Laura Noonan explains how Central Bank provides emergency liquidity

andycole

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Hi everyone -

State of emergency: some truths on the funds keeping our banks afloat

Link to Story: http://www.independent.ie/business/irish/state-of-emergency-some-truths-on-the-funds-keeping-our-banks-afloat-2533375.html

I would like to hear some opinions and feedback of what is being discussed here in this article in today's Irish Independent - what is meant by ELA Emergency Liquidity Assistance; is this the IMF Bailout Fund that is being described? At the beginning of this article it is suggested that the Department of Finance and the Central Bank of Ireland are not telling anyone what is going on? Is what is being described here the fact that the Central Bank of Ireland are now printing Euro's as we have ran out of cash e.g. ATM machines etc..?


"Ireland is now home to the biggest ELA scheme in the world -- in proportional terms -- with taxpayers here on the hook for about €50bn of emergency cash that's been channelled through the Central Bank of Ireland (CBI) into our banks.

Despite the massive sums involved, the CBI and the Department of Finance have repeatedly refused to comment on the operations while the money maestros at the ECB have been similarly reticent."
 
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Sunny

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It has nothing to do with the IMF bailout fund. It is tool used by National Central Banks to deal with liquidity stress in banks. Basically banks are allowed lodge collateral with the Irish Central Bank that the ECB won't wont accept and recieve cash in exchange. In Ireland's case, the main collateral is the promissary notes given by the Government into Anglo and Irish Nationwide. Irish banks are also running short of collateral that they can use with the ECB and so are having use 'riskier' assets for collateral. I would imagine that the banks simply used the cash to pay back State guaranteed debt that was due at the end of last year.
It is probably the most secretive part of central bank operations when it comes to liquidity and it is pretty much a last resort from Central Banks (Needs ECB approval). Having said that, there is a load of rubbish going around about the scheme such as the Irish Central Bank is printing euro.
 

Brendan Burgess

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Andy

That is a great article. Thanks for bringing it to our attention. It is the first attempt which I have seen to explain how the ELA works.

I think that the key point here is that the Irish Government has guaranteed the liabilities of the banks. The Irish Government guarantees the liabilities of the Central Bank, I presume.

Let's take Anglo.
The Irish Government has lodged €25 billion in Promissory Notes.
This is an asset and a liability of Anglo. It is money owed to the government and it is money owed by the government.
If the Central Bank puts €20 billion into Anglo, they would have got the Promissory Notes as security.
So the Central Bank can demand that the government pays it the €20 billion.

In other words, the total liability of the State has not changed.
 

Sunny

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Next piece on the subject

http://www.independent.ie/business/irish/bank-giant-citi-plays-down-risk-of-ela-assistance-2540407.html

They are getting nearer but are still incorrect in my opinion by saying a minimum of €18 billion exposure to the taxpayer as the loans would be collateralised albeit with lower quality assets.

At least we are finally beginning to move past the scaremongering and thanks to Brendan's piece on another thread, we are getting away from headline figures of €300 billion national debt that I heard one commentator come out with recently.
 

Brendan Burgess

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Folks

I have deleted some comments praising the article which then went on to criticize others.

This is not a discussion forum. This forum is for establishing the facts.
 

Duke of Marmalade

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This note from Citigroup which is also good doesn't seem to quite align with Laura's piece.
Citigroup said:
We leave you with a final thought. If the Irish banks cannot borrow additional
amounts from the Eurosystem using collateral issued by or guaranteed by the
Irish sovereign, why are they interested in borrowing from the CBI’s ELA? At
best, the liabilities of the ELA are as good (in terms of credit risk) as the Irish
sovereign. Are the counterparties of the Irish banks that get paid with the liquid
assets provided to the Irish banks by the ELA, under the impression that these
assets are Eurosystem liabilities rather than liabilities of the informal ELA
subsidiary of the Central Bank of Ireland that is not part of the Eurosystem.


Why does anyone accept payment in ELA liabilities? Is it because no-one can
tell the difference between an ELA deposit at the CBI and a Eurosystem deposit
at the CBI?

This is a bit hard to follow but it seems to be suggesting that the banks who accept funds drawn on the CBI ELA are not covered by the Eurosystem/ECB. Laura states quite clearly that in fact these funds come in the form of a "cheque from Frankfurt". In other words according to Laura what happens is as follows: Irish Bank lodges asset pool with CBI, Frankfurt writes cheque to Irish Bank and debits the CBI's account with the ECB. According to Citigroup, The Irish bank gets a credit to its account with the CBI (backed by a debit), it uses this credit to pay its counterparty but that counterparty then has a credit with the CBI which is not within the ECB system.​


Personally I think the Citigroup explanation is a bit of nonsense (apologies for criticising another report when we are seeking facts:eek:) and Laura's makes much more sense and is explained a lot clearer too.​
 

Sunny

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I don't understand what they are saying in that paragraph at all. Must read the document and might make more sense.
 

Duke of Marmalade

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I don't understand what they are saying in that paragraph at all. Must read the document and might make more sense.
Sunny, I somewhat messed up the quote but I have fixed it now. I would be interested in your take. Looks like Citigroup were trying to be oh so clever, they are suggesting that those counterparty banks who are accepting this liquidity don't know what they are doing. I think Laura's explanation is much more plausible. Hers is a very well researched piece so much better than the scare stories on this particular aspect that I have seen from others, but it must surely be as a result of very well informed contacts which is what good journalism is all about.
 

Sunny

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Duke, I dont get the point they are making about counterparties of the Irish banks that get paid from the liquid assets of the ELA scheme not realising that these are from the ICB and not the ECB. Surely the ICB is providing cash to the Irish banks so why would a counterparty care where the cash came from as long they are paid? Citi are usually pretty good so will reserve judgement but that paragraph is very confusing.
 

Duke of Marmalade

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Duke, I dont get the point they are making about counterparties of the Irish banks that get paid from the liquid assets of the ELA scheme not realising that these are from the ICB and not the ECB. Surely the ICB is providing cash to the Irish banks so why would a counterparty care where the cash came from as long they are paid? Citi are usually pretty good so will reserve judgement but that paragraph is very confusing.
Sunny when I first read this Citi piece I believed them. But then some obvious fault lines were shown up on Irisheconomy.ie. What is cash? For a bank it is a deposit in some other bank or Central Bank. I read the Citi argument that these guys were getting deposits in the CBI which were not underpinned by the ECB. I believed that but then one asks why would same bank not simply transfer its deposit with the CBI to the ECB. So the Citi argument was based on a premise that these counterparty banks didn't realise that CBI deposits were only as good as Irish sovereign debt and therefore didn't get round to transferring to the ECB. Laura's explanation is much more credible and it goes like this:

Irish bank needs to transfer cash to German bank (because of run).

Irish bank pledges asset pool to CBI.

ECB pays German bank and debits the CBI account.

CBI debits Irish bank.

There is huge misunderstanding in this space. Dan White of the Sindo was on the case a few weeks ago and was taking the sensationalist line that CBI were printing Euros. Laura explains how totally in control of the whole process are the ECB.
 
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