2018
January 30, 2018
IMFS Distinguished Lecture
Yves Mersch, Member of the Executive Board, European Central Bank
“The Limits of Central Bank Financing in Resolution”
A financial institution that is close to or in resolution is not necessarily financed by a central bank. In his IMFS Distinguished Lecture, Yves Mersch, member of the Executive Board of the ECB, made clear that there are sharp limits for a central bank to finance in resolution.
Mersch, who is the longest-serving board member at the ECB, emphasized that the Eurosystem should be adequately protected against any risk associated with its lending activity. He pointed out that while central banks may be involved in administering resolution measures, they should not finance them. “The ECB has repeatedly stated that the financing of resolution measures is a government task,” Mersch said. This was the reason why the Single Resolution Fund (SRF) was established, he argued. Financing of resolution should no longer come from the taxpayers but from the banks themselves. The SRF ensures uniform practice in the financing of resolutions within the Single Resolution Mechanism (SRM).
In this context, Mersch also referred to the monetary financing prohibition. “The ECB has repeatedly stated that financing by central banks, even when granted independently and at their full discretion, is incompatible with the monetary financing prohibition.” As financing insolvent institutions was a government task, the ECB has identified criteria to distinguish between those possibilities. However, liquidity can be provided under certain circumstances, respecting the limits set out in the Treaty and any Governing Council decisions and under the generally applicable monetary policy rules. “Whilst the provision of central bank liquidity should not be ruled out in resolution, it should not be assumed either”. Mersch warned: “Resolution planning should not assume that central bank liquidity will fill the gaps”. “Central banks provide liquidity, not solvency support,” he concluded.