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Very interesting.

Seems the ECB can use this facility to ‘replace’ lost deposits of any bank, which would seem to remove the ‘bank run’ risk.

However, it is supposed to be only for very short term liquidity needs.

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>   On Wed, Dec 3, 2008 at 2:54 AM, Dave wrote:
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>   Not sure if any of the following is new info but was an interesting read
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>   DV
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Emergency Liquidity Assistance in the euro area

A Belgian newspaper (La Libre Belgique) is currently running a fascinating series of articles on the collapse of Fortis and Dexia.

In one article (lalibre.be/economie/actualite/article/464148/chapitre-7-la-trahison-des-hollandais.html) it mentions that Fortis benefited from an Emergency Liquidity Assistance from the NBB at the end of September for an amount of about €50bn. This confirms our own findings that showed such a loan on the balance sheet of the NBB (most of it was in $, see NBB loans to Fortis: About €50bn at the end of September 2008, 16 October 2008).

What is interesting is that it sheds a bit more light on a mechanism that is available on a euro area basis, and that up until now had been referenced only infrequently by the ECB. For example, the December 2006 edition of the Financial Stability Review (p.171) has the following description:

“One of the specific tools available to central banks in a crisis situation is the provision of emergency liquidity assistance (ELA) to individual banks. Generally, this tool consists of the support given by central banks in exceptional circumstances and on a case-by-case basis to temporarily illiquid institutions and markets. This support may be warranted to ease an institution’s liquidity strains, as well as to prevent any potential systemic effects, or specific implications such as disruption of the smooth functioning of payment and settlement systems. However, the importance of ELA should not be over-emphasised. Central bank support should not be seen as a primary means of ensuring financial stability, since it bears the risk of moral hazard. Furthermore, ELA rarely needs to be provided, and is thus less significant than other elements of the financial safety net, which have increased in importance in the management of crises.”

Apparently, these credit lines can be given by the various national banks, against collateral (including all the buildings of the retail banks network, in the case of Fortis!) and a ‘high’ rate of interest. But these credit lines need to be approved first by the ECB Governing Council and all 15 governors of the individual central banks. According to press reports, in a few days at the end of September, there were no less than 15 ECB teleconference calls to approve such ELAs to Belgian banks (Fortis and Dexia) but also German and Irish banks (probably Hypo Re since the bailout was at about the same time).

Looking at the balance sheets of the individual central banks it is quite difficult to have a complete picture of how much of these ELAs have been extended: while it was relatively clearly identified on the NBB balance sheet, it does not look like it was the case on the Bundesbank balance sheet, and to our knowledge the ECB as such has not given any figure on such credit lines. It is interesting, though, that such a mechanism existed. It is still available if needed in case of emergency, even if to a certain extent the existence of the guarantee schemes (introduced after this) may make its use slightly less necessary.

In addition it seems that Trichet was quite involved in the discussions, warning that Fortis did not have enough liquidity even after the capital injection that occurred over the weekend of 27-28 September (the ELA was probably extended from the Monday onwards, and it was after the next weekend that the Fortis share price really took a dive to below 1).

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