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Boe Says It Can Print Money At Zero Cost, On Moral Hazards

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Liquidity insurance and moral hazard

Central banks typically provide liquidity insurance to the banking system. When designing their liquidity insurance

facilities, central banks — like any insurance provider — have concerns over ‘moral hazard’.

[EasyBet]: Concern? Really ?

Moral hazard in this context refers to the risk that the availability of liquidity insurance induces banks to take on

more risk than they otherwise would. A simple incentive arises because liquid assets such as reserves yield less than illiquid

long-term loans and hence self-insurance is costly.

Given that central banks can create reserves at effectively zero cost to themselves, it could be argued that it does not matter

if banks take on more liquidity risk.

[EasyBet]: Ah...now BoE is admitting they can print money at zero cost (to BoE, that is)

That line of reasoning fails to take account, however, of the intimate relationship between

banks’ liquidity risk and their solvency. For example, one way that an insured bank could increase its liquidity risk would be

by making longer-term loans than it otherwise would. But that would probably also increase its solvency risk, given that

pay-offs from its loan book would become more uncertain.

[EasyBet]: Not if BOE does all these QE, SLS, ZIRP for an extended period. It is in effect a gold plated guarantee for the too big to fail.

Central banks have a number of options for limiting this moral hazard. One response that all central banks seek to

implement is to lend only to institutions that it judges to be solvent. In principle, this threat of not being able to access

central banks’ liquidity facilities should reduce the liquidity risk (and the associated solvency risk) banks are willing to shoulder.

[EasyBet]: Really?

It can, however, be difficult to distinguish between liquidity and solvency problems in practice. So central banks also make

liquidity insurance costly to access.

[EasyBet]: So..you see, BOE does not know which bank is insolvent, so she lend money to them at 0.5% (and max 1.5%, 100bp above

base) and call that punishment...

In principle, they can do this by charging higher interest rates for high usage of liquidity

facilities or for accepting lower-quality collateral.

Alternatively, they can increase the size of the haircuts on collateral imposed beyond those that would be strictly

necessary to guard against credit risk. Central banks are unlikely to have sufficient information to

manage moral hazard effectively through haircuts alone. They can set haircuts based on an analysis of the characteristics of

the assets pledged as collateral (for example, an assessment of how the value of an asset might change in different scenarios)

to help manage credit risk.

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Borrow 5-10x your salary or be priced out of housing your family.

That's the sort of moral hazard these kunts have dished out. Gun at the head banking - with debt on top. There are not words to describe this despicable bunch of lowlife parasites. Who knows how many decent companies have been taken under by the debt funded chancers over the last decade - those that borrowed could use that money to push all the competition out of the way by using that debt to run unprofitably.

They know nothing of what they are and what they have done.

Edited by OnlyMe

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Borrow 5-10x your salary or be priced out of housing your family.

That's the sort of moral hazard these kunts have dished out. Gun at the head banking - with debt on top. There are not words to describe this despicable bunch of lowlife parasites. Who knows how many decent companies have been taken under by the debt funded chancers over the last decade - those that borrowed could use that money to push all the competition out of the way by using that debt to run unprofitably.

They know nothing of what they are and what they have done.

I agree with you100% but maybe you are like me. Until we have monetary reform all else in this God-forsaken world matters not a jot. If this was an open debate and a pure election issue where a party spelled out clearly how the current system works, how it has failed and what the new system should be then we may have a chance. Will we get it? Not a snowball's chance in hell. Mostly because politicians of all parties have no clue how the system works anyway and the few that do have vested interests.

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  • 312 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



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