Discussions continue in some circles as to whether the ECB’s emergency liquidity assistance for Greek banks is legitimate. This column assesses the underlying economics of the emergency liquidity assistance programme and the complex interrelationship between the EU, the ECB and the Greek banks.
The ECB increased its emergency liquidity assistance for Greek banks from €50 billion in February 2015 to approximately €90 billion in June 2015. Its actions were accompanied by a discussion among academics, politicians and practitioners regarding the legitimacy of emergency liquidity assistance. Some have even accused the ECB of deliberately delaying the bankruptcy filing of already insolvent Greek banks.
In a recent paper (Götz et al. 2015), the authors analyse the underlying economics of the emergency liquidity assistance programme and the complex interrelationship between the EU, the ECB and the Greek banks, with a particular focus on the political economy of a monetary union with incomplete fiscal union. The authors conclude that the ECB’s actions cannot be classified as delaying the filing for insolvency. [...]
Conclusions and recommendations
There are two supplementary issues relevant for policy considerations surrounding the ELA instrument and bank solvency assessments:
First, the evaluation of stand-alone bank solvency by market participants seems to be based primarily on speculation as opposed to factual evidence.
We therefore ask for greater transparency, especially in relation to stress test results.
Second, transparency regarding the central bank’s actions as the lender of last resort would help to better understand its actions in times of crises.
This is particularly relevant when the ECB’s actions can be interpreted as pre-empting the political decision-making process. Hence, we encourage the ECB to be less opaque in explaining its motivation for providing emergency liquidity assistance and to disseminate more detailed data on the size and composition of outstanding emergency liquidity assistance positions.
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