The ECB’s difficult return to normality: a proposal

Some banks are entirely dependent on the ECB with regard to liquidity supply since they are not able to raise liquidity from the private market. Martin Mandler and Peter Tillmann, University of Giessen, propose an instrument for reviving the repo market that creates an opportunity for banks in the crisis countries to borrow German and French government bonds – as collateral – in exchange for shaky Greek, Irish and Portuguese government bonds. In this way it might be possible to reduce the dependence of these banks on direct lending from the ECB and allow the ECB to return to a normal monetary policy regime.