst "because thence all the banks neglect as well as Hellenic Republic goes fifty-fifty farther downwardly the toilet." (And Kingdom of Spain , as well as Italy).

So , what should a European Bank Regulator do? Well , it should protect the banking organization from sovereign default. It should declare that  sovereign debt is risky , require mark it to marketplace , require large uppercase against it , as well as it should forcefulness banks to cut down sovereign exposure  to teach rid of this manifestly "systemic" "correlated risk" to their residual sheets. (They tin merely require banks to purchase CDS , they don't guide maintain to require them to dump bonds on the market. This is merely almost non wanting to pay insurance premiums.) It should produce for the obvious risky elephant inward the room just what banking concern regulators failed to produce for mortgage backed securities inward 2006.


Moreover , it should encourage a genuinely European market. Greek , Castilian , Italian banks failing is no occupation if large international banks tin swoop inward , selection upwardly the assets , as well as opened upwardly the doors the adjacent day. Bankruptcy is recapitalization.  Greece needs a national banking organization every bit much every bit Chicago (same population) does.

All good as well as good. And all diametrically opposed to the ECB's "crisis-fighting" agenda. The correct arm of the ECB should move protecting the banking organization inward this way. But the left arm of the ECB is using banks every bit sponges for sovereign debt.

In trying to teach by the sovereign debt crisis , the ECB has bought huge amounts of sovereign debt. It has lent  euros to banks that inward plow guide maintain bought large amounts of sovereign debt (often , I get together , amongst non thence subtle pull per unit of measurement area 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 organization from sovereign default , spell the left arm wants to materials the banking organization amongst sovereign debt?

Converesely , how tin the left arm produce anything but impress euros similar mad , similar a shot that the correct arm has responsibleness for the banking system?  Lending to banks who purchase sovereign debt was ever excused past times the sentiment that the banking concern shareholders behave the credit opportunity as well as national supervisors accept tending of that problem. Now it's inward the ECB's lap. Politically , can the ECB actually near downwardly national banks , strong the creditors , as well as allow them move taken over past times large pan-european banks?

I bet on the outcome: impress euros similar mad , perish along pretending sovereign debt is opportunity costless , as well as prop upwardly existing banks. Let's promise I'm every bit good cynical. For once.