AMSTERDAM (MNI) – The idea that the European Central Bank is
becoming a “bad bank” is based on a misunderstanding of Eurosystem
credit operations, ECB Executive Board member Lorenzo Bini Smaghi said
on Wednesday.
Speaking at the International Risk Management Conference here, Bini
Smaghi also said that a central bank’s “financial independence” was key
for the institution to ensure market liquidity and investor confidence.
“Otherwise the credibility of its monetary policy aimed at ensuring
price stability may be jeopardised,” Bini Smaghi said. “This is why
central banks manage their risks, albeit not necessarily in the same way
as private financial institutions because of the fundamental differences
which exist between the two.”
Bini Smaghi outlined the “lines of defense” that protect the ECB,
which included dealing with counterparties who meet their obligations
and accepting collateral that complies with “minimum credit quality
thresholds”.
“The third line of defence relates to other elements of the
collateral risk control framework,” such as valuation haircuts, Bini
Smaghi added.
Bini Smaghi noted that the liquidity support from a central bank
when needed can help counterparties with funding to bridge them to
“calmer market conditions.” However, the central bank need not be the
only source of funds.
An ECB credit operation “is predicated on the assumption that
counterparties are and remain solvent institutions,” Bini Smaghi
explained. “If the latter condition is not met, then fiscal authorities
should step in and, if necessary, inject fresh capital. The measures
announced for the Irish banking system are a case in point.”
— Frankfurt bureau: +49 69 720 142; email: frankfurt@marketnews.com —
[TOPICS: M$$EC$,M$X$$$,M$$CR$,MT$$$$]
