State aid to banks (IVOR nr. 109) 2018/3.3.9:3.3.9 Liquidity assistance by central banks

State aid to banks (IVOR nr. 109) 2018/3.3.9

3.3.9 Liquidity assistance by central banks

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Central banks may act as a lender of last resort (LOLR)1 by providing emergency liquidity assistance (ELA).2 Within the Eurozone, the decision to grant ELA is at the discretion of the national central bank3, but the ECB can veto a decision to grant ELA.4 This raises the question whether ELA can be considered as a national measure.5 Another question is whether ELA constitutes State aid. This question was answered by the Commission in its decision on Northern Rock.6 The Commission held that liquidity assistance does not constitute State aid, if the following cumulative conditions are met:

i)

the financial institution is solvent at the moment of the liquidity provision and the latter is not part of a larger aid package,

ii)

the facility is fully secured by collateral to which haircuts are applied, in function of its quality and market value,

iii)

the central bank charges a penal interest rate to the beneficiary,

iv)

the measure is taken at the central bank’s own initiative, and in particular is not backed by any counter-guarantee of the State.

These four cumulative conditions were codified in point 51 of the 2008 Banking Communication and reprised in point 62 of the 2013 Banking Communication.7

As a final remark, it should be noted that the ordinary activities of central banks relating to monetary policy, such as open market operations and standing facilities, fall outside the scope of the State aid rules.8

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