Monday, August 25, 2008

Regulatory arbitrage...

Banks shopping around for the most advantageous jurisdiction to place impaired collateral...

Aug. 25 (Bloomberg) -- The European Central Bank will announce changes to the rules governing its money-market auctions in coming weeks to head off the risk of abuse by financial institutions, council member Yves Mersch said.

``At the margins there can still be cases where you see dangers of gaming the system,'' Mersch said in an interview on Aug. 23 in Jackson Hole, Wyoming. ``The Governing Council has been discussing the whole issue'' and has agreed on a ``certain amount'' of refinement to the existing rules, he said.

ECB officials have become increasingly concerned that banks are taking advantage of collateral rules that are broader than those used by the Federal Reserve and the Bank of England. The danger is that banks struggling to sell securities damaged by the credit-market turmoil will dump them on the ECB and become overly reliant on central-bank funds.

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