•  
  •  
 

Document Type

Note

Abstract

In the European Union (EU), primary EU treaty law prohibits central banks from engaging in monetary financing, which includes lending to insolvent firms. This legal prohibition exists alongside, and in parallel to, various regulatory provisions of the Eurosystem. As a result, EU Member State central banks face unique legal limitations when acting in their roles as lenders of last resort, providing emergency liquidity assistance (ELA). In practice, European central banks—both members of the Eurosystem and not—lend to firms of questionable solvency with some frequency, often creatively employing fiscal guarantees to limit their balance sheet exposure and shift the lending risk to the fiscal authority, thereby reducing the risk of monetary financing as described in EU law. Through stylized case studies, this note explores instances where ELA intersects with issues of solvency, highlighting the challenges that European central banks face. It also discusses the role of fiscal guarantees as a policy tool for such situations, describing their benefits, risks, and limitations. The note concludes that policymakers should make plans for such scenarios ahead of time in line with applicable regulations on solvency, and should maintain coordination with fiscal authorities when appropriate.

Download

Share

COinS