Cross-posted from Lex Live — Lex’s new, free, blog. Lex has also been writing notes this week on the consequences of independence for sovereign debt, banks, and Scotland’s oil industry…
Or, why it isn’t surprising at all that RBS and Lloyds would move their respective holding companies to the UK, probably overnight, if Scotland voted to become independent. Despite the odd packaging of this as NEWS by the UK press.
It’s the emergency liquidity (or ELA). Click chart to enlarge:
FT Alphaville began writing in detail about emergency liquidity assistance in the eurozone — that is, national central banks lending to stricken, but supposedly solvent banks on highly secretive terms, against collateral not accepted at the ECB — some two and a half years ago.
Throughout that period, the ECB’s precise oversight of this liquidity assistance remained in the dark. Despite the risk being taken by taxpayers, and despite the fact ELA effectively stopped the Greek, Irish and Cypriot banking systems from going under at various points. And despite procedures having been in place since 1999 for the ECB to restrict ELA by a national central bank if it endangers the rules of the euro (as used in Cyprus). Read more
Yes, it’s hardly a neutral document on the matter.
Still, there are lots of interesting charts in the UK government’s latest report on the finance and economics of Scotland becoming a sovereign state, this time covering the dangers from banks…
…Although we think they missed one.*
A “one-off” often isn’t. Calling something after “stability” isn’t very stable. Saying that something is not a precedent usually makes it one.
Presenting the Cyprus bailout’s “upfront one-off stability levy” for depositors in Cypriot banks: Read more
Yes the IMF calls for common eurozone deposit insurance, in this new banking union paper. But also look at what they suggest on emergency liquidity assistance:
Lender of last resort. The lender of last resort makes liquidity support available to solvent yet illiquid banks. Centralizing all LOLR functions at the ECB would in the steady state eliminate bank-sovereign linkages present in the current ELA scheme (see Box 1). This would require changes to the ECB’s collateral policy, as by definition euro area banks that tap ELA cannot access Eurosystem liquidity owing to collateral constraints. Until such time as all banks are brought under the ECB’s supervisory oversight, ELA would be sourced through both the ECB (for banks brought under its purview) as well as national central banks (for banks that remain under national supervision, albeit with adjustments made to the national ELA limits).
Which would be nothing short of a revolution. Read more
And why this could well have been the best possible deal for Ireland.
________________________ Read more
***DRAGHI “THERE IS NO MORE ELA”***
***WE THINK THAT’S A PROMISSORY NOTES ‘DEAL’***
Click for the feed from the Irish parliament, where legislators have until the morning to pass an emergency bill liquidating Anglo Irish’s resolution company, unlocking a promissory note deal which might be on its way, before creditors of Anglo hit the LITIGATE button. Or something. (The entire prom note deal is needed by the Irish government before the notes’ next circa €3bn interest payment, because that’s what they promised the public.) Read more
*NOONAN SAID TO PLAN ANGLO IRISH SPEECH IN PARLIAMENT
A few hours later… Read more
So, we’re going to the wire once again in the now traditional dance between Greece and the troika. As the FT reported on Thursday:
Eurozone leaders face a new round of brinkmanship over Greece’s €174bn bailout after international lenders failed to bridge differences on how to reduce Athens’ burgeoning debt levels, pushing the country perilously close to defaulting on a €5bn debt payment due next week.
The European Central Bank has recently started talking more about risk, and in particular the risks to its balance sheet. Yesterday, Standard Chartered analysts Thomas Costerg and Sarah Hewin had a note out talking about how the ECB was concerned about capital outflows from the periphery being replaced by TARGET2 inflows, and how TARGET2 imbalances might lead to a more fragmented policy. From StanChart:
ECB President Draghi recently hinted that managing risks was his utmost priority, further differentiating the ECB from other major central banks (Japan, US, UK), which have shown less reluctance about conducting broad-based quantitative easing (QE). Read more
Finally, we have seriously reiterated our request to take advantage of a direct financing line from the Greek Central Bank, via the ELA (emergency liquidity assistance), the public tool of access to banking liquidity...
That’s Crédit Agricole’s chief executive at Tuesday’s shareholder meeting, on the funding options for the bank’s Greek albatross, Emporiki. Via Reuters. We smell no fear of stigma here. Read more
NOT HALTING. SHIFTING. THEN IT GOES BACK LATER.
Today was really not the best day for the ECB to signal this: Read more
From the FT:
Athens-based bankers said withdrawals exceeded €1.2bn on Monday and Tuesday – 0.75 per cent of deposits – as President Karolos Papoulias failed in two final meetings with conservative, socialist and leftwing leaders to form a national unity government. Read more
For every 10 euros of the European Central Bank’s now almost €1,200bn of ‘normal’ liquidity supplied to banks, picture one euro of Emergency Liquidity Assistance from national central banks.
Now imagine there’s just under 10 cents within the ‘ELA’ euro which are even shadowier. (It’s a conceit, we know – just bear with us.) Read more
We have an Irish promissory notes deal! A weird one.
This is not the deal to restructure the notes (used to reanimate the IBRC, the Anglo Irish after-life vehicle) overall. This is not a deal ‘with’ the ECB at all, technically. It’s in order to defer a €3.06bn cash payment that Ireland would have had to send to the bank at the end of this month. One plan was to swap out the cash for a long-term Irish government bond, achieving the deferral for, potentially, the bond’s lifetime. Read more
Pacta sunt servanda
- Olli Rehn, noted scholar of Latin (‘pacts are binding’) Read more
The Government agrees that a limited statutory power of direction for the Chancellor over the Bank in a time of financial crisis would be helpful in clarifying lines of responsibility and accountability…
Or — an interesting power-shift in the UK’s Financial Services bill, just published by the Treasury at pixel time. Read more
(Aren’t all the best stories collateral stories nowadays?)
Cast your minds back to December. Borrowing from the ECB Marginal Lending Facility is ballooning past €5bn – and staying there for days on end – despite its penalty rate. Read more
It is an irrevocable, unconditional, direct, autonomous and first demand guarantee. The guarantee is joint but not several, and the allocation between the States (respectively 60.5, 36.5 and 3% for Belgium, France and Luxembourg) remains the same. The guarantee covers financial contracts and securities…
Yep. Dexia. Read more
Nov 23 (Reuters) – France, Belgium and Luxembourg are discussing how to provide temporary state debt guarantees for failed financial group Dexia… the deal has still to be confirmed, leaving the bank dependent on emergency liquidity assistance of about 30 to 40 billion euros ($40.5 – $54 billion), the [Belgian De Tijd] paper said.
Remember the guarantees would be parcelled out among the three governments, according to a ratio that may, or may not, be up for negotiation. Until then… Read more
Update — See reader comment below. This may be a case of mistaken identity (or a Bank of Greece accounting change), not liquidity usage in July. We stand corrected if this is accounting changes. ELA’s not easy to spot!
___________________ Read more
Things you might not have noticed in recent Greek bank results:
Eurobank EFG ability to generate recurring profits is reflected in pre provision income, which amounted to €749m in 1H2011 or €324m in 2Q2011, slightly down by 3.5% over 1Q2011, mainly due to lower trading income, higher net interest income and lower costs. Read more
A tidy scoop from RTE, who’ve uncovered key Irish government documents setting up Emergency Liquidity Assistance to banks:
Among things you can find out from reading the IMF staff’s 172-page fourth review of the Greek bailout:
1) The Greek central bank is making contingency plans for providing lenders with emergency liquidity assistance outside the European Central Bank (p. 16): Read more
Ireland has made an unwelcome name for itself as a country where a state and financial system have become most uncomfortably entwined — the sovereign-bank loop on steroids, if you will.
Just think of that Emergency Liquidity Assistance (ELA) which sees the Irish central bank accepting far dodgier collateral in return for loans to banks than the European Central Bank’s own-brand of repos. Or the Eligible Liabilities Guarantee (ELG) scheme — in which the Irish state guarantees certain bank deposits plus new bank debt securities issued with a maturity of up to five years. Or Irish banks issuing Ireland-guaranteed (i.e. ELG) bonds to themselves to use as collateral at the ECB’s facilities. Read more
The heart of Europe’s single currency union lies not in some grandiose parliamentary hall in Brussels, but in a little-known payment system platform with the unimpressive title of, “Target2“.
Just think of two eurozone banks. Imagine, say, Dublin Depository and Berlin Bank. Read more
Right. Ignore our eurozone liquidity maths from last week.
ECB unlimited liquidity + ELA unlimited liquidity = eurosystem unlimited liquidity, more or less. That should be; ECB unlimited liquidity + ELA unlimited liquidity ≠ eurosystem unlimited liquidity, according to Nomura’s Lefteris Farmakis. Read more
We already knew Irish banks’ reliance on emergency lending is higher than ever — but how high can it go?:
While the Irish banks’ dependence on ECB funding dropped by another €9bn in February, their use of the Irish central bank’s Emergency Liquidity Assistance facility is estimated to have risen by nearly €19bn (currently standing at €67bn), thus yielding a net increase of €10bn. Furthermore, lending data for February (published on the 25th) included a €17bn tap from the ECB’s overnight Marginal Lending Facility; the subsequent decrease in autonomous factors by a roughly equal amount indicates that this €17bn tap has also been shifted to ELA. Consequently, our expectation is that “Other assets” in the balance sheet of the Irish Central Bank will rise by at least 17bn in March. Read more