Public funding of failing banks in the European Union (LBF vol. 19) 2020/5.5.2.2:5.5.2.2 Lack of access to liquidity support in resolution

Public funding of failing banks in the European Union (LBF vol. 19) 2020/5.5.2.2

5.5.2.2 Lack of access to liquidity support in resolution

Deze functie is alleen te gebruiken als je bent ingelogd.Deze functie is alleen te gebruiken als je bent ingelogd.Deze functie is alleen te gebruiken als je bent ingelogd.

Section 5.5.1.2 showed that in resolution, public funding sources are more geared towards solvency support. A bank in resolution may however also be in need of liquidity support. Liquidity support may be needed, if resolution takes place at a point when a bank is still solvent.

In the case of Banco Popular, a rapid evaporation of liquidity followed media coverage on doubts about asset quality and the bank’s poor earnings position coupled with questionable management. This prompted the resolution decision by the ECB.1

Liquidity support may also be needed after the capital position has been restored (through bail-in or bail-out).2 In the EU, the resolution framework has been qualified by Ms König, Chair of the SRB, as “being geared towards addressing solvency issues more than liquidity”. She sees a need for central banks to step in and to provide liquidity in resolution.3

Given the extent of the potential liquidity needs in resolution, the resources of the SRF, even when supplemented by a backstop of the same or similar size, may not be sufficient to adequately address these needs.4

The additional liquidity facility could be provided by the ECB in the form of ‘Eurosystem Resolution Liquidity’ (ERL).5 That instrument should be construed as a monetary policy tool as the ESCB may not take financing actions that should be undertaken by public authorities. In addition, it would require a public-sector guarantee, for example, provided by the SRF with a potential backstop provided by the ESM, in order to meet the collateral demand.6 In this way, the ECB would not finance any government deficits, no taxpayer money would be involved, and thus no monetary financing would take place. ERL would also not be considered State aid, although this should ideally be covered by the State aid regime for the banking sector through a special section, provided that i) the bank is not considered insolvent at the moment it receives the funds because a recapitalisation plan is applied in the short term; ii) while collateral for ELA purposes might be depleted, there will be a guarantee from the SRF, considered as appropriate collateral for funding in resolution purposes, which is backed by funds raised ex ante and if needed ex post by the industry so neither taxpayers money nor moral hazard issues would be involved, and iii) there is no counter-guarantee from a State.7 The debate on ERL is closely linked to the unsettled issue on whether the function of ELA should be centralized at the level of the ECB.8 See section 5.2.2.

With the introduction of ERL as a source of liquidity support in resolution the definition of ‘solvency’ as applied by the ECB in relation to ELA may become stricter as it will then no longer be necessary to rely on ELA for liquidity purposes within resolution. See section 5.4.1.1.

Deze functie is alleen te gebruiken als je bent ingelogd.