ECB: Central Bank Funds Have Not Solved Problems

Steps by central banks to provide funds to cash-strapped institutions have not solved the problems of these entities, ECB Executive Board member Jose Manuel Gonzalez-Paramo said.
And he added: (see text) In order to avoid (?????) financial stability and to ensure appropriate financing conditions, the Eurogroup has complemented the concerted actions on deposit guarantees with far-reaching measures in two main areas: (1) funding guarantees, and (2) capital injections.

We are certainly witnessing challenging times. With hindsight, the financial turmoil and the episodes of extreme volatility that have impacted all markets and regions around the world over the last fifteen months have put at risk some of the core functions of the financial system – in particular, the provision of financing to the economy -, which are essential pre-requisites for employment creation and economic growth.

In the early stages of the turmoil – that were every much dominated by liquidity concerns-, central banks occupied the central stage by addressing liquidity tensions through a host of measures aiming to provide short-term funding to illiquid but solvent institutions.

Since the last spring, the market tensions changed qualitatively insofar as the rescue of Bear Stearns showed how quickly liquidity spirals can bring about insolvency. The months that followed witnessed an increase in the number of case-by-case interventions by Treasuries around the world, while private capital investors and long-term lenders disappeared from the markets

More recently, the demise of Lehman Brothers sent shock waves to the global system that put at risk the solvency of systematically-relevant institutions worldwide. The fallout of this episode triggered a more systematic and comprehensive response to the financial crisis which has been framed with particular efficacy in the Declaration on a concerted European action plan of the euro area countries of 12 October. In order to avoid (?????) financial stability and to ensure appropriate financing conditions, the Eurogroup has complemented the concerted actions on deposit guarantees with far-reaching measures in two main areas: (1) funding guarantees, and (2) capital injections.

These measures in combination with the enhanced liquidity provisions by central banks should restore confidence and contribute to re-establishing an environment within which governments, regulators and supervisors can define and implement the urgent reforms that are needed to underpin a much sounder global financial system.

Liquidity, financial markets and the economy: The role of central banks
Central bank funds have not solved problems-Paramo