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I think its in the Article 123 provision, allowing the NCBs to act as lender of last resort to commercial banking, but not to their Treasuries.

In the US, when we want to pretend that the Fed can not act as public lender of last resort, we put in place regulations restricting the Fed to purchasing of bonds on the open market, and force the Treasury to pretend that it is selling the bonds to private holders, who turn around and sell to the Fed in pursuit of their Federal Open Market Committee actions in defense of their target cash rate.

But that pretense is a policy decision, not a structural requirement, and if it were to become inconvenient at a time when it was politically feasible, could readily be reversed ~ we have at some points since WWII have had direct purchases of Treasury security by the Fed, which is the above without the pretense (note that the pretense is useful for transactions income for the FIRE sector).

If an NCB was to purchase its own Treasury's securities to maintain a target long term interest rate, from private holders, that would make a market for the Treasury to sell those securities.

And in a self-fulfilling prophecy, if they act to make that market, the Treasury securities up to the amount that they elect to purchase will be worth precisely the interest rate terms at which they purchase it.

The moral hazard for a district central bank buying public non-sovereign debt from a provincial government is whether it can afford the debt service. In a conventional central bank, surplus income is returned to Treasury, so when it holds sovereign debt, there is no question of being able to afford the debt service.

So the question is: if an ECB member NCB has a surplus of revenue over costs, does it still return the surplus to its national Eurozone government? If so, it seems like it ought to be able to make a market in the debt of its own national government.

I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Wed Dec 1st, 2010 at 03:41:32 PM EST
So the question is: if an ECB member NCB has a surplus of revenue over costs, does it still return the surplus to its national Eurozone government?

Yes. ECB profits flow to the NCBs, but not the other way around.

But the NCBs take marching orders from Frankfurt.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed Dec 1st, 2010 at 04:16:38 PM EST
[ Parent ]
In what sense do they take marching orders from Frankfurt ... in the sense that they toe the party line, or in the sense that a Fed Reserve Bank implements any action ordered by the Federal Open Market Committee because the FOMC says so?

I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.
by BruceMcF (agila61 at netscape dot net) on Wed Dec 1st, 2010 at 05:33:25 PM EST
[ Parent ]
I don't know what the formal chain of command is. But a couple of years ago, before the crisis, Italy suggested using its own central bank to run its own monetary policy. The ECB threatened to stop clearing payments with the Italian central bank if they did so, and the Italians backed down.

But I don't know how much of that was the typical theatre between Frankfurt and Silvio Corruptioni and how much of it was serious policymaking.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed Dec 1st, 2010 at 08:44:20 PM EST
[ Parent ]
If the ECB has the independent authority to do that, they have the authority, as opposed to just leading the party line, since its the payments clearing function that is central to a central banks ability to function as the lender of last resort.

I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.
by BruceMcF (agila61 at netscape dot net) on Wed Dec 1st, 2010 at 10:44:23 PM EST
[ Parent ]
Well, I don't know whether they have that authority. The ECB likes to give the impression that it has authority that it does not formally have according to the treaties.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed Dec 1st, 2010 at 11:10:55 PM EST
[ Parent ]
Sorry my ignorance.. what is "payment clearance " in this context... the italian introduce the extra number in the right (or left) column of the balance-sheet and.. voala...

I guess I am missing something...what?

A pleasure

I therefore claim to show, not how men think in myths, but how myths operate in men's minds without their being aware of the fact. Levi-Strauss, Claude

by kcurie on Fri Dec 3rd, 2010 at 06:38:57 AM EST
[ Parent ]
Central banks act as clearinghouses for payments between regular banks. The fact that each bank has an account and reserves at the central banks allows them to trust each other and credit each other payments even if there's a delay in money actually changing hands.

In the case of cross-border banking you need central banks to clear payments with each other. The ECB might act as a clearinghouse for payments among national central banks. If that is the case and the ECB refused to clear payments with the Italian Central bank, the Italian monetary system might become cut off from the rest of the EU.

At least as I understand the situation.

Of all the ways of organizing banking, the worst is the one we have today — Mervyn King, 25 October 2010

by Migeru (migeru at eurotrib dot com) on Fri Dec 3rd, 2010 at 07:07:12 AM EST
[ Parent ]
Can't the italian central bank act as a clearing house?. I thought any national central bank can have the account number of any bank. So the spanish central bank has the account of the spanish and any foreign bank.. so if any bank wants to put money in an Spanish bank it can go to the spanish central bank...if a spanish bank gives money to a german bank, the spanish central bank can move the money directly to the account.. if te ECB blocks it, it is the foreign bank problem..and it can always request the spanish cnetral bank to increase its acount in the spanish central bank vor create one.. isn't it?

A pleasure

I therefore claim to show, not how men think in myths, but how myths operate in men's minds without their being aware of the fact. Levi-Strauss, Claude

by kcurie on Fri Dec 3rd, 2010 at 07:36:12 AM EST
[ Parent ]
But if the Italian Central Bank is shunned as a counterparty by the rest of the Eurozone central banks, foreign banks not regulated by the bank of italy may withhold any reserves they hold with the Italian Central Bank. Moreover, they may refuse to extend credit to Italian banks on the argument that their Lender of Last Resort is not creditworthy.

Of all the ways of organizing banking, the worst is the one we have today — Mervyn King, 25 October 2010
by Migeru (migeru at eurotrib dot com) on Fri Dec 3rd, 2010 at 08:57:52 AM EST
[ Parent ]
Central Banks are not in fact necessary for this credit/payment clearing function as a 'central counterparty' analagous to an exchange clearing house.

In Hong Kong, the Hong Kong Monetary Authority oversees the centralised clearing system in which all the Hong Kong clearing banks (also note issuers) participate. Because Hong Kong's is a 'real-time' settlement system, there is no need for a central counterparty as a 'risk intermediary' because there is no risk.

I explicitly referred to this some ten years ago when the implications sank in of 'Peer to Peer' connectivity - and a decentralised, dis-intermediated 'Market 3.0' -  in the aftermath of a market-centric Dot Com I set up.

Market 3.0: the final version

In a spot transaction the two functions take place contemporaneously and the exchange of value is conditional: if I don't have the shares, I can't offer them for sale, and if I don't have the money, I can't bid for the shares.

The consequence of this is that for true real-time settlement of a spot transaction, there is no requirement for a risk intermediary such as a central counterparty because there is no risk. Where there is an element of time between the conclusion of the contract and its settlement, then this introduces the requirement for risk management, and the interpolation of a risk intermediary such as a central counterparty or insurer.



"The future is already here -- it's just not very evenly distributed" William Gibson
by ChrisCook (cojockathotmaildotcom) on Fri Dec 3rd, 2010 at 09:02:10 AM EST
[ Parent ]
ChrisCook:
Because Hong Kong's is a 'real-time' settlement system, there is no need for a central counterparty as a 'risk intermediary' because there is no risk.
You still have to deliver banknotes to settle balances occasionally?

There is no way to completely eliminate settlement risk.

Of all the ways of organizing banking, the worst is the one we have today — Mervyn King, 25 October 2010

by Migeru (migeru at eurotrib dot com) on Fri Dec 3rd, 2010 at 09:08:12 AM EST
[ Parent ]
Migeru:
You still have to deliver banknotes to settle balances occasionally?

There is no way to completely eliminate settlement risk.

The clearing banks issue Hong Kong Bank Notes, except for the lowest denomination HK $10 notes which are issued by the HKMA.

These notes get credited to bank accounts when paid in to a branch, thereby generating a (real time) credit in the system. While they are circulating, the issuers benefit from the Seigniorage.

The only settlement risk here is of counterfeit currency notes.

This is slightly different from the situation in Scotland, where Scottish Bank Notes must be matched - during the working week - by funds deposited with the Bank of England. Over the week-end the Scottish banks benefit from the Seigniorage....an interesting hybrid.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Fri Dec 3rd, 2010 at 09:38:45 AM EST
[ Parent ]
It seems to me that the major function of central banks in foreign transaction clearing is to allow only the net difference to ever have to be transferred. But the sticking point will always be the case of persistent current account deficits with specific countries. So European national central bank to national central bank clearing could work so long as the current account balances remained close to zero or within a range deemed acceptable by the bank carrying the deficit. Such an arrangement would tend to make such deficits either self limiting or at the discretion of the surplus country, as is the case between the USA and China. Such an arrangement might be a little too obvious to suit the desires of Germany, however.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Fri Dec 3rd, 2010 at 10:58:23 AM EST
[ Parent ]
In line with the details up there, the basics are that one bank receives a check drawn on another bank, the payment is cleared between the two banks by a transfer from one bank's account at the Central Bank to the other bank's account. Those accounts are assets of the commercial banks and liabilities of the Central Bank. Since its a transfer from one bank's reserve account to another, there is no change to the total liabilities of the Central Bank.

The fact that payments clear at the central bank means that if the central bank can always clear Treasury checks by accepting the IOU of the Treasury as an asset and increasing Central Bank liabilities by adding an equivalent amount to the Treasury account.

If the Central Bank for reasons of political theater is not allowed to do that, but it has an interest rate target to maintain, the Treasury auctions those IOU's, with payment ending up in its account at the Central Bank, and then that the Central Bank more or less ends up buying up those bonds to stabilize interbank interest rates.

The reason that the action of a conventional Central Bank action ends up (either directly or after the fact) eliminating the debt service burden on the Treasury is that the Central Bank is either owned by the government or chartered by the government as a not-for-profit, with any surpluses going back to the Treasury. So once Central Bank operating expenses are covered out of interest income on Treasury bonds they hold, all the excess goes straight back to Treasury.

Its the combination of the clearinghouse function and surplus on income over operating costs returning to the Treasury that ensures that Treasury checks never bounce. If the ECB can interfere with an NCB clearing payments, it can interfere with the NCB operating as a clearinghouse for payments across national borders, making reserve assets of commercial banks held in that NCB's accounts a second-class citizen, only good for clearing payments within the country.

That's why the question of whether the ECB is by treaty required, allowed, or not allowed to interfere with cross-border clearances between NCB's is of interest. And IANL, so even if I had the text, I could only guess how it would be interpreted by a court.

And whether an NCB in the Eurozone can get away with freelancing in this way ~ and I suspect that the Bundesbank had good enough lawyers to make sure that one way or another, the treaty terms do not allow that kind of freelancing ~ given the unsustainability of multiple cash rate policies in a single currency zone ~ that's what led to the formation of the Federal Open Market Committee in the US ~ there's also a quite reasonable argument that an NCB should not be allowed to engage in this kind of action.

I still prefer a system of determining the shortfall from full output, allocated on a per capita basis, and the ECB buying individual member state bonds on the open market equivalent to that amount ~ which would be a confederalization of fiscal policy.


I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Fri Dec 3rd, 2010 at 01:21:11 PM EST
[ Parent ]
Excellent!!!

A pleasure

I therefore claim to show, not how men think in myths, but how myths operate in men's minds without their being aware of the fact. Levi-Strauss, Claude

by kcurie on Sat Dec 4th, 2010 at 07:33:35 AM EST
[ Parent ]
On the separation of funcions between the ECB and NCBs, there's this from the Bank of Spain.

Banco de España - Sobre el Banco - FuncionesBank of Spain - About the Bank - Functions
Funciones como miembro del SEBCFunctions as a member of the ESCB
Desde el 1 de enero de 1999 el Banco de España participa en el desarrollo de las siguientes funciones básicas atribuidas al SEBC: From 1 January 1999 the Bank of Spain takes part in the development of the following basic functions attributed to the ESCB:
* defining and executing the monetary policy of the Eurozone, with the principal objective of keeping price stability in the zone as a whole
* carrying out foreign exchange operations consistent with the provisions of article 111 of the Treaty on European Union, as well as holding and managing the official foreign reserves of the State
* promoting the good functioning of payment systems in the Eurozone
* issuing legal tender notes
Funciones como banco central nacionalFunctions as National Central Bank
Respetando las funciones que emanan de sus integración en el SEBC, la Ley de Autonomía otorga al Banco de España el desempeño de las siguientes funciones:Respecting the functions that flow from its integration in the ESCB, the Autonomy Law gives the Bank of Spain the responsibility for the following functions:
* holding and managing the reserves of foreign currency and precious metals not transferred to the ECB
* promoting the good working and stability of the financial system and, without prejudice of the BCE's functions, the national payment systems
* supervising the solvency and normative compliance of credit institutions, or other entities and financial markets it has been charged with supervising
* issuing coinage and carrying out, on account of the State, other functions relative to coinage
* elaborating and publishing statistics relating to its funcions and assisting the ECB in the compilation of statistical information
* providing treasury and financial agent services for public debt
* advising the government, as well as carrying out the necessary reports and studies


Of all the ways of organizing banking, the worst is the one we have today — Mervyn King, 25 October 2010
by Migeru (migeru at eurotrib dot com) on Thu Dec 2nd, 2010 at 05:25:39 AM EST
[ Parent ]
i swear watching you, mig and gang peeling back these onion layers is getting as exciting as watching a sherlock holmes mystery getting unravelled...

it's the story, and i sense a denouement approaching.

'The history of public debt is full of irony. It rarely follows our ideas of order and justice.' Thomas Piketty

by melo (melometa4(at)gmail.com) on Wed Dec 1st, 2010 at 07:34:39 PM EST
[ Parent ]
if an ECB member NCB has a surplus of revenue over costs, does it still return the surplus to its national Eurozone government?
Yes, see my top-level comment
Deutsche Welle: Germany's Bundesbank Posts Huge Profits for 2008 (10.03.2009)
The entire sum earned is being transferred to the federal government -- which is something of a novelty. In previous years, portions of the Bundesbank's earnings have had to be used to pay off debt from the former East Germany, but now that the debt is gone, the bank's profits will flow into state coffers.
This is because the ECB's equity is owned by the 27 Central Banks in the ESCB and the equity of a National Central Bank is owned by its treasury. However, some decisions have been transferred by treaty to the ECB Governing Council or to the ESCB, and so are made collegially by the NCB Chairmen.

Of all the ways of organizing banking, the worst is the one we have today — Mervyn King, 25 October 2010
by Migeru (migeru at eurotrib dot com) on Thu Dec 2nd, 2010 at 02:51:46 AM EST
[ Parent ]

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