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The ECB as lender of last resort?

Goodhart, C. & Schoenmaker, D. (2014) “The ECB as lender of last resort?“, VoxEU Organisation, 23 Οκτωβρίου.


As part of the move to a banking union, the largest banks in the Eurozone will soon be supervised by the ECB. This column argues that supervision and the lender of last resort function should be seen as a joint product. After the introduction of the euro, the national central banks continued to act as lenders of last resort because bank supervision remained at the national level. Now that supervision is moving to the ECB, so should the lender of last resort function for the larger, cross-border, banks.

A guiding principle for decision-making in crisis management is “he who pays the piper calls the tune” (Goodhart and Schoenmaker 2009). So long as resolution is organised on a national basis, the national governments will normally want to oversee and undertake the function of supervision. That has been the current setup for financial supervision and crisis management, which have been nationally organised. Following this principle, the ECB clarified that the national central banks should remain the lender of last resort (LOLR) for individual banks with problems at the time when EMU started (Padoa-Schioppa 1999). This is the individual LOLR function. By contrast, the ECB had assumed the more general aggregate liquidity support function from the start of EMU, as this general role is intrinsically linked to monetary policy operations.

Lender of last resort in the banking union

Supervision and resolution will shortly be moved to the European level in the banking union. The question then arises: What should happen with the individual LOLR function? As LOLR is typically not codified in legislation, this is currently a decision for the national central banks in the Eurosystem. Recent speeches (e.g. Lautenschläger 2014) seem to suggest that the ECB is planning to keep this LOLR function at the national level. However, the national central banks cannot call the tune anymore in the banking union. The ECB will supervise the significant banks (these are the 120 largest banks in the banking union; the national supervisory authorities remain responsible for the local banks). We argue that the individual LOLR function for those significant banks should then move – in tandem with supervision – to the ECB.


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