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Constructive ambiguity

20 March 2015 By George Hay

The European Central Bank is responsible for the stability of both the euro and the single currency zone’s biggest banks. The two goals are not perfectly aligned, as a spat over Greece is making clear.

On one side is the Single Supervisory Mechanism, a group that formally took on bank regulation in November. In January, it recommended that Greek banks should limit their exposure to illiquid assets, including their own state’s short-dated treasury bills. Now it wants to turn the advice into a legally binding restriction.

On the other side is the central bank’s Governing Council, responsible for monetary policy and, as it turns out, dealing with troubled and recalcitrant member nations. The council recently told the Greek banks not to use emergency central bank liquidity to increase their Greek T-bill holdings from the Feb. 18 level. But it has delayed approving the SSM’s apparently similar proposal.

There are two interpretations for the Governing Council’s delay. One is basically technical. It might simply want to clarify the proposal to clearly delineate the ECB’s supervisory and monetary roles. The other is more political. Council members are painfully aware of the delicate state of negotiations between the Greek state and its creditors over new support. Anything that even suggests a hardening of the tone at the ECB could throw the negotiations off track.

If there is a political override, there could be a problem. Regulators are supposed to be apolitical. They should be able to mandate the sacrifice of some short-term economic growth for the sake of financial stability. The SSM cannot serve its mandate well if the monetary policy gurus feel free to tell the bank tsars what to do.

But in reality, a Governing Council that wants to help keep Greece safely within the euro zone is also serving financial stability. Greek capital controls or a Greek exit from the single currency would almost certainly destabilise the banking system, quite possibly to the point of total collapse. In the fight against such a calamity, a loss of SSM independence looks like bearable collateral damage.


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