More than a channel setting apart UK, Euro central banks

Differences between the way the ECB and the Bank of England have tackled the global credit crunch were thrust into the spotlight when the British central bank was forced to rescue Northern Rock.

The Bank of England has remained aloof in recent weeks while the ECB injected large amounts of emergency funding into the money markets to keep the wheels of short-term credit markets from grinding to a halt.

Investors are looking anxiously for further signs of strain in the financial sector meaning it could be harder still for the British central bank to maintain what has been, until now, a firmly stand-back strategy to dealing with the credit crisis.

In an operation with government backing, the BoE agreed to provide emergency loans to Northern Rock, which also issued a profit warning.

On the surface that made it look like the BoE's refusal to intervene like the ECB in the money markets left a problem to fester until it claimed a casualty.

'Bailout'

"The rescue of Northern Rock certainly looks much more like a bailout than anything else," said Marco Annunziata, chief economist at UniCredit, a large European investment bank.

And that means the Bank of England now seems to be flirting closest with what central banks hate most - being seen as an easy source of public insurance for foolhardy investors, known in economic circles as moral hazard.

"Moral hazard just got a strong boost," Annunziata said.

ECB boss Jean-Claude Trichet refused to be drawn into debate when questioned at a news conference in Portugal on Friday about the relative merits of BoE and ECB responses to the credit crunch that set in across the world in early August.

Central banks in different regions had different traditions, different instruments at their disposal and different market structures to deal with, Trichet said.

That, according to Adam Posen, a central bank expert at the Peterson Institute for International Economics in Washington, goes to the heart of the matter.

Posen argues that central banks in various regions are doing as is probably most appropriate to the structures, strengths and weaknesses of markets in those regions and suggests weaknesses in mainland Europe's bank sector justify greater ECB activism.

It was to be expected that a mortgage lending specialist may end with problems, as happened with Northern Rock, when credit markets do not function normally, but it was more worrying that some banks in mainland Europe had faced difficulties for other reasons, Posen said.

Agencies

(China Daily 09/18/2007 page16)