ECB distrusts national central banks

The case of the Latvian ABLV Bank has prompted ECB President Draghi to take up calls for a reform of the present rules for Emergency Liquidity Assistance for banks (ELA). Within the framework of a hearing before the EU Parliament Draghi said the ELA rules should be changed and the instrument centralised. The Latvian central bank had recently granted ABLV Bank Emergency Liquidity Assistance of almost EUR 300 m before the ECB decided shortly thereafter to close the bank after several serious violations of the law in the USA and the loss of the bank’s business basis.

According to the statutes ELA loans can only be granted to solvent banks that are suffering a temporary liquidity bottleneck. But the corresponding national central banks are responsible for ELA loans: they extend the loans on their own responsibility and also bear the financial risk. Although the ELA loans fall within the national purview, the ECB is not fully excluded. While the national central banks can act independently on the basis of the ELA rules, the ECB Governing Council can use its veto.

So the ECB can already intervene in due course if it has doubts about the legality of the national central bank’s actions. Centralisation, which Draghi is calling for, would not only limit the powers of the national central banks, it would at the same time make it clear that the ECB distrusts to a certain extent the national central banks or also the banks in their reciprocal dealings. Perhaps the case of ABLV Bank shows that this lack of trust is justified in light of what is possibly a nationally tainted view of things, but it does not foster public trust in European monetary policy.

If the granting of ELA loans really is centralised, this should not mean that the risks of ELA are also centralised. The financial consequences for the euro area might otherwise be no less than dramatic. If a country’s financial sector were to get into difficulties, as was recently the case in Greece, then the ECB would presumably also initially seek to help with ELA loans in order to avoid a collapse. But if the country concerned were then to leave the euro area, the bulk of the loans would have to be written off. The collateral for the ELA loans would hardly be able to cover the losses. The financial consequences would ultimately have to be borne by the tax payers in the member states. In Greece’s case the loss would be high, but it would not be dramatic. However, the amount of damage caused by a larger member state would be far greater.

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