Europe already has a ‘bad bank’ — the ECB
From Prof Richard Werner, University of Southampton Business School, UK
Sir, Charles Haswell (Letters,
March 6) questions the wisdom of large-scale central bank purchases of
good assets, when important bad assets can be bought. He is right: it
makes no economic sense to spend billions of taxpayers’ money on bank
bailouts, in the process exacerbating public sector debt, often
resulting in cuts to welfare and education spending, when a costless
method is available to solve the problem.
That is why I have been arguing since the 1990s in
Japan that central banks should use their prerogative to purchase bad
debts from banks at times of crisis — at face value. Banks would
immediately have the strongest balance sheets possible. Nor would the
central banks make losses from this, since they can keep the assets on
their books at market value. And if the dud assets are still worth 10
cents in the dollar, compared with the actual funding cost of zero, that
is an actual gain of 10 cents for the central bank. Central banks are
aware of this option, and have used it whenever they wanted to prevent
banking crises from turning into recessions — such as the Bank of
England in August 1914 or the Bank of Japan in 1945.Mr Haswell suggests that today the main obstacle to the implementation
of this policy is the moral hazard argument. But it is precisely to avoid moral hazard that one should deploy central banks for this one-off costless clean-up operation: moral hazard dictates that those who mess up should pay up. Need I say more?
Prof Richard Werner
Chair in International Banking,
University of Southampton Business School, UK
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