Is the Banca d’Italia taking the MIC? Part 3

Dr Fabrizio Saccomanni, Director General of the Banca d’Italia (the Central Bank of Italia) and I have been engaged in a bit of a ding dong in the ‘Letters to the Editor’ section of the Financial Times.  The issue is whether a recently established collateralised interbank lending scheme (the MIC) promoted by the Banca d’Italia (1) represents a balkanisation of the monetary policy implementation and liquidity management of the Eurosystem (the European Central Bank and the 16 national central banks (NCB’s) of the Eurozone member states), and (2) involves the Banca d’Italia assuming credit risk and therefore potentially implies the need for recourse by the Banca d’Italia to the Italian sovereign, through the Italian Treasury.

Following my first blog post on the subject, three letters have been published thus far on the Letters to the Editor page of the Financial Times: (1), (2) and (3).

Dr Saccomanni’s first reply has been reproduced in an earlier blog post of mine, along with an expanded version of my rejoinder to his first reply.  I reproduce Dr. Saccomanni’s rebuttal of my rejoinder to his first reply below:

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A very Italian scheme for a European problem

From Mr Fabrizio Saccomanni.

Sir, I hesitate to reopen the discussion with Willem Buiter on the collateralised interbank market (MIC) launched by the Bank of Italy, but his reply (January 29) to my letter of January 27 deserves further comment.

First of all, I reject the accusation that this initiative contributes to the balkanisation of the European interbank market. In Europe there are already several differently organised markets, such as the GC Pooling run by Eurex and the repo segment of the MTS, which trade collateralised contracts. These markets have continued to perform well even in the most acute phases of the crisis and have provided banks with a vital instrument at a time when the uncollateralised segment of the interbank market has come to an almost complete standstill. Adding another trading venue to the existing ones does not entail any risk of balkanisation. In fact, it helps preserve a level playing field for all categories of operators. It should also contribute to reduce the still large risk spreads in the European interbank market, a clear sign of the persistent perception of counterparty risk. The scheme is designed to cope with this hopefully temporary malfunction and is expected to be terminated at the end of 2009.

Prof Buiter asks whether equal and uniform access to the MIC scheme is envisaged for all banks that are eligible counterparties of one of the national central banks in the Eurosystem. The answer is yes, and there is no need to have a branch or a subsidiary in Italy. The e-mid platform used by MIC already has 80 non-Italian participants. The condition for foreign participants to gain remote access to MIC is that their respective NCBs accept to take part in the guarantee scheme at the same conditions as the Bank of Italy does. Let me also reaffirm that there is no fiscal or quasi-fiscal subsidy inherent in the MIC. The risk management features of this market have been designed in such a way as to achieve a mutual sharing of risks among participants, thereby limiting the residual risks borne by the Bank of Italy to a standard liquidity risk that can be managed with ordinary instruments.

Finally, Prof Buiter seems uncomfortable with the fact that MIC is “a very Italian” scheme, probably not intending it as a compliment. It is an Italian contribution to finding a European solution to a European problem and we hope that, like the Wimbledon Championship at the All England Lawn Tennis Club, it will attract a wide range of foreign participants and promote free competition.

Fabrizio Saccomanni,
Director General,
Bank of Italy
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My response to this rebuttal follows.  It has not, at the moment I post this, been published on the Financial Times’ Letters to the Editor page.

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Sir,

First, I was indeed unaware of the feature that foreign participants that are eligible counterparties of one of the NCBs in the Eurosystem can and do gain remote access to MIC without having a branch or subsidiary in Italy. My mistake. However, the Banca d’Italia imposes a reciprocity condition for such remote access: the NCB that is the counterparty of the foreign bank seeking remote access has to accept to take part in the guarantee scheme on the same terms as the Banca d’Italia.This mitigates but does not eliminate the balkanisation of the Eurosystem along national lines brought about by the MIC. Reciprocity is not the same as the ‘most favoured nation’ principle, giving any eligible counterparty of one of the NCBs in the Eurosystem unconditional remote access to MIC without having a branch or subsidiary in Italy on the same terms as Italian banks and banks with branches or subsidiaries in Italy. Only the ‘MFN principle’ rules out balkanisation along national lines.

Second, there obviously is a potential fiscal or quasi-fiscal subsidy inherent in the MIC. Even unlimited mutual sharing of risks among participants would not limit the residual risks borne by the Bank of Italy to a standard liquidity risk, since the entire pool of participants could default simultaneously. Furthermore, the mutual sharing of risks in the case of the MIC is limited.

Finally, I reject (and rather resent) the suggestion that the heading under which my letter appeared, which characterised the MIC as “a very Italian” scheme, was probably not intended as a compliment. Dr. Saccomanni ought to know that the headers are chosen by the editors, not by the authors of the letters, which are not even consulted. The context of my own reference to the MIC as “ So far, so Italian” ought to make it clear that this characterisation summarised my (mis)interpretation of the MIC as being accessible only to Italian banks or banks with branches or subsidiaries in Italy. I was uninformed, but not a bigot. I don’t speak for the editors of Letters to the Editor of the Financial Times, of course.

Yours sincerely,
Willem H. Buiter

Maverecon: Willem Buiter

Willem Buiter's blog ran until December 2009. This blog is no longer active but it remains open as an archive.

Professor of European Political Economy, London School of Economics and Political Science; former chief economist of the EBRD, former external member of the MPC; adviser to international organisations, governments, central banks and private financial institutions.

Willem Buiter's website

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