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European Central Bank Facing A Difficult Situation

While the Bank of England has faced the dilemma of how much funding assistance to give to the UK markets without allowing backs to benefit directly, this situation is now being replicated in Europe where the European Central Bank (ECB) is faced with the same situation. So what is going on?

It is a little known fact that the ECB has very different collateral rules to those used in the UK and the US. The rules are seen as more bank friendly as assets of a lower quality than those required in the UK and US can be used to obtain additional funding from the ECB. However, there are signs that some banks are starting to abuse this situation to their own ends causing growing calls for a tightening of the rules.

This is where the situation becomes very complicated for the ECB, do they tighten rules and force some banks into financial crisis (and the knock on affect this would have on the economy) or do they risk banks switching to ECB control to gain access to easier funding?

In the good times this was not a real concern but now that the economic crisis across Europe is deepening the ECB is now in something of a quandary.

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