The Eurosystem (all national central banks and the European Central Bank) provides liquidity to banks that request it, mainly through open market operations (operations at market conditions, weekly and longer-term loans), in addition to marginal lending facilities (overnight loans). All of these loans are granted in exchange for assets, collateral (sovereign debt securities, etc.), intended to guarantee that central banks will recover the amount of their loans in the event of default by a bank. The list of assets is defined by the Eurosystem and, in theory, contains only securities considered to be safe. A bank cannot therefore access its national central bank’s counter without holding assets from this list.
In the context of the European debt crisis, the Eurosystem excluded a number of assets, particularly those from peripheral eurozone countries, following the deterioration in their value. Greek sovereign debt securities, for example, were temporarily declared too risky, making it difficult for many Greek banks to access liquidity at a time when their needs were significant.
To prevent banks losing access to Eurosystem liquidity from encountering excessive difficulties, the Emergency Liquidity Assistance program was set up. Under this program, national central banks can now lend directly to banks in their country by defining their own criteria for assets accepted as collateral. The loans are then made as part of exceptional liquidity support operations. In the case of Greece, this means that the Greek central bank can now decide to lend to Greek banks in exchange for Greek sovereign debt securities. In doing so, the NCB assumes the risk of losses alone: in the event of default, the losses will not be mutualized at the euro area level.
Charles B.
