–Scale Of Global Cbank Intervention Could Prevents A Timely Exit

FRANKFURT (MNI) – The Eurozone needs a pan-European banking system
to break the adverse feedback between the financial health of banks and
their national governments, the Bank of International Settlement (BIS)
said in its annual report, released Sunday.

“A currency union that centralizes the lender of last resort for
banks must unify its banking system. Banks in Europe must become
European banks,” the report said.

Not surprisingly, the BIS — which serves and represents the
world’s central banks — put its weight firmly behind the European
Central Bank, which has urged Eurozone governments to take bold steps
towards a banking union that would include centralized regulatory and
supervisory responsibilities, joint deposit insurance, and a common
resolution authority.

Such a union “will break the adverse feedback between the banks and
the sovereign and other destructive links that are making the crisis so
severe,” the BIS report said. “They will revive interbank lending and
sovereign access to funding markets. They will allow the Eurosystem to
withdraw from its unconventional and undesirable role as an
intermediary.”

The BIS highlighted the urgency of the ECB and central banks in
other advanced economies withdrawing from their unconventional
accommodative policies as soon as possible, warning that prolonged,
extraordinarily loose monetary policy carried severe risks.

“Although central banks in many advanced economies may have no
choice but to keep monetary policy relatively accommodative for now,
they should use every opportunity to raise the pressure for
deleveraging, balance sheet repair and structural adjustment by other
means,” the BIS argued.

Thus far, central banks have not exerted such pressure effectively
enough, the BIS suggested. “Simply put: central banks are being cornered
into prolonging monetary stimulus as governments drag their feet and
adjustment is delayed.”

The report warned that “central banks face the risk that, once the
time comes to tighten monetary policy, the sheer size and scale of their
unconventional measures will prevent a timely exit from monetary
stimulus, thereby jeopardizing price stability” and with it the
credibility and independence of central banks.

Meanwhile, low interest rates and high liquidity weaken the
incentives for the private sector to repair balance sheets and for
fiscal authorities to limit their borrowing requirements. “The positive
effects of such central bank efforts may be shrinking whereas the
negative side effects may be growing,” the report cautioned.

— Frankfurt newsroom; +49-69-720142; email: jtreeck@marketnews.com

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