30 January 2018

ECB: The limits of central bank financing in resolution

In his speech Mr Yves Mersch, Member of the Executive Board of the ECB, focuses on the provision of central bank liquidity to entities that are close to or in resolution – a topic that has attracted much public interest.

This discussion is taking place in the broader context of the completion of Europe’s banking union. But a single European Deposit Insurance Scheme (EDIS), alongside an effective, common backstop for bank resolution, remains one of the missing pieces.

Mr Mersch says: “While we are not there yet with respect to EDIS and indeed common backstops, the need remains for banks to be able to plan ahead and obtain liquidity, even if determined as failing or likely to fail or once the resolution process is activated.”

The question is whether and to what extent this liquidity should be provided by central banks.

The ECB’s position on the matter has been constant: the provision of central bank liquidity – be it through monetary policy credit operations or emergency liquidity assistance, should not be automatically assumed in resolution planning. 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.

This obviously does not mean that an entity otherwise in compliance with central bank requirements for the provision of liquidity cannot access such liquidity.

Mr Mersch concludes that liquidity provision by central banks in the event of resolution must not be assumed ex ante, even though the possibility is not excluded provided the specific rules and objectives of the Eurosystem are followed. The provision of central bank liquidity will be the independent and ad hoc decision of the Eurosystem under the respective frameworks for monetary policy and potential emergency lending not interfering with monetary policy.

Resolution financing is a government task, now complemented by the rules and procedures applied by the Single Resolution Board and the national resolution authorities within the framework of the SRM. Central banks provide liquidity, not solvency support. And funding gaps that cannot be addressed by the industry or through the Single Resolution Fund should be filled, ultimately, by Member States.

Full speech

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