High debt, rise of non-banks risk tying ECB's hands, Schnabel says
TLT•ECB board member Isabel Schnabel said rising public debt and the expansion of non-bank finance could limit the central bank’s ability to set monetary policy. She called for stronger regulation of non-banks and said Europe should put public finances in order.
1. Debt and market risks
Schnabel said public debt has ballooned since the start of the century, with much of the new debt held by non-banks, including potentially highly leveraged hedge funds. Faster transmission of interest-rate changes could increase market volatility and prompt leveraged investors to sell bonds as collateral values fall and margin requirements rise.
2. Call for stronger rules
Schnabel said central banks may be forced to stabilise markets to prevent liquidity problems from becoming a credit crisis, potentially interfering with their mandates. She urged Europe to resist deregulating banks and to strengthen regulation of non-banks such as hedge funds, investment funds and insurers. She also said governments should put public finances in order, noting that the effective interest rate on government debt is now higher than economic growth.
