Emergency liquidity assistance to troubled banks in the euro area probably jumped last week after the European Central Bank moved some Greek institutions off its centralized refinancing operations.
In the financial statement of the euro system for the week ending May 25 published by the Frankfurt-based ECB today, “other claims on euro-area credit institutions denominated in euro” rose 34.1 billion euros ($42.8 billion) to 246.6 billion euros. The ECB says ELA is recorded under this item, though it contains more than just ELA and the bank has declined to break down the data.
Under ELA, the 17 national central banks in the euro area are able to provide emergency liquidity to banks that can’t put up collateral acceptable to the ECB for refinancing operations. The risk of the lending is then borne by the central bank in question, ensuring any losses stay within the country concerned and aren’t shared across all euro members. On May 17, the ECB confirmed it had moved some Greek banks onto the ELA program of Greece’s central bank until they are recapitalized.
“Via ELA, the ECB is putting pressure on policy makers to recapitalize banks,” said Thomas Costerg, an economist at Standard Chartered bank in London. “Although Greece’s ELA program has grabbed the headlines recently, ELA funding could spread to other euro-area countries should economic headwinds increase, confidence deteriorate or if banking-sector recapitalization efforts were seen as too slow.”
The euro fell to its lowest level against the dollar since July 2010 as investor concern about Spain’s ability to recapitalize banks increased. The euro traded 0.5 percent lower at $1.2480 at 7:10 p.m. in Frankfurt. Egan-Jones Ratings Co. reduced its credit rating for Spain to B from Bb-.
The ECB’s move to put some Greek banks on ELA funding may be the cause of a drop in its outstanding longer-term refinancing operations, or loans of longer than one week.
LTRO loans of 21.4 billion euros were “repaid before maturity,” the ECB said in today’s statement, reducing the total outstanding amount to 1.061 trillion euros. The ECB lent euro-area banks about 1 trillion euros in two three-year LTROs in December and February.
ELA loans require the assent of the ECB’s 23-member Governing Council and carry a penalty interest rate, though the terms are never made public.
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