The ECB’s Risky Business

A central bank always has a crucial role to play in a financial crisis. But the ECB’s role within the eurozone nowadays is even more “central” than that of the Federal Reserve or the Bank of England, because it has been forced to substitute for the cross-border interbank market.

BRUSSELS – A central bank always has a crucial role to play in a financial crisis. But the European Central Bank’s role within the eurozone nowadays is even more “central” than that of the Federal Reserve or the Bank of England.

A key difference between the eurozone and the United States is that lending between two banks located in two different member countries is still perceived as carrying quite different risks than “domestic” lending (between two banks in the same country). This is not the case in the US, because it has an integrated financial system, and support for banks (deposit insurance or outright bailouts) is administered at the federal level.

As a result, the fact that California might be closer to bankruptcy than some eurozone countries has no influence at all on the credit rating of banks headquartered there, or on their ability to obtain funds on the interbank market. In Europe, by contrast, the fate of all banks depends upon their home governments.

To continue reading, please log in or enter your email address.

To read this article from our archive, please log in or register now. After entering your email, you'll have access to two free articles from our archive every month. For unlimited access to Project Syndicate, subscribe now.

required

By proceeding, you agree to our Terms of Service and Privacy Policy, which describes the personal data we collect and how we use it.

Log in

http://prosyn.org/e1J4gxK;

Cookies and Privacy

We use cookies to improve your experience on our website. To find out more, read our updated cookie policy and privacy policy.