A lot has recently been written on the causes of banking crises. Central banks – many of which have taken on responsibility for macroprudential policy – have produced much of it.
This time it is the turn of Martin Weale, an external member of the Bank of England’s Monetary Policy Committee, and Matthew Corder, a Bank economist, who have published a paper on predicting crises and recessions.
Though the research points to three reasonable predictors of crises, none are perfect. The degree to which they are flawed offers some indication of just how tricky setting policy for financial stability will be. Read more
The European Central Bank favours the eurozone using as flexibly as possible its €440bn bail-out fund, the European Financial Stability Facility. But does that include giving the EFSF access to its liquidity?
The idea of making the EFSF an ECB “counterparty” – able to take part in its regular offers of unlimited liquidity – was proposed originally by Daniel Gros and Thomas Mayer in a Centre for European Policy Studies research paper. It gained ground last week as European leaders came under pressure in Washington from the rest of the world to come up with a more decisive response to the escalating eurozone debt crisis. With access to ECB liquidity, the EFSF’s firepower would be enormous. Read more