domenica 16 aprile 2017

Europe already has a ‘bad bank’ — the ECB

Europe already has a ‘bad bank’ — the ECB

From Prof Richard Werner, University of Southampton Business School, UK
Sir, Charles Haswell (Letters, March 6) questions the wisdom of large-scale central bank purchases of good assets, when important bad assets can be bought. He is right: it makes no economic sense to spend billions of taxpayers’ money on bank bailouts, in the process exacerbating public sector debt, often resulting in cuts to welfare and education spending, when a costless method is available to solve the problem.
That is why I have been arguing since the 1990s in Japan that central banks should use their prerogative to purchase bad debts from banks at times of crisis — at face value. Banks would immediately have the strongest balance sheets possible. Nor would the central banks make losses from this, since they can keep the assets on their books at market value. And if the dud assets are still worth 10 cents in the dollar, compared with the actual funding cost of zero, that is an actual gain of 10 cents for the central bank. Central banks are aware of this option, and have used it whenever they wanted to prevent banking crises from turning into recessions — such as the Bank of England in August 1914 or the Bank of Japan in 1945.

Mr Haswell suggests that today the main obstacle to the implementation
of this policy is the moral hazard argument. But it is precisely to avoid moral hazard that one should deploy central banks for this one-off costless clean-up operation: moral hazard dictates that those who mess up should pay up. Need I say more?

Prof Richard Werner
Chair in International Banking,
University of Southampton Business School, UK

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