Greece Vs Puerto Rico Together With What's Systemic.
How is a Greek default unlike from a Puerto Rican default?
Answer: because Puerto Rico doesn't lead maintain its ain banking system. It can't nigh downwardly banks. Banks inwards Puerto Rico are non loaded upwardly on Puerto Rico debt, together with therefore depositors are non inwards danger if the province authorities defaults.
Puerto Rico, similar Greece, uses a mutual currency. But at that spot is no query of PRexit, that people wake upwardly i morning time together with their dollar banking concern accounts are of a precipitous PR Peso banking concern accounts. So they lead maintain no argue to run together with larn cash out.
Banks inwards New York are likewise non loaded upwardly on Puerto Rico debt. U.S.A. of America banking concern regulators haven't said that those banks tin dismiss pretend Puerto Rico debt is lead chances free.
If a Puerto Rican banking concern fails, whatsoever large U.S.A. of America banking concern tin dismiss rapidly lead maintain it over together with proceed it running.
Influenza A virus subtype H5N1 Puerto Rican authorities default volition live a mess. Just similar the default of a large concern inwards Puerto Rico. But it volition non hateful a banking concern run, crisis, together with economical paralysis.
So hither is a large lesson of the Greek debacle: In a currency union, sovereign debt must live able to default, without shutting downwardly the banks, merely every bit corporations default. Banks must non live loaded upwardly on their country's sovereign debt. Bank rule must process sovereign default merely similar corporate default. It tin dismiss happen, together with banks must diversified together with capitalized to endure it. Banks must live complimentary to function across borders. A mutual currency needs a theatre commitment that it volition non live abandoned.
In financial regulation, the large fence rages over what is "systemic," with the latest absurd sentiment to extend that designation to equity property managers. (More later.) All that give-and-take starts amongst statements that sovereign debt or anything backed yesteryear sovereign debt or sovereign guarantees is security together with per se non "systemic." Sovereign debt even together with therefore counts every bit lead chances complimentary inwards most all banking regulation.
Hellenic Republic should reinforce the lesson: Sovereign debt is a prime number origin of "systemic" danger. That is specially truthful of pocket-sized governments inwards a currency union. Influenza A virus subtype H5N1 authorities is merely a highly leveraged financial establishment together with insurance company.
Wrong answers:
- Fiscal union. The U.S.A. of America is non necessarily going to bail out Puerto Rico. Or Illinois. Or their creditors. People proceed maxim a currency marriage ceremony needs financial union, but it is non so.
- National deposit insurance is actually non key either. The banks operating inwards Puerto Rico are non inwards danger, together with therefore they don't require deposit insurance protection.
Update: A colleague pointed me to this first-class article on banks belongings their ain sovereign debt yesteryear Lucrezia Reichlin together with Luis Garicano.
Answer: because Puerto Rico doesn't lead maintain its ain banking system. It can't nigh downwardly banks. Banks inwards Puerto Rico are non loaded upwardly on Puerto Rico debt, together with therefore depositors are non inwards danger if the province authorities defaults.
Puerto Rico, similar Greece, uses a mutual currency. But at that spot is no query of PRexit, that people wake upwardly i morning time together with their dollar banking concern accounts are of a precipitous PR Peso banking concern accounts. So they lead maintain no argue to run together with larn cash out.
Banks inwards New York are likewise non loaded upwardly on Puerto Rico debt. U.S.A. of America banking concern regulators haven't said that those banks tin dismiss pretend Puerto Rico debt is lead chances free.
If a Puerto Rican banking concern fails, whatsoever large U.S.A. of America banking concern tin dismiss rapidly lead maintain it over together with proceed it running.
Influenza A virus subtype H5N1 Puerto Rican authorities default volition live a mess. Just similar the default of a large concern inwards Puerto Rico. But it volition non hateful a banking concern run, crisis, together with economical paralysis.
So hither is a large lesson of the Greek debacle: In a currency union, sovereign debt must live able to default, without shutting downwardly the banks, merely every bit corporations default. Banks must non live loaded upwardly on their country's sovereign debt. Bank rule must process sovereign default merely similar corporate default. It tin dismiss happen, together with banks must diversified together with capitalized to endure it. Banks must live complimentary to function across borders. A mutual currency needs a theatre commitment that it volition non live abandoned.
In financial regulation, the large fence rages over what is "systemic," with the latest absurd sentiment to extend that designation to equity property managers. (More later.) All that give-and-take starts amongst statements that sovereign debt or anything backed yesteryear sovereign debt or sovereign guarantees is security together with per se non "systemic." Sovereign debt even together with therefore counts every bit lead chances complimentary inwards most all banking regulation.
Hellenic Republic should reinforce the lesson: Sovereign debt is a prime number origin of "systemic" danger. That is specially truthful of pocket-sized governments inwards a currency union. Influenza A virus subtype H5N1 authorities is merely a highly leveraged financial establishment together with insurance company.
Wrong answers:
- Fiscal union. The U.S.A. of America is non necessarily going to bail out Puerto Rico. Or Illinois. Or their creditors. People proceed maxim a currency marriage ceremony needs financial union, but it is non so.
- National deposit insurance is actually non key either. The banks operating inwards Puerto Rico are non inwards danger, together with therefore they don't require deposit insurance protection.
Update: A colleague pointed me to this first-class article on banks belongings their ain sovereign debt yesteryear Lucrezia Reichlin together with Luis Garicano.
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