UK-based Romanian economist Daniela Gabor creatively’that even in their own terms, current European Central Bank (ECB) crisis policies, geared to lending banks cash on easy terms for defined periods, cannot stabilise financial markets. The banks still eventually need “marketable collateral” – financial assets which they can use as proof of creditworthiness in financial markets.
Traditionally they have used government (“sovereign”) bonds as their “best”, most trustworthy, financial assets, and they still do. Current ECB policies “cannot offer effective solutions for preserving sovereign bonds as marketable collateral”. Even in its own frame of reference, the ECB should do what it has so far refused to do: act as a “lender of last resort”, a financial backstop, for governments in the eurozone.’
Gabor: The paper first distinguishes between market-based and bank-based measures to then focus on the collateral management strategies of European banks, in the context of an increasing reliance on secured market funding, to discuss a crucial policy challenge in monetary unions with integrated funding markets: banks’ ability to access market funding depends on existing portfolios of marketable collateral – in Eurozone mainly sovereign bonds. The constraints on the central bank’s ability to stabilize markets for collateral may thus worsen banks’ funding conditions through ‘coordinated risks’ between counterparty (bank) and collateral (sovereign). Since bank-based crisis policies cannot offer effective solutions for preserving the role of sovereign bonds as marketable collateral, the dilemma of how to stabilize funding markets within the existing European institutional architecture remains unresolved.