The ECB seems to be edging towards QE, but faces a quandary on what to buy. This proposal suggests that the ECB buy ‘Safe Market Bonds’. These would be synthetic bonds formed by the senior tranches of EZ national bonds combined in GDP-weighted proportions. The ECB would merely announce the features of the synthetic bonds it will purchase. The market would create the bonds in response to this announcement, thus avoiding new EZ-level institutions or funds.
Luis Garicano, Lucrezia Reichlin, 14 November 2014
Harold Cole, Thomas Cooley, 22 June 2014
In the aftermath of the sub-prime crisis, the major credit rating agencies have been criticised for giving overly generous ratings to mortgage-backed securities. Whereas many commentators have blamed the ‘issuer pays’ market structure for distorting incentives, this column argues that the key distortion came from regulators’ use of private ratings to assign risk weights. This induced investors to focus on the risk weights attached to ratings rather than their information content, thus undermining the reputation mechanism that had previously kept ratings honest.
Viral Acharya, Robert Engle, Diane Pierret, 14 March 2014
Macroprudential stress tests have been employed by regulators in the US and Europe to assess the solvency condition of financial firms in adverse macroeconomic scenarios. The capital required by regulators in such adverse scenarios is strongly dependent on Basel capital standards. This column argues that macro stress tests would be more effective if capital requirements were measured differently from the current regulatory risk weight-based approach, and in particular, were based on total assets and on market risks.
Viral Acharya, 25 October 2011
The Vickers Commission recommends separating commercial and noncommercial banking activities in order to protect core financial functions from riskier activities. This column warns that such ring-fencing may fail because there are still incentive problems in traditional banking activities. The accompanying risk-weighted capital requirement recommendations will address this only if we do a better job of measuring risks.