Final deposition of losses through the European Central Bank’s balance sheet

Abstract:

The European Central Bank (ECB)’s unlimited potential to create money and its ability to indefinitely stave off insolvency, enable it to act as a ‘Bad Bank’. This can be implemented by using the ECB’s balance sheet to permanently deposit financial market participants’ losses which would otherwise jeopardize financial stability. While final deposition of losses is used as a policy instrument to establish financial stability, it also has a number of economic effects, such as redistributive effects, misdirected incentives and inflationary dangers. Against the backdrop of the ECB’s independence and the instable financial condition of the European Monetary Union, these consequences raise questions as to the Member States’ sovereignty.

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