ECB belatedly looks to reign in liquidity assistance

The European Central Bank (ECB) is considering tightening the secretive emergency liquidity assistance (ELA) regime that allowed the Central Bank here to extend vast amounts of debt to Irish banks during the crash.

ELA is a form of emergency funding that allows national central banks, including ours, to directly create and pump cash into struggling commercial banks outside the normal ECB money creation regime.

At the peak in 2012 Irish banks owed €67bn in ELA loans, and the debts were named in the controversial Jean Claude Trichet letters to the late Brian Lenihan in 2010 as a key reason why Ireland was forced into a national bailout.

The loans are given at the discretion of the national central bank although they have to be approved by the European Central Bank.

A source, speaking on condition of anonymity, told Reuters that the ECB has held discussions at working level focused on limiting the period of time for which banks could make use of ELA.

Christian Schulz, an economist at Berenberg bank, said any such move to restrict the use of ELA would play well in Germany, where ECB policy is widely seen as being too loose.

This could go some way to assuaging German concerns about the ECB embarking on a round of sovereign bond purchases – a possibility it is considering.

“I think that will go down well in some part of the German media and at the Bundesbank,” he added.

Irish Independent

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