As regular visitors know, one of my favorite puzzles. This excellent article over at Business Spectator touches on the question in the context of the ECB. My message to the RBA on this matter: build trust thru transparency...
"In its attempt to maintain financial stability, the ECB and Eurosystem have had to walk a fine line between providing just enough liquidity to keep potentially solvent institutions afloat and subsidising the financial sector. Given the lack of transparency it is not easy to judge how well they have done at this, but a couple of examples show that sometimes – through design or otherwise – they have strayed into the subsidisation territory.
One example was the policy of allowing Icelandic banks to borrow from the Eurosystem using each other’s debt as collateral. Another was the unlimited one-year fixed rate liquidity provision of June 2009, which may have been a transfer of about €1 billion from taxpayers to delighted banks.
Playing Santa Claus to banks – Icelandic or otherwise – is not part of the ECB’s mandate and does not enhance its legitimacy...
Unfortunately, the ECB’s insistence on secrecy with respect to the programme is particularly damaging. It is widely believed that the average discount to face value paid for the Greek debt acquired (prior to August at least) was no more than 20 per cent. The national central banks appear to have sought out the lucky counterparties. And the ECB won’t say who they are or how much they paid. The possibilities for corruption under such a system are endless. And one does not have to be a conspiracy theorist to imagine that taxpayers throughout the eurozone were called upon to subsidise German and French banks after their own governments failed to exercise proper regulation and supervision."
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