Saturday 17 March 2018

ECB belatedly comes clean on emergency lending scheme

Former ECB chief Jean Claude Trichet
Former ECB chief Jean Claude Trichet
Donal O'Donovan

Donal O'Donovan

The European Central Bank (ECB) has revealed the full terms of its emergency bank funding scheme, including how much it charges lenders, as part of an attempt to make the often-criticised liquidity lifeline more transparent.

Emergency Liquidity Assistance (ELA) kept many banks afloat, including in Ireland, in the aftermath of the great crash. In theory it can be provided by central banks, as lender of last resort, to solvent European banks experiencing a temporary loss of funding during a crises.

Irish banks have been weaned off emergency funds, or in the case of Anglo Irish Bank, the debt was replaced with other instruments. Critics long argued that ELA was not transparent and was used for political purposes at the height of the debt crisis.

That included forcing Greece to take unpopular action to stave off the collapse of banks or risk ejection from the euro.

In Ireland, shadowy ELA funds were used by the Central Bank to prop up Irish banks from 2008, a move that rapidly accelerated into tens of billions of euro in secret loans.

In November 2010 the then ECB chief Jean Claude Trichet wrote to Brian Lenihan, as Irish finance minister, and threatened to cut off ELA unless Ireland immediately signed up to a bailout.

At the time, the Irish banks were dependent on billions of euro of short-term ELA from the central bank.

If the ECB had carried through with its threat, Irish banks risked collapse, which would have sent the already crisis-wracked economy into meltdown.

Mr Trichet also sought, and received, a guarantee that Irish taxpayers were on the hook for the loans to the Irish lenders.

Later, in 2011, Mr Trichet told then Finance Minister Michael Noonan that a "bomb would go off in Dublin" if losses were allowed to fall on banks' senior bondholders, a comment widely seen as a threat to cut off ELA. The unprecedented power ELA gave central banks over democracies fuelled widespread criticism.

During the crisis the scale, cost or recipients of ELA were never revealed.

The ECB said its new policy increases transparency regarding ELA rules and procedures. The loans will be provided at a price at least 1pc above the ECB's marginal lending rate, which currently stands at 0.25pc, meaning a minimum cost of 1.25pc.

Banks using ELA must provide a funding plan within two months of receiving ELA and this needs to be updated every quarter while it receives liquidity help, the ECB said.

Banks also need to report regulatory capital ratios on a monthly basis and may also need to prepare a recapitalisation plan.

ECB President Mario Draghi

Irish Independent

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