Excellent work. It seems like only a crisis beyond the power of central banks (like a major or world war) will change the dynamic. So far, the easy answer has been preferred to the difficult one.
C & G & M argue very convincingly that: (1) "Whatever ECB takes from the less risky countries" = "whatever ECB gives to the more risky countries" and (2) "whatever" is not forever.
Great post with many interesting insights! On the market discipline aspect in particular, I would not be so sure. You argue that the broad collateral framework implies banks could get cheaper funding than they would otherwise. Assuming that MREL (which is defined by democratically legitimated resolution authorities) is sufficient, an increase in asset encumbrance (which follows the participation of lending operations) should lead to increased risk premia on MREL eligible liabilities. If that was not the case, MREL holders would just be bad at pricing risks, and if that is true, it seems unplausible that other liability holders who are allegedly crowded out by ECB operations (but who hold less risky liabilities and have thus a lower incentive to assess risk properly) would be much better in doing so and thus contribute to market discipline.
Excellent work. It seems like only a crisis beyond the power of central banks (like a major or world war) will change the dynamic. So far, the easy answer has been preferred to the difficult one.
C & G & M argue very convincingly that: (1) "Whatever ECB takes from the less risky countries" = "whatever ECB gives to the more risky countries" and (2) "whatever" is not forever.
Great post with many interesting insights! On the market discipline aspect in particular, I would not be so sure. You argue that the broad collateral framework implies banks could get cheaper funding than they would otherwise. Assuming that MREL (which is defined by democratically legitimated resolution authorities) is sufficient, an increase in asset encumbrance (which follows the participation of lending operations) should lead to increased risk premia on MREL eligible liabilities. If that was not the case, MREL holders would just be bad at pricing risks, and if that is true, it seems unplausible that other liability holders who are allegedly crowded out by ECB operations (but who hold less risky liabilities and have thus a lower incentive to assess risk properly) would be much better in doing so and thus contribute to market discipline.