Wednesday, May 16, 2012

ECB making Greek central bank conduit for providing liquidity to Greek banks

In a sign that the ECB is nervous about the quality of the collateral that the Greek banks have available to post for funds, the ECB is making the Greek central bank act as a conduit for providing the funds.

Previously, the Irish central bank did this for the Irish banks.

Given what is happening in Spain, Italy and France, it is highly likely that in the not very distant future, their central banks will be acting as a conduit for providing funds too.

According to MarketWatch,

The European Central Bank is increasingly refusing requests for liquidity from Greek banks, making them dependent on support from the Greek central bank, Dutch financial daily Financieele Dagblad reports Wednesday, citing “sources in Brussels.” 
At the end of January, Greek banks had received EUR73 billion in liquidity support from the ECB, but this amount has dropped by more than 50% now, according to the newspaper. 
The ECB is cutting back support because Greece has been holding off on recapitalizing its banking system, despite receiving EUR25 billion in funds for that purpose, the paper says.
Since central banks do not lend on the basis of capitalization of the banking system, but rather follow Walter Bagehot's dictum of lending against good collateral, I am not sure why the ECB would involve itself in the issue of did Greece recapitalize its banks or not.

According to a Bloomberg article on the shift by the ECB to funding the Greek banks through the Greek central bank,

The European Central Bank said it will temporarily stop lending to some Greek banks to limit its risk as President Mario Draghi signaled the ECB won’t compromise on key principles to keep Greece in the euro area. 
The Frankfurt-based ECB said today it will push the responsibility for lending to some Greek financial institutions onto the Greek central bank until they have sufficiently boosted their capital. 
“Once the recapitalization process is finalized, and we expect this to be finalized soon, the banks will regain access to standard Eurosystem refinancing operations,” the ECB said in an emailed statement..... 
A 130 billion-euro ($165 billion) bailout earlier this year provided a 50 billion-euro fund to recapitalize Greek banks after they reported losses from the country’s debt restructuring, the largest ever. 
Greece’s four biggest banks are waiting for European Union approval to receive 18 billion euros of bonds issued by the European Financial Stability Facility for their recapitalization, Imerisia reported today, without saying how it got the information. 
The ECB can only lend to sound banks and therefore won’t allow undercapitalized institutions to access its refinancing operations, a euro-area official said on condition of anonymity.
How would the ECB know which banks are sound banks and which are undercapitalized institutions?

The European Banking Authorities' stress tests have passed banks that subsequently needed to be nationalized.
Greek banks locked out of those operations will have to tap the so-called Emergency Liquidity Assistance program via the Greek central bank, the ECB said. The ECB “continues to support Greek banks,” it said.

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