Last week we mentioned the ECB liquidity-operation where almost 440 bln EUR was handed out to European banks at 1% for the duration of 1 year. An early Christmas present.
Willem Buiter comments as follows:
You may think that this implies that the cost to the banks of borrowing from the Eurosystem for a year - 1.00% - does not imply a subsidy, as the banks’ borrowing from the Eurosystem is secured against collateral. You would be right if the collateral consisted of German government bonds. My guess (I don’t have hard information) is that this was not the case, and that instead the borrowing banks stuffed the Eurosystem with the worst quality collateral they could put their hands on, subject to the constraint that a rating agency had rated it at least BBB-. Given the well-established practice of Eurozone banks that are eligible counterparties of the Eurosystem in repos and at the discount window, to carefully structure collateral packages that just meet the letter of the ECB’s collateral eligibility requirements, I am happy that I am not responsible for vetting and verifying the credit risk present in the portfolio of that increasingly speculative, highly leveraged entity known as the Eurosystem.
Everything is quite simple these days: banks clean up their crapy balance sheets by transferring the risks to the ECB and receiving risk-free money instead at an absolute fire sale rate. It’s a kind of subsidy.
Sphere: Related Content
Willem Buiter comments as follows:
You may think that this implies that the cost to the banks of borrowing from the Eurosystem for a year - 1.00% - does not imply a subsidy, as the banks’ borrowing from the Eurosystem is secured against collateral. You would be right if the collateral consisted of German government bonds. My guess (I don’t have hard information) is that this was not the case, and that instead the borrowing banks stuffed the Eurosystem with the worst quality collateral they could put their hands on, subject to the constraint that a rating agency had rated it at least BBB-. Given the well-established practice of Eurozone banks that are eligible counterparties of the Eurosystem in repos and at the discount window, to carefully structure collateral packages that just meet the letter of the ECB’s collateral eligibility requirements, I am happy that I am not responsible for vetting and verifying the credit risk present in the portfolio of that increasingly speculative, highly leveraged entity known as the Eurosystem.
Everything is quite simple these days: banks clean up their crapy balance sheets by transferring the risks to the ECB and receiving risk-free money instead at an absolute fire sale rate. It’s a kind of subsidy.
No comments:
Post a Comment