International Banking Notes - Central Bank Role

482 Notes

February 1st:

Central bank role: Control:

1.Monetary policy:

Easiest: on the open market

changing reserves for banks. Limit to lend out: start unwinding loans ( not renewing loans or credit lines.  (not usually used to monitor supply of money )

Discount rate: cant borrow from peers and need to up reserves so discount is rate central banks is charging.  (Expensive way to do it)

Case:  Euro Crisis

Euro : stability and growth pact : required fiscal compliance. Inflation 3%, debt ratio ,  60% of GDP initially was arrangement between the 16 countries.

1st problem : wasn't well monitored , nobody followed it greatly. Ex : Greece ration double between 09-2013 but didn't get kicked out of Eurozone.

US crisis : 1st thing that fuelled the euro crisis bcz had investment in us , worried abt value of that

2nd Greece lied about their deficit. anyone holding debt, bonds securities in Greece had their assets 50% devalued.  

Greece : own admission of fudged info. No one would lend to Greece after that : Bankruptcy.

Euro central banks, : injected money into system 95 billion euros to help banks. But didn't help.

AIG  got in trouble, and multiple banks had huge exposure , so govt helped aig but that wasn't the case for bersten.

** mbs : bundle of mortgages , -> third party ( mbs rated b risk )

mortgages subprimed (mauvais payeur)  : ended up in bundles rated aaa … which is part of the the crisis 09. Rating agency are big part of that problem.

ECB : 2ND attempt : would repurchase debt from bnks , very short term. But wasn't enough so started doing long terms up to 12 months.

Then inflation started to rise : pushed the rate up on these loans to lower inflation.

ECB : lot of European bnks were holding americn securities so , they did swaps to devaluate.

Agred to purchase back ( millions )to help bring bck incentive.

May 2010 : eurpeean financial stability facility  :help Greece with bailout ( would have to pay taxes etc . ) didn't wanna kick them out of union bcz then spain, Portugal, Ireland would have followed etc . which would of impacted The EURO.

Question to be resolved :

1. How would you assess the ECBs performance during the crisis

They missed their inflation target, didn't help the scenario,

1. what was their analysis of the problem

Lack of trust in us in the banks bcz of subprimed loans etc. so they push money into the system, to build incentive even tho they would have losses.

However the ECB didn't have tht scenario bcz the EUR banks saw crisis s a lack of liquidity fuelled by fact that Greece was more in debt they what they stated. Didn't see it as a lack of consumer confidence. So that's why they were less aggressive.

1. Why did the ecb respond less aggressively that the US FED.

Didn't happen before, and the main mission for ecb was to control inflation

 They base floor of 1 % and inflation at 3% ; Deflation , prices go down and problem iswait and see situation. so ppl stop buying d and p goes down , job losses etc.

Buy or not :

Buy and add more restrictions to make an example for other countries. As they were the one that made the headlines , its an opportunity for them to show it as an exemple with more severe sanctions. So that other would not specifically learn from it but act more cautiously.

February 15, 18

Greek Crisis Tragedy or opportunity Case

1. Main Cause of its crisis:     - corruption, no one pays taxes, high public debt,

• Industry : shipping and tourism , so very subject to worldwide economy
• Don't spend anything on R&D , not educated society
• Growth was mainly based on consumption and importing largely which created the debt
• Then pumped up debt when they could could borrow at same rate as other countries in Union
• Weren’t savers
• False statistic abt debt questioned gov. integrity

Rest of Europe: rapid increase in debt , Greece wasn't compliant with reg. within Union.  Led to the credibility of the union

Impact of Greece being bailed out : other countries like pigs , would loosen up with the thinking that they could be bailed up . ppl would of lost big amnt of money bcz they held bonds in Greece.

Risk that Germany would have to step in everytime bcz it was sending a trend.

Role of EU CB : had to come to table many times to satisfy the greek debt . change collatereal measures to still accept greek bonds. ( were backed by them)

Initiated program of market purchases of sovereign bonds

2. Buy or not GGB :

NO : No growth, situation hasn't changed ; dead trap, social tensions : unemployment, contagion will happen nwz , IMF wont restructure

YES : ECB will continue to buy their bonds

If they misses their performance EU will back them or relax its stance

Germany will cough up money

Less costly to fix greeece then to recapitalize EUBanks

3.Does the Greek crisis spell doom and gloom for the future of the euro and the euro area?

Small country, so that big impact on EURO but the rest of the union still have their interest in that country. But then again, if they default again will they be bailed out again ?