Tuesday, 7 May 2013

Yves Mersch's “Ten Commandments”

In a key note address titled "The euro and the ECB: Perspectives and challenges ahead" Yves Mersch, Member of the Executive Board of the ECB, sets out his "ten commandments" on what “to do” and “not to do” with monetary policy in crisis times,
  • Provide liquidity, not solvency support. Recapitalization is the task of shareholders and governments.
  • Prevent disorderly deleveraging and fire sales of assets, do not delay unduly necessary balance sheet adjustments.
  • Provide temporary backstop to markets under stress, do not replace market functioning for too long.
  • Provide short-term liquidity support, do not enter long-term credit allocation to be left to financial intermediaries.
  • Act as lender of last resort to the banking system based on the traditional role of central bank refinancing, do not confuse this with LOLR to governments or inappropriate fine-tuning of financial markets.
  • Support functioning monetary transmission mechanism (via banks and markets), do not guarantee uniform financing conditions or suppress fundamentally justified risk premia.
  • Preserve singleness of monetary policy, do not compensate need for political commitment to keep composition of currency area intact.
  • Buy time and pre-empt self-fulfilling dynamics (tail risks), do not distract from need by other policy domains to undertake structural reforms and address underlying fundamentals, avoiding wrong incentives and moral hazard.
  • Fulfil the duty of fire-fighting in crisis to preserve financial and ultimately price stability, but keep a medium-term perspective and do not neglect unintended consequences and adverse side-effects from protracted non-standard measures on financial institutions and functioning.
  • Take responsibility and credit for averting Armageddon, but do not overstate what monetary policy can and cannot do.
Seems like he forgot to include the 11th commandment; "assisting in confiscating depositors' money"on the "to do" list.

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