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The Euro in Crisis Decision Time at the European Central Bank- Case Solution
| Solution Id | Length | Case Author | Case Publisher |
|---|---|---|---|
| 1128 | 307 Words (2 Pages) | Gunnar Trumbull, Dante Roscini, Diane Choi | Harvard Business School : 711049 |
A Word File
The European Union’s response to the financial crisis was two-pronged. The political institutions were galvanized into action regarding the solvency of the banking sector, while the European Central Bank’s response was restricted to the liquidity of the banking sector. The financial crisis in Europe was intricately linked to the events in the United States. The uncertainty came about, and the money markets began to falter. Resultantly, in March 2008, the European Central Bank introduced “enhanced credit supports” to maintain liquidity. As opposed to using main refinancing operations (MROs) that were used formerly, the ECB countered the uncertainty in Europe by proposing new instruments.
Following questions are answered in this case study solution
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Evaluate the ECB's response to the financial crisis of 2008-2011. What was their analysis of the problem?
Case Analysis for The Euro in Crisis Decision Time at the European Central Bank-
1. Evaluate the ECB's response to the financial crisis of 2008-2011. What was their analysis of the problem?
These instruments, launched under the long term refinancing operation (LTRO) comprised of loans with maturities ranging from 3 to 6 and 12 months. Medium-term assets’ rates were lowered using these instruments. This operation also helped boost confidence in the ECB as banks realized they had long term liquidity support. However, while the operation was successful in its motive of correcting the money markets, inflation also rose rapidly. Eventually, the MRO rate was also pushed up.
In September 2008, the Lehman Brothers crash prompted a lowering in the MRO rate, and collateral standards were relaxed. Eventually, borrowing as well as deposits grew. The Euro inflation rate plunged too, simultaneously with the MRO rate. In 2009, the average inflation rate stood around 0.3%.
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