Jan Pieter Krahnen, Director of the Research Center SAFE, points out that the decision of the European Central Bank (ECB) to purchase sovereign bonds of Eurozone member states (“quantitative easing”) will not only have an effect on price stability but also on financial stability.
“By buying sovereign bonds, the ECB aims to provide markets with more liquidity so that, based on these funds, banks will offer more credit,” Krahnen said. “If quantitative easing really has this effect and encourages risk taking and leveraging of banks, the new Single Supervisory Mechanism will want to work against this development. It is the supervisor’s job to make sure that risk taking in the banking sector decreases and equity holdings go up.”
