The limits of central bank financing in resolution

Feb 05 2018

On January 30th Yves Mersch, member of the Executive Board of the European Central Bank, discussed the key topic of central banks liquidity provisions to entities which are close to resolution.

Specifically, the question is the extent to which this liquidity should be provided by central banks, and it frames in the broader context of the completion of the banking union in Europe. A single European Deposit Insurance Scheme (EDIS) is retained to be a helpful tool that can provide support to resolution schemes.

The ECB’s position on the matter has been constant: resolution measures should be financed by contributions from shareholders and creditors of the bank, or by the State or at Union level, but not by central banks.

A key point here is that a standalone guarantee has never been recognised as adequate collateral under our framework. Guarantees can only play a limited role, and in no circumstances would a guarantee “cure” the lack of financial soundness of a given counterparty or the lack of collateral (or a combination of the two), which is often the case in a resolution scenario.

Emergency liquidity assistance can be provided by national central banks on the basis of their national competences and to pursue national objectives, namely, to preserve financial stability. Hence, the provision of central bank liquidity should not be ruled out in advance, yet neither should be taken for granted. Resolution planning should not be designed assuming a priori that central bank liquidity will fill the gaps.



The limits of central bank financing in resolution


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