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The Bank of England’s emergency scheme covertly to support struggling banks is unexpectedly under threat from fine print in EU rules that are days from passing into law. Fears that the lending programme – known as Emergency Liquidity Assistance (ELA) – would be unworkable have prompted a highly unusual scramble to revise the terms of legislation agreed months ago.
The implications of the new directive were spotted by officials in London, but the restrictions could potentially apply to any EU national central bank trying to extend loans as liquidity support. The directive is one of the central EU reforms since the financial crisis, which seeks to lift the burden of bank failure from taxpayers by imposing losses on creditors.
At the height of the 2008 crisis, the Bank of England extended loans amounting to an intraday peak of £61.5 billion to Royal Bank of Scotland and HBOS – an exposure which was only disclosed more than a year afterwards.
This concern – raised more than four months after a deal on the final text of the legislation was reached between the EU member states and European parliament – has prompted a flurry of backroom diplomacy to agree amendments to the law. Diplomats involved in the process are concerned over other, more central issues in the legislation being potentially reopened.
For example, the proposed compromise does not cover state guarantees of bank bonds – a different form of "extraordinary public support" preferred by other Member States. There was a fierce political battle over "precautionary recapitalisations" – with some Member States demanding that they should be permitted under strict conditions.
Philippe Lamberts, a Green MEP in the parliament negotiating team, said he would ideally prefer the text to remain as it was but was ready to back a compromise that limited the potential fallout for taxpayers. The Bundesbank, Irish and Belgian central banks all offered ELA during the crisis.