Wednesday, January 18, 2012

ECB ends stigma of borrowing from central bank

One of the results of the ECB's three year funding program has been to put an end to the idea that there is any stigma associated with a bank borrowing from the central bank.

During the first round of funding, 528 banks borrowed from the ECB.  The next round of funding, which according to ZeroHedge could exceed 1 trillion euros, is highly likely to see an increase in the number of banks.

For Eurozone banks, it is prudent to be borrowing under the ECB program and locking in funding rather than relying on raising funds at maturity from interbank lending and unsecured borrowing markets that are currently frozen.

Since it is prudent to be relying on ECB funding, it is also prudent for banks to disclose this reliance.

It is nice to have yet another assumption underlying the blueprint for saving the financial system confirmed.

Regular readers know that under the blueprint, banks are going to disclose their current asset, liability and off-balance sheet exposure details.  With this disclosure, all losses hidden on and off the bank balance sheet will become visible.

To address the potential that when these losses become known market funding will disappear, the blueprint required the central bank to provide the needed liquidity.

As a result of the ECB funding program to address the fact that market funding has already disappeared in the Eurozone, this part of the blueprint is already in place.

1 comment:

Anonymous said...

Excellent call. It would appear that this development is also a partial affirmation that banks can live with negative equity as long as their funding continues from the central bank.