Friday, March 14, 2014

Where did they get that idea?

European Central Bank President Mario Draghi receiving the Joseph "Creative Destruction" Schumpeter Award (it's just as well Paul Krugman is travelling) --

Looking back, there is no doubt that the business models and liability structure of euro area banks had to evolve. Before the crisis, numerous banks funded their activities with too much debt and not enough equity; and that debt involved wholesale financing that was too high relative to deposits. This model was only able to develop because of the perception of an implicit state guarantee for bank debt – a perception that is perhaps the most pervasive component of the link between sovereign and bank risks.

Could those naughty banks have developed the "perception" of a state guarantee for bank debt because, er, the ECB was actually enforcing such a guarantee such as in the case of Ireland, November 2010?