How is a Greek default unlike from a Puerto Rican default?
Answer: because Puerto Rico doesn't receive got its ain banking system. It can't nigh downward banks. Banks inward Puerto Rico are non loaded upward on Puerto Rico debt, as well as hence depositors are non inward danger if the province authorities defaults.
Puerto Rico, similar Greece, uses a mutual currency. But in that place is no inquiry of PRexit, that people wake upward ane morn as well as their dollar banking company accounts are of a abrupt PR Peso banking company accounts. So they receive got no argue to run as well as larn cash out.
Banks inward New York are besides non loaded upward on Puerto Rico debt. the US banking company regulators haven't said that those banks tin pretend Puerto Rico debt is run a endangerment free.
If a Puerto Rican banking company fails, whatever large the US banking company tin rapidly accept it over as well as transcend away along it running.
H5N1 Puerto Rican authorities default volition live a mess. Just similar the default of a large concern inward Puerto Rico. But it volition non hateful a banking company run, crisis, as well as 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 downward the banks, simply every bit corporations default. Banks must non live loaded upward on their country's sovereign debt. Bank rule must process sovereign default simply similar corporate default. It tin happen, as well as banks must diversified as well as capitalized to hold out it. Banks must live complimentary to function across borders. A mutual currency needs a describe of piece of job solid commitment that it volition non live abandoned.
In financial regulation, the large scrap rages over what is "systemic," with the latest absurd sentiment to extend that designation to equity asset managers. (More later.) All that give-and-take starts amongst statements that sovereign debt or anything backed past times sovereign debt or sovereign guarantees is security as well as per se non "systemic." Sovereign debt all the same counts every bit run a endangerment complimentary inward nigh all banking regulation.
Hellenic Republic should reinforce the lesson: Sovereign debt is a prime number rootage of "systemic" danger. That is particularly truthful of minor governments inward a currency union. H5N1 authorities is simply a highly leveraged financial establishment as well as insurance company.
Wrong answers:
- Fiscal union. The the US is non necessarily going to bail out Puerto Rico. Or Illinois. Or their creditors. People transcend away along proverb a currency wedlock needs financial union, but it is non so.
- National deposit insurance is actually non key either. The banks operating inward Puerto Rico are non inward danger, as well as hence they don't involve deposit insurance protection.
Update: A colleague pointed me to this first-class article on banks asset their ain sovereign debt past times Lucrezia Reichlin as well as Luis Garicano.
Answer: because Puerto Rico doesn't receive got its ain banking system. It can't nigh downward banks. Banks inward Puerto Rico are non loaded upward on Puerto Rico debt, as well as hence depositors are non inward danger if the province authorities defaults.
Puerto Rico, similar Greece, uses a mutual currency. But in that place is no inquiry of PRexit, that people wake upward ane morn as well as their dollar banking company accounts are of a abrupt PR Peso banking company accounts. So they receive got no argue to run as well as larn cash out.
Banks inward New York are besides non loaded upward on Puerto Rico debt. the US banking company regulators haven't said that those banks tin pretend Puerto Rico debt is run a endangerment free.
If a Puerto Rican banking company fails, whatever large the US banking company tin rapidly accept it over as well as transcend away along it running.
H5N1 Puerto Rican authorities default volition live a mess. Just similar the default of a large concern inward Puerto Rico. But it volition non hateful a banking company run, crisis, as well as 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 downward the banks, simply every bit corporations default. Banks must non live loaded upward on their country's sovereign debt. Bank rule must process sovereign default simply similar corporate default. It tin happen, as well as banks must diversified as well as capitalized to hold out it. Banks must live complimentary to function across borders. A mutual currency needs a describe of piece of job solid commitment that it volition non live abandoned.
In financial regulation, the large scrap rages over what is "systemic," with the latest absurd sentiment to extend that designation to equity asset managers. (More later.) All that give-and-take starts amongst statements that sovereign debt or anything backed past times sovereign debt or sovereign guarantees is security as well as per se non "systemic." Sovereign debt all the same counts every bit run a endangerment complimentary inward nigh all banking regulation.
Hellenic Republic should reinforce the lesson: Sovereign debt is a prime number rootage of "systemic" danger. That is particularly truthful of minor governments inward a currency union. H5N1 authorities is simply a highly leveraged financial establishment as well as insurance company.
Wrong answers:
- Fiscal union. The the US is non necessarily going to bail out Puerto Rico. Or Illinois. Or their creditors. People transcend away along proverb a currency wedlock needs financial union, but it is non so.
- National deposit insurance is actually non key either. The banks operating inward Puerto Rico are non inward danger, as well as hence they don't involve deposit insurance protection.
Update: A colleague pointed me to this first-class article on banks asset their ain sovereign debt past times Lucrezia Reichlin as well as Luis Garicano.
