By the end of March, Cypriot ELA peaked at 11.4 billion with Laiki, which was subsequently shut down, receiving close to 9.5 billion. Its ELA debt is now weighing down
But what is ELA?
We must understand that when we deposit money to a bank, it does not keep our money stashed away ready for withdrawal upon request.
If customers withdraw money en masse the bank could collapse. This is what happened to
Under normal circumstances banks lend to each other in good faith (no collateral required) on the interbank money market charging interest.
If banks don't trust each other and therefore do not lend to each other, weaker banks may find themselves in a tight liquidity situation.
If a bank is unable to borrow from the interbank market, then it can borrow from the
If a bank is shut out from the interbank money market and does not have high quality assets for ECB lending, then the bank's domicile
As per ECB guidelines: "ELA means the provision by a Eurosystem NCB of: central bank money to a solvent financial institution that is facing temporary liquidity problems Responsibility for the provision of ELA lies with the NCB(s) concerned."
The amount of ELA given appears on the NCB's financial statements on the asset side of the balance sheet and is called "other claims on euro area institutions denominated in euro" the same terminology is applied throughout the eurozone. NCB's must publish their financial statements every month.
We have established that ELA is launched on the initiative of a NCB not the ECB and it is given to solvent institutions, meaning institutions with sufficient assets to be mortgaged with their domicile NCB in exchange for ELA.
The ECB also plays an active role. Specifically, the ECB must be informed by the NCB on: the amount of ELA that was disbursed, the recipient bank, the collateral/guarantees given, ELA's interest rate and an assessment of the bank's short and medium term solvency and liquidity positions.
This information must be submitted to the ECB either before or after the NCB launches an ELA programme. However, if the overall volume of ELA given reaches the 500 million threshold, the ECB must be informed prior to any extension of the programme.
If the NCB intends to provide more than 2 billion in ELA, the governing council of the ECB (the 18 national central bankers of the eurozone) must consider the risks from the continuation of the ELA operation and may reject an extension. ECB's bylaws state that a two thirds majority vote of the council is required to halt ELA operations.
By the end of
Compounding Laiki's problems further was the haircut of Greek bonds, agreed by
Therefore, Laiki needed capital and sustained huge losses to its Greek bond portfolio by more than 50 per cent. Moreover, Laiki's exposure to the recession-hit real estate sector and to
ELA is provided to a solvent bank that is facing temporary liquidity problems. Laiki's solvency at this stage was questionable and its liquidity problems were not temporary, the implication being that the
Even more alarming is the stance of the ECB. By the end of
We all know that Laiki's ELA was dumped on the
The CBC had, in theory at least, sufficient assets mortgaged by Laiki that could be liquidated and recover part of the sum. In addition, since CBC bears the risk and cost arising from the provision of ELA it should have absorbed any loss incurred by overextending ELA to Laiki.
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