Saturday, September 22, 2012

OMT and cross-border lending conditions

The ECB OMT program's main effort will be change cross-border lending conditions. These conditions are poor as banks become more nationalistic and keep leading capital within their own borders. Put simply, the effort should be twofold. One, get an environment to have large banks in Northern Europe provide funds to those countries in southern Europe. If the banks are well capitalized and have unlimited funds at cheap rates, they may make this possible. Two, the ECB wants to reduce the risk premium on sovereign bonds and lending within debtor countries. If banks will not buy the bonds and make the cross-border lending, the ECB will serve as the cross border lender of last resort within the EU. 

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