Alcimos vs ECB, financial stability edition

I listened in to the first hour of a very interesting conversation on the Modern Money Network about the Alcimos vs. ECB case where Alcimos contests the legality of the ECB’s refusal to fulfil its LOLR function for Greek banks. A lot of that conversation revolved around the ECB’s (lack of) mandate for financial stability. Two observations:

  1. The “ECB has no mandate for financial stability’ argument needs to be confronted with the fact that the ECB’s policies have financial stability implications. In a paper Cornel Ban and I have written, soon to be published in the Journal of Common Market Studies, we argue that the ECB’s collateral framework is pro-cyclical – that is, the risk management practices that it adopted from private repo market participants can and have sharpened liquidity spirals in Europe, with damaging consequences for periphery sovereigns. The ECB marks to market daily, makes margin calls daily, and has repeatedly hiked haircuts, just like  private shadow banks have done in crisis (and let’s not forget, the reason why the FSB has made reform of repo markets a priority for global financial stability).  This is why the various rounds of LTROs failed to stabilise European financial markets (LTROs are basically long-term repos, with the pro-cyclical risk management framework inbuilt) and why OMTs should be viewed as a commitment to preserve market liquidity in the markets where the very large European repo market sources collateral  – government bond markets.
  2. The ‘mandate’ argument is spurious: the ECB has repeatedly interfered in the fiscal affairs of Member States, most recently opposing publicly the FTT plans. More importantly, it has invoked financial stability arguments to oppose the FTT, particularly on the repo market. As the Financial Times reported, Benoît Cœuré, ECB executive board member, said in 2013:

 “We’re willing to engage constructively with governments and the European Commission to ensure that the tax has no   negative impact on financial stability”

The ECB cannot cherry-pick when and how it cares about financial stability. Given its independence, it should most certainly not interfere in tax decisions of elected governments by invoking financial stability while simultaneously threatening to let the Greek banking system go because it has no financial stability mandate! It’s like someone putting their house on fire and deciding not to worry about it because they are not the officially-designated firemen.

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