Financial Stability News

News about financial stability and central banking

ECB as Pawnbroker of Last Resort (POLR)

FT Alphaville blog has invented a new term for central bank lender of last resort – Pawnbroker of Last Resort! Commenting on the latest developments in the Eurozone  they note that …

The ECB’s less fussy nature when it comes to the type of collateral it accepts makes it, de facto, the dumping ground for all collateral that the public market has deemed unacceptable and is no longer prepared to fund against. In many ways, therefore, if you are going to fund at the ECB, it does make sense to get your hands on the cheaper stuff. It’s one possible explanation why Italian bond auctions (and other distressed bond markets) have always been well covered despite notching up record-high bond yields.

This is a trend we have seen for some time, even before the crisis, as commercial banks have rationed their stronger collateral for market financing, while leaving the weaker stuff (“trash”) for central bank financing.

Clearly not healthy for central bank’s balance sheet and potentially a drag on their solvency as well.

 

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