The ECB as Lender of Last Resort in the Eurozone? An analysis of an optimal institutional design of Emergency Liquidity Assistance competence within the context of the Banking Union

Abstract

The latest financial crises in Europe and the United States have reminded us of the importance of the role of central banks as Lender of Last Resort. This article examines the current legal framework in the European Union with regard to the allocation of Lender of Last Resort competence, which until now has been exercised by the national central banks in the Eurozone. The new Emergency Liquidity Assistance Agreement 2017 sustains this institutional design, leaves the Emergency Liquidity Assistance competence with the national central banks and specifies the cooperation between the European Central Bank and the national central banks with regard to the veto-option of the European Central Bank to national Emergency Liquidity Assistance operations. Against this background, the paper discusses whether the current legal competence structure of the European and Monetary Union would also allow for more authority of the European Central Bank with regard to Emergency Liquidity Assistance powers. The paper concludes there is a sufficient legal basis in the monetary policy and financial stability mandate of the European Central Bank to allow it to grant Emergency Liquidity Assistance at least with regard to ‘significant’ banks, as defined under the current European Banking Supervision regime.