European Central Bank says can’t be overly generous with emergency loans

By: | Published: July 8, 2015 12:10 AM

The European Central Bank cannot provide emergency funding to banks on overly generous terms or against insufficient collateral, it said on Tuesday, spelling out strict terms for banks in Greece and elsewhere to obtain such funds.

The European Central Bank cannot provide emergency funding to banks on overly generous terms or against insufficient collateral, it said on Tuesday, spelling out strict terms for banks in Greece and elsewhere to obtain such funds.

The ECB, which has been providing an Emergency Liquidity Assistance (ELA) lifeline to Greek banks, on Monday raised the discount on the collateral Greece must put up in return for the cash, keeping pressure on Prime Minister Alexis Tsipras hours ahead of a meeting with other euro zone leaders.

In a document published on its website on Tuesday, the ECB spelt out instances in which ELA provision would conflict with its objectives, saying it could not be supplied by national central banks against insufficient collateral and on generous terms that invited “moral hazard”.

“Provision of ELA at overly generous conditions… could increase the risk of moral hazard on the side of financial institutions or responsible authorities,” the bank said in the document.

Other examples of possible conflict included situations in which ELA would run the risk of amounting to government financing or conflict with the single monetary policy of the euro zone.

Under ECB rules, ELA is designed to support solvent banks in need of liquidity. It is provided by national central banks after ECB approval.

Some members of the ECB governing council have long voiced reservations about ECB aid to Greek lenders, with Germany’s Jens Weidmann recently questioning their solidity.

The ECB acknowledged that, in general, risks associated with emergency lending were not fully offset by the provision of collateral.

“Even after risk control measures have been applied, some residual risks remain,” the bank said in the document.

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