BuBa leader Jens Weidmann says the effectiveness of lax monetary policy wanes with time. He also says an exit is more difficult if dovish policies are held for too long.
The more important point in his speech was about banks holding sovereign debt. There are no upper limits or capital requirements for bank sovereign debt holdings because they are considered risk free. This made lenders more exposed during the crisis and diminishes capital for lending.
Weidmann says ending the special treatment for sovereign debt would spur lending (probably true). What he doesn’t say is that it would also drive up sovereign yields, which is fine if you’re Germany and borrowing at 1.85% but a problem for cash-strapped Italy who is already paying 4.37% for 10-year bonds.
