Injections of liquidity as part of monetary policy and emergency provision of liquidity
Question discussed at the 2008 general meeting
Since August 2007, the European Central Bank has injected liquidity into the financial markets on a number of occasions, in the process of implementing the euro area’s monetary policy. These injections of liquidity took the form of loans granted to the banks against collateral based on securities or bank loans meeting very strict quality criteria. Since the conduct of the euro area’s monetary policy is decentralised, these loans are recorded on the balance sheet of the national central bank of the country in which the borrower is established, but the risks of losses on these loans are borne by the Eurosystem as a whole, in proportion to the share of each NCB in the ECB’s capital.
The risk of losses is limited, since they will only occur if two conditions are fulfilled, namely if the borrower bank fails and if a loss is recorded on the realisation of the collateral.
In addition, in the context of their statutory duty to contribute to the stability of the financial system, the national central banks might consider it necessary to supply emergency liquidity to a bank established in their country. However, they will only do so if that bank is solvent, and only if adequate collateral is provided. If the bank is no longer solvent, the provision of support, if any, becomes a matter for the government rather than the central bank.