Regarding the article dated 16 June 2013 on the granting of Emergency Liquidity Assistance (ELA) to Laiki Bank, the Central Bank of Cyprus (CBC) would like to remind the following:
1. Until 21 March 2013, the two largest Cypriot banks were receiving ELA from the CBC, with no objection from the Governing Council of the European Central Bank (ECB), since the latter expected that a financial assistance programme would be implemented. On 21 March 2013, the ECB’s Governing Council announced that, in accordance with prior decisions, it would stop providing ELA to both Cypriot banks after 25 March 2013, due to the lack of clear and binding policy decisions on behalf of the Cypriot side to implement a preliminary agreed financial assistance programme.
2. The Cypriot banks, under the existing rules, remained solvent until 25 March 2013. The provisions for the losses of the two banks over a three year horizon, under Pimco’s adverse scenario, were not taken into account for the purposes of the banks’ balance sheet and, despite the capital shortages, these banks were considered solvent because of the prospect of recapitalisation through the financial assistance programme. It should be recalled that the preliminary Memorandum of Understanding (MoU) of November 2012 provided for an amount of €10 billion to recapitalise the banks in Cyprus. Consequently, the banks were considered to be solvent.
When the initial proposal put forward by the Eurogroup meeting held on 15 March 2013 was rejected by the House of Representatives, and therefore there was no prospect for a financial assistance programme through which the two banks would be recapitalised, then these banks were considered insolvent.
3. On 21 March, the ECB’s Governing Council announced that it would terminate ELA after 25 March to both Cypriot banks and demanded its repayment by 26 March. The implementation of this decision would have led to the disorderly bankruptcy of the two banks, due to the immediate activation of the Deposit Protection Fund, whose funds were not sufficient to cover the amount of insured deposits in both banks. The cost would have to be borne by the Cypriot state, which would have caused the disorderly bankruptcy of the country.
4. It should be emphasised that ELA is a tool through which liquidity is granted to a bank, upon the presentation of adequate collateral. However, in order to do this, banks must be solvent.
It is therefore used in crises, and national central banks have an important role to play as monetary authorities, since it is part of their remit to contribute to the smooth operation of payment systems and ensure financial stability. In general, ELA is a monetary tool which is granted when institutions do not have sufficient liquidity and they cannot obtain it through markets or through the normal participation in the Eurosystem’s credit operations.
ELA funding is not automatic, but rather is at the discretion of the national central bank. The central bank evaluates the seriousness of the situation and acts as a lender of last resort, providing ELA only after obtaining the consent of the ECB’s Governing Council.
5. Therefore, the provision of ELA by the CBC functioned and continues to function as a stabilising factor, preventing the disorderly bankruptcy of the Cypriot state.