Emergency Liquidity Assistance (ELA) facilities can be created by national central
banks when the counterparty banks in their jurisdictions can no longer fund themselves at the regular facilities of the Eurosystem, either because their creditworthiness has deteriorated too much or because the quality of the collateral they offer is too poor to be acceptable at the Eurosystem. The ELA facilities can, subject to a number of provisos, take collateral not acceptable at the Eurosystem from counterparties that are not sufficiently creditworthy to access the Eurosystem.First, the GC of the ECB determines the limit on the total size of the ELA facility.3 Second, the terms and conditions (interest rates, valuation, haircuts etc.)
set by the ELA facility typically are more onerous than those available at the regular credit facilities of the Eurosystem. These terms and conditions too are subject to approval by the GC of the ECB.
4 Third, although the liabilities of the ELA facility are Eurosystem liabilities (base money or non-monetary liabilities), the exposure of the ELA facility is not an exposure of the Eurosystem. Instead it is an exposure just of the NCB in question (see also Section 3 below). A full sovereign indemnity or guarantee by the national sovereign for this exposure of the NCB is supposed to be given. This protects the Eurosystem against losses that may be incurred by the ELA facility, as long as the loss-absorption capacity of the NCB and its sovereign are
adequate. When the NCB in question has little or no conventional loss absorption
capacity (capital plus reserves plus any capital gains it may be able to realise from
its revaluation account) the fact that its credit creation capacity is controlled and
capped by the GC of the ECB means that it cannot use seigniorage (the profits from
the issuance of central bank money [base money]) to meet its commitments.
5The guarantee of the sovereign is not worth much if the sovereign itself is insolvent or at
high risk of insolvency, as is the case, for instance, with Greece, Portugal and
Ireland, in our view