Emergency Liquidity Assistance (ELA) Facilities

Since ELA is back in the news* here is some recycled background on these facilities and how they fit into the ECB’s monetary strategy…*Q&A: emergency liquidity assistance and Greece’s banks, Financial Times, 16 May 2012

The Emergency Liquidity Assistance (ELA) facility gives all national central banks (NCBs) in the euro area the ability to support domestic financial institutions, over and above the assistance provided by the Eurosystem in “exceptional circumstances and on a case-by-case basis to temporarily illiquid institutions and markets”.

Examples include Bundesbank support for German banks (2008), the Irish Central Bank’s help to Irish banks (2010) plus the Greek central bank’s assistance to domestic banks in 2011; because of their sensitivity, terms (rates, collateral, haircuts, maturity, etc) are not usually disclosed.

Providing liquidity support through ELA is not a function of the NCBs that arises from their membership in the ESCB or Eurosystem; it occurs separately from the non-standard measures (such as Enhanced Credit Support) which are provided by the Eurosystem to safeguard financial stability in the euro area.

Because ELA is not an ESCB or Eurosystem function, the decision to provide such assistance to a financial institution lies primarily with the relevant NCB.

Costs and liabilities arising from ELA support are not pooled or shared by the other members of the Eurosystem ; ELA provisions are made at the NCB’s own risk and potential cost.

The ECB has the power to stop NCBs from offering ELA if there are signs that such support would interfere with the Eurosystem’s EMU-wide responsibilities for price and financial stability.

Ireland’s secret liquidity is unbelievably cheap, Financial Times, Feb 2011
ELA: An Emperor without Clothes?, Citigroup Global Markets Research, Jan 2011
Dublin warned over ECB liquidity, Financial Times, 15 Nov 2010
ECB objectives and tasks, Deutsche Bank Research, Mar 2008
The EU arrangements for financial crisis management, ECB Monthly Bulletin, Feb 2007