"The European Central Bank is considering tightening lending standards amid concerns it has become a dumping ground for troubled securities, a move that could squeeze some struggling banks. As soon as Thursday, when its governing council meets, the ECB could announce plans to toughen rules of the collateral it will accept in exchange for billions of euros in loans that have kept much of the banking sector afloat. Policy makers are worried that banks have been taking advantage of the ECB's lending facilities, in part, by packaging risky mortgages into securities specifically designed to be parked as collateral with the central bank. ... In providing banks with a longer-term home for the securities, central bankers could be aggravating the crisis by preventing the market from finding a proper price for the securities. ... In a conversation with bankers, at least one ECB official expressed concern that the central bank has become the only game in town for financing mortgage securities, according to a person familiar with the conversation. The bankers also learned the ECB had received complaints that its lending practices are creating an artificial price for the securities and could be stalling any market recovery, the person said", my emphasis, Carrick Mollenkamp and Sara Munoz at the WSJ, 30 August 2008.
What is a central bank for, if not to be "taken advantage of" by commerical banks. The ECB sounds like it is a 12-year old girl being assaulted by a 60-year old "dirty old man". Of course the ECB is "creating an artificial price for the securities". That's why it's there. See my 18 October 2007 post concering Henry Paulson's MLEC proposal.
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