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>FLASH ECONOMICS (ECONOMIC RESEARCH)
After the "lender of last resort" after "the buyer of assets of last resort", now the
"recapitaliser of last resort"?
"recapitaliser of last resort"?
In this crisis, the three possible roles of central banks and governments with regard to banks and financial markets have clearly appeared:
− the traditional role of a "lender of last resort", which consists in restoring bank liquidity if need be;
− the new role, which is more developed in the United States and in the United Kingdom than in the euro zone, of a "Buyer of Assets of Last Resort", and which allows them to try to rebuild liquidity in asset markets, or remove risky assets from banks’ balance sheets, or alternatively facilitate bank refinancing;
− an even newer role (for governments and even more for central banks): "Recapitaliser of Banks of Last Resort"; this allows banks to survive crises, and their losses on the assets they hold. This role is seen above all in the United States but also in the euro zone.
We would like to consider the perverse effects of this third role played by the authorities. If banks know they will be bailed out by the government should they run into severe problems, and furthermore (as is the case in the United States) that they will be able to pay back this aid subsequently:
− they can choose to hold excessively low capital (therefore have a far too great leverage effect) during expansion periods;
− they are given an incentive to take excessive risks;
− they do not have an incentive to change their model, above all if the government, when withdrawing from the equity of banks, does not exert any pressure to get them to change their model.
The role of Recapitaliser of Last Resort, above all in Anglo-Saxon countries, therefore has perverse effects, but is becoming inevitable. Increasingly, huge banking groups are being built, if this role is played by central banks and by governments to a greater extent in Anglo-Saxon countries than in the euro zone. It will furthermore result in a divergence in banking industries: banks will take greater risks and will be more aggressive in Anglo-Saxon countries; while banks will be more cautious in the euro zone. This divergence is not necessarily disastrous for euro-zone banks , if investors are attracted by "conservative finance".
To see full report: FLASH ECONOMICS
− the traditional role of a "lender of last resort", which consists in restoring bank liquidity if need be;
− the new role, which is more developed in the United States and in the United Kingdom than in the euro zone, of a "Buyer of Assets of Last Resort", and which allows them to try to rebuild liquidity in asset markets, or remove risky assets from banks’ balance sheets, or alternatively facilitate bank refinancing;
− an even newer role (for governments and even more for central banks): "Recapitaliser of Banks of Last Resort"; this allows banks to survive crises, and their losses on the assets they hold. This role is seen above all in the United States but also in the euro zone.
We would like to consider the perverse effects of this third role played by the authorities. If banks know they will be bailed out by the government should they run into severe problems, and furthermore (as is the case in the United States) that they will be able to pay back this aid subsequently:
− they can choose to hold excessively low capital (therefore have a far too great leverage effect) during expansion periods;
− they are given an incentive to take excessive risks;
− they do not have an incentive to change their model, above all if the government, when withdrawing from the equity of banks, does not exert any pressure to get them to change their model.
The role of Recapitaliser of Last Resort, above all in Anglo-Saxon countries, therefore has perverse effects, but is becoming inevitable. Increasingly, huge banking groups are being built, if this role is played by central banks and by governments to a greater extent in Anglo-Saxon countries than in the euro zone. It will furthermore result in a divergence in banking industries: banks will take greater risks and will be more aggressive in Anglo-Saxon countries; while banks will be more cautious in the euro zone. This divergence is not necessarily disastrous for euro-zone banks , if investors are attracted by "conservative finance".
To see full report: FLASH ECONOMICS
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