I’m not arguing that the very low risk-based charges on repo lending in Basel III are “wrong” in any microprudential sense. After all, they are designed to solve a different problem – that of ensuring bank solvency.
Can the two objectives be combined, say by writing deficit limits in a certain way, having transition rules, or encouraging countries to run fiscal rainy day funds that would promote long-run fiscal responsibility and short term flexibility? There are many possibilities, and many nuances. 3. Financial integration in a currency union.