21 Jul 2022

Jan Krahnen: “The TPI as a macroeconomic measure lacks sustainability”

SAFE Director argues for fewer sovereign bonds in bank portfolios in light of the European Central Bank’s monetary policy stance

In its decision today, the Governing Council of the ECB decided, as expected, to raise the key interest rates by 50 basis points. It also decided to use a new Transmission Protection Instrument (TPI). Jan Pieter Krahnen, Director of the Leibniz Institute for Financial Research SAFE, explains:

“The ECB has followed the dynamics of the markets in Europe, the world and probably also the growing pressure from the public and has exceeded the widely expected interest rate step with 0.50 percent. At the same time, the ECB wants to help limit a divergence of financing conditions for companies in the eurozone. To this end, it has presented the TPI, whose accompanying preconditions, which are crucial for the public discussion, are outlined in today’s press release. It remains unclear what fiscal sustainability and macroeconomic soundness, the core statements in the statement, are actually supposed to mean.

Therefore, a clearer definition is needed: For example, the targeted purchase of sovereign bonds of highly indebted countries could and should be closely linked to the introduction of a concentration limit for domestic sovereign bonds in banks’ balance sheets. This measure would allow for a sustainable fiscal policy - both of the government and of the economy. 

A concentration limit would lead to Europe’s banks’ sovereign bond portfolios becoming more diversified than they are now - and to breaking the doom loop between sovereign over-indebtedness and bank insolvency that today makes bank bailouts inevitable in a sovereign debt crisis. For the enforcement of a concentration limit, it is facilitated by the fact that the ECB, through its assigned banking supervision, can implement such a limit quickly and effectively. 

The concern TPI becomes a sustainable macroeconomic measure through the concentration limit proposed here - in line with the ECB's requirements.”

Scientific Contact

Prof. Dr. Jan Pieter Krahnen

Scientific Director and Program Director SAFE Policy Center