What is the ECB’s Emergency Liquidity Assistance?

Greek banks have been heavily dependant on “Emergency Liquidity Assistance” (ELA) since being cut off from standard European Central Bank funding options in early February.

The ECB defines ELA as support given by central banks in “exceptional circumstances and on a case-by-case basis to temporarily illiquid institutions and markets”.

These are effectively loans given at the discretion of the national central bank of the country in question, although they have to be approved by the ECB.

The ECB adds that the national central banks may provide ELA “against adequate collateral” and only to “illiquid but solvent” credit institutions.

Any changes to the limits of ELA require a two-thirds majority in the ECB’s 25-member Governing Council.

The Governing Council approves maximum ELA amounts for each individual bank.

The exact details of ELA are not published but the average interest rate charged on it is estimated to be around 100 to 150 basis points above the ECB’s benchmark interest rate.

That rate is currently 0.05 percent.

The collateral banks post when using ELA is typically of a lower average quality than is normally accepted by the ECB. But a larger ‘haircut’ – or discount – is also usually applied to counterbalance some of the risks.

A key justification for ELA provision is to “prevent or mitigate potential systemic effects as a result of contagion through other financial institutions or market infrastructures.”

ELA loans sit on the balance sheet of the national central bank and therefore that of the Eurosystem of central banks (the euro zone’s 19 national central banks plus the ECB), but not directly on the ECB’s own balance sheet.

ELA is subject to the normal ban on the ECB financing governments set out in the central bank’s founding treaty.

It does appear in the ECB’s daily calculations of overall euro zone liquidity as part of the “autonomous factors” header. Governments are ultimately responsible for any losses from ELA given by their central banks, as they underwrite them.

Despite the stipulation that use of ELA should be temporary, Greece, Ireland and Cyprus have used it in the past during their crises to prop up their banks for months at a time.

Some national central banks, but not all, provide details on ELA use.

The Bank of Greece is currently providing just short of 88 billion euros ($99.88 billion)of ELA according to central bank sources.

(For ECB ELA procedures click https://www.ecb.europa.eu/pub/pdf/other/201402_elaprocedures.en.pdf?e716d1d560392b10142724f50c6bf66a) ($1 = 0.8811 euros)

This article is published in collaboration with Reuters. Publication does not imply endorsement of views by the World Economic Forum.

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Author: Marc Jones is a European Central Bank correspondent at Reuters. 

Image: The Euro sculpture is partially reflected in a puddle on a cobblestone pavement. REUTERS/Kai Pfaffenbach.