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
| Published date | 01 October 2019 |
| DOI | 10.1177/1023263X19855628 |
| Author | Sara Elisa Dietz |
| Date | 01 October 2019 |
| Subject Matter | Articles |
Article
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
Sara Elisa Dietz LL.M.(Harvard)*
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 com-
petence, 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 oper-
ations. 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 Eur-
opean 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.
Keywords
ECB, Lender of Last Resort, Eurosystem, Banking Union, Emergency Liquidity Assistance
* Doctoral Student at the Ludwig-Maximilians-Universita
¨tMu¨nchen, Munich; Guest Researcher at the Max-Planck-Institut
fu¨r Steuerrecht und O
¨ffentliche Finanzen, Munich, Germany
Corresponding author:
Sara Elisa Dietz, Max-Planck-Institut fu¨r Steuerrecht und O
¨ffentliche Finanzen, Marstallplatz 1, Munich 80539, Germany.
E-mail: sara.dietz@maximilianeum.de
Maastricht Journal of European and
Comparative Law
2019, Vol. 26(5) 628–668
ªThe Author(s) 2019
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DOI: 10.1177/1023263X19855628
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1. Introduction
To set the ground for the potential role of the European Central Bank (ECB) as Lender of Last
Resort (LOLR) in the Eurosystem, the paper begins by examining the current division of compe-
tences between the national central banks (NCBs) and the ECB in the Eurosystem in general and
describing the two different dimensions of central banks as LOLR – the traditional function of
financial assistance to individual institutions in case of temporary illiquidity and the LOLR
function as an open-market operation. The article focuses on the former, the conventional role
of central banks as LOLR and lays out the interplay of the NCBs and the ECB by granting
Emergency Liquidity Assistance (ELA) within the current legal framework taking into account
the latest ELA Agreement 2017.
1
At present the ECB undertakes a restrictive understanding of
Article 14.4 European System of Central Banks (ESCB) Statute and holds that ELA is not a task of
the ESCB, but instead remains within the residual competence of the Member States. However, the
NCBs have to notify the ECB about potential ELA measures and the ECB can veto ELA opera-
tions. Against this background the article discusses the possibility of a transfer of ELA compe-
tences to the ECB: the first question addressed is whether the current competence structure allows
for an ELA competence by the ECB; second, whether political, economic and fiscal considerations
also strike for a such a competence of the ECB. The paper argues that both the monetary policy and
financial stability mandate of the ECB can serve as a complementary basis for an ELA competence
of the ECB. However, they only justify a partial transfer of ELA competences to the ECB. Such a
partial transfer of ELA competences would be a coherent complementation of the Banking Union
and create synergetic effects with the Single Supervisory Mechanism (SSM) and Single Resolution
Mechanism (SRM). On this basis, the article concludes with a proposal for a new institutional
design of ELA competences. It argues for an ELA competence of the ECB with regard to ‘sig-
nificant’ banks, similar to the criteria the SSM establishes to determin e the significance of a
financial institution.
2. Background: the role of the NCBs within the Eurosystem
2
The institutional structure of the ESCB is shaped to accommodate the founding principles of the
European Union (EU), namely the principle of conferral (Article 5 (1) Treaty on the European
Union (TEU)) as well as the principle of subsidiarity and decentralization (Article 5(2) TEU). In so
far as competences have been transferred to the EU level, that is to the ESCB, the ESCB fulfills
these tasks. The ESCB comprises the ECB and the NCBs and in accordance with the principle of
decentralization, NCBs as the national authorities implement the ESCB’s policies, as outlined
below (section 2.A). At the same time, NCBs do not lose their capacity as national authorities when
they fulfil competences that have not been transferred to the European level but remain with the
Member States (section 2.B). Therefore, the NCBs are often metaphorically described as wearing
1. This article is the result of my LL.M. paper which I wrote under the supervision of Professor Hal S. Scott, Emeritus
Nomura Professor of International Financial Systems of the Harvard Law School.
2. The ESCB (European System of Central Banks) consists of the ECB and the NCBs (see Article 282(1) TFEU). The
Eurosystem – a term which was first coined in the Lisbon Treaty – comprises the ECB and those NCBs, whose currency
is the Euro, and conducts the monetary policy of the Union (see Article 282 (1) TFEU). Although most provisions of the
TFEU and the ESCB Statute refer to the ESCB, the conduct of monetary policy is effectively carried out by the
Eurosystem. (see R. M. Lastra, International Financial and Monetary Law (2nd edition, Oxford University Press, 2015),
p. 248). This paper will only focus on the Eurosystem as a reference point of discussion.
Dietz 629
‘two hats’ – in the first scenario they act as agents within the ESCB fulfilling tasks at the European
level and according to EU law; in the second scenario they act in their capacity as national
authorities, within their own responsibility according to national law.
3
These two different situa-
tions will now be further illustrated.
4
A. The NCBs as European agents – A cooperative system between the ECB and NCBs
Article 3 TEU has given the EU
5
the exclusive competence to conduct the single monetary policy
for the Member States, which share the Euro as a single currency. Article 119(2)(3) in conjunction
with Article 127 and 282 Treaty on the Functioning of the European Union (TFEU) delegate the
task of defining, conducting and implementing the monetary policy of the Eurozone to the ESCB
and construe price stability as its primary objective. As Article 1 ESCB Statute and Article 282
TFEU stipulate, the ECB and the NCBs constitute the ESCB, thereby laying the foundation for the
dual structure of this ‘hybrid European-national entity’,
6
the European Banking System.
7
Accord-
ing to Article 12.1(1) and (2) ESCB Statute, it is the tas k of the Governing Council and the
Executive Board of the ECB to formulate and conduct the monetary policy of the Union. Although
the decision-making process is hence centralized at the EU level within the ECB bodies, the second
step of implementation is decentralized,
8
because the Executive Board is prompted by the ESCB
Statue (Article 12.1(2)) to give necessary instructions to NCBs, which then implement the mon-
etary policy measures.
9
As Article 12.1(3) ESCB Statute makes clear, ‘the ECB shall have recourse
to the national central banks to carry out operations which form part of the tasks of the ESCB’. The
NCBs act as ‘ECB agents’
10
on behalf of the ECB, which takes full responsibility for the NCBs’
actions, and thereby become an ‘integral part of the ESCB’ (Article 14.3 ESCB Statute). This
institutional dual structure is applicable when the ESCB is fulfilling the tasks that were conferred
to it to according to Article 127 TFEU, which is primarily the conduct and implementation of the
monetary policy (Article 127(1) TFEU).
3. M. Hallerberg and R.M. Lastra, ‘The Single Monetary Policy and Decentralization: An Assessment’, European
Parliament (2017), http://www.europarl.europa.eu/thinktank/en/document.html?reference¼IPOL_IDA(2017)607345,
p. 5.
4. M. Selmayr, ‘Art. 282’, in H. von der Groeben, J. Schwarze and A. Hatje (eds.), Europa
¨isches Unionsrecht (7th edition,
Nomos, 2017).
5. As the following analysis shows, it is ultimately neither the EU as a legal entity nor solely the ECB as a legal entity at
the supranational level, that is vested with the monetary policy, but rather the ESCB; compare: M. Waibel, ‘Monetary
Policy: An Exclusive Competence Only in Name?’, in S. Garben and I. Govaere (eds.), The Division of Competences
between the EU and the Member States (Bloomsbury, 2017), p. 105.
6. M. Waibel, in S. Garben and I. Govaere (eds.), The Division of Competences between the EU and the Member States,p.
105; see also M. Selmayr, ‘Art. 282 AEUV’, in H. von der Groeben, J. Schwarze and A. Hatje (eds.), Europa¨isches
Unionsrecht,§7.
7. R.M. Lastra, International Financial and Monetary Law, p. 248.
8. Ibid., p. 256; M. Selmayr, ‘Art. 282 AEUV’, in H. von der Groeben, J. Schwarze and A. Hatje (eds.), Europa¨isches
Unionsrecht, § 23.
9. C. Zilioli and P. Athanassiou, ‘Art. 14 Satzung des Europa¨ischen Systems der Zentralbanken und der Europa¨ischen
Zentralbank’, in H. von der Groeben, J. Schwarze and A. Hatje (eds.), Europa¨isches Unionsrecht (7th edition, Nomos,
2015), § 37.
10. M. Selmayr, ‘Art. 282 AEUV’, in H. von der Groeben, J. Schwarze and A. Hatje (eds.), Europa
¨isches Unionsrecht,§
24.
630 Maastricht Journal of European and Comparative Law 26(5)
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