Blog Post

Limits to the Greek bank run

An important question has emerged this week as regards the role of the ECB as a lender of last resort to banks in Greece. The press has widely reported Greeks withdrawing cash from their deposits as well as shifting deposits to other countries. The ECB was therefore forced to increase its amount of Emergency Liquidity Assistance (ELA) from 60 billion to 65 billion.

By: Date: February 19, 2015 Topic: European Macroeconomics & Governance

An important question has emerged this week as regards the role of the ECB as a lender of last resort to banks in Greece. The press has widely reported Greeks withdrawing cash from their deposits as well as shifting deposits to other countries. The ECB therefore increased its amount of Emergency Liquidity Assistance (ELA) from 60 billion to 65 billion. This has triggered negative reactions from conservative German economists, among them Hans-Werner Sinn in the FT, arguing that ELA should be much more limited than that. 

The Greek banking system has a pretty large deposit base of 243.8 billion

So what are the theoretical and political limits to liquidity provisioning by the ECB? In a normal bank-run, a central bank needs to provide unlimited liquidity to allow all depositors to withdraw their cash if they wish to. For the Greek banking system, the theoretical limit would be the size of all deposits. The graph below shows the deposits in billion and in percent of total assets. The Greek banking system has a pretty large deposit base of 243.8 billion (December 2014) which is 61% of the total size of the balance sheet of 397. billion. This deposit base has come down since January 2012, when it was still above 75%.

Source:  European Cental Bank, Aggregated balance sheet of euro area monetary financial institutions, excluding the Eurosystem: Greece and Bruegel calculations

If no agreement between euro area partners can be found, then the ECB cannot provide unlimited funding.

So could the ECB go ahead and just fund the 243.8 billion with ELA? This is a tough call and my answer would clearly be "it depends". If there is certainty that Greece stays in the euro, its banks remain solvent and a political compromise is reached, then the answer is an unambiguous "yes". More problematically, if there is a clear political consensus that no agreement between euro area partners can be found, then the ECB cannot provide unlimited funding. The reason is simply that the ECB would know that in the case of a certain exit, the Greek banks would be insolvent as the economy is collapsing and therefore the value of the assets of the banks would be inferior to the liquidity provided. And even if Grexit wasn’t certain but government default was, parts of the banking system would be insolvent requiring limits on ELA.

The ECB is caught in extremely difficult political discussions.

In between, there is a "grey" zone, in which the ECB has to provide liquidity as they are doing it now, but where fully replacing capital outflows can be problematic as it materially changes the terms of the political discussion between the different parties. Unavoidably and nolens volens, the ECB is caught in extremely difficult political discussions. These political discussions are difficult also because the costs of Greece leaving the euro are very high (as shown here and here). It is a tough call what the limits to liquidity provisioning are in such a situation but the limits should be set politically, not by the ECB. Overall, the limits on political union define the limits on monetary union.


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint. Anyone is free to republish and/or quote this post without prior consent. Please provide a full reference, clearly stating Bruegel and the relevant author as the source, and include a prominent hyperlink to the original post.

View comments
Read about event

Upcoming Event

Nov
20
16:30

European Banking Supervision: the past five years and prospects for the future

This event will look back at the first five years of the Single Supervisory Mechanism.

Speakers: Danièle Nouy and Guntram B. Wolff Topic: European Macroeconomics & Governance, Finance & Financial Regulation Location: Bruegel, Rue de la Charité 33, 1210 Brussels
Read article More on this topic More by this author

Podcast

Podcast

Deep Focus: How to improve anti-money laundering efforts in Europe

In this episode, Bruegel senior fellow Nicolas Véron joins Sean Gibson to discuss the recent Policy Contribution on how to better the European Union anti-money laundering (AML) regime, a paper he has co-written with Joshua Kirschenbaum.

By: The Sound of Economics Topic: European Macroeconomics & Governance Date: October 30, 2018
Read article Download PDF More on this topic

Policy Contribution

A better European Union architecture to fight money laundering

A series of banking scandals in multiple EU countries has underlined the shortcomings of Europe's anti-money laundering regime. The impact of these shortcomings has been further underlined by changing geopolitics and by the new reality of European banking union. The imperative of establishing sound supervisory incentives to fight illicit finance effectively demands a stronger EU-level role in anti-money laundering supervision. The authors here detail their plan for a new European unitary architecture, centred on a new European anti-money laundering authority that would work on the basis of deep relationships with national authorities.

By: Joshua Kirschenbaum and Nicolas Véron Topic: European Macroeconomics & Governance Date: October 25, 2018
Read article More on this topic More by this author

Opinion

Greece: What to expect after the bail-out

After being under the close scrutiny of three financial assistance programmes since May 2010, Greece has finally left the bail-out in August 2018. How different is the post-bail-out era from the preceding eight years? Will Greece be able to stand on its own? And how might the country improve its economic outlook? In this post, which summarises a presentation recently given at an Athens conference, the author answers these three questions.

By: Zsolt Darvas Topic: European Macroeconomics & Governance Date: October 9, 2018
Read article More on this topic

Opinion

The ECB is compromising the attractiveness of euro-area sovereign bonds

The ECB should refine its collateral framework in order to continue protecting its balance sheet without putting at risk the safe-asset status of sovereign bonds of the euro area.

By: Grégory Claeys and Inês Goncalves Raposo Topic: Finance & Financial Regulation Date: August 29, 2018
Read article More on this topic More by this author

Blog Post

Criteria for entry into the ERMII and the banking union: the precedent from Bulgaria

In its bid to join the single currency Bulgaria has made commitments on financial supervision but also wider structural reform which set a precedent for future applicants for participation in the exchange rate mechanism ERMII. Most conditions, though not all, are justified by the additional demands of the banking union. But the envisaged timeline seems ambitious, and verification will not be straightforward.

By: Alexander Lehmann Topic: European Macroeconomics & Governance Date: August 29, 2018
Read article More on this topic

Opinion

Integrity of official statistics under threat

Andreas Georgiou has unwittingly become an international icon for statistical integrity. His continuing politically-motivated persecution is highly damaging for Greece, and more broadly for the credibility and reputation of the euro area.

By: Edwin M. Truman and Nicolas Véron Topic: European Macroeconomics & Governance Date: August 10, 2018
Read article More on this topic More by this author

Opinion

Griechenland braucht einen Neuanfang

This was first published by Die Zeit. Acht Jahre nach Beginn des ersten Hilfsprogramms für Griechenland ist es soweit – Griechenland soll wieder auf eigenen Füßen stehen. Die Eurogruppe soll heute das Ende des dritten Hilfsprogramms beschließen und die Modalitäten für die Zeit danach definieren. Ziel sollte es jetzt sein, einen tragfähigen Ausstieg aus dieser für alle Seiten […]

By: Guntram B. Wolff Topic: European Macroeconomics & Governance Date: July 3, 2018
Read article More on this topic More by this author

Blog Post

The European Union must defend Andreas Georgiou

Andreas Georgiou’s case raises disturbing questions about the integrity of European statistical processes. Forceful action by EU authorities on Mr Georgiou’s case is long overdue. The European Union also needs to consider reforming its statistical framework to ensure a similar scandal cannot recur.

By: Nicolas Véron Topic: European Macroeconomics & Governance Date: June 26, 2018
Read article More on this topic

Blog Post

European bank mergers: domestic or cross-border?

As the European economy recovers from the global financial crisis, bank mergers are back on the agenda. While cross-border mergers have been predicted before, most European bank mergers have been domestic until now. What are the odds of cross-border mergers in the upcoming bank-consolidation wave?

By: Patty Duijm and Dirk Schoenmaker Topic: Finance & Financial Regulation Date: June 21, 2018
Read article More on this topic

Blog Post

Is the ECB collateral framework compromising the safe-asset status of euro-area sovereign bonds?

Central banks’ collateral frameworks play an important role in defining what is considered as a safe asset. However, the ECB’s framework is unsatisfactory because it is overly reliant on pro-cyclical ratings from credit rating agencies, and because the differences in haircuts between the different ECB credit quality steps are not sufficiently gradual. In this note, the authors propose how the ECB could solve these problems and improve its collateral framework to protect its balance sheet without putting at risk the safe status of sovereign bonds of the euro area.

By: Grégory Claeys and Inês Goncalves Raposo Topic: European Macroeconomics & Governance Date: June 8, 2018
Read article More by this author

Podcast

Podcast

Director's Cut: Developing deposit insurance in Europe

In this week’s Director’s Cut of ‘The Sound of Economics’ podcast, Bruegel director Guntram Wolff talks with Nicolas Véron, senior fellow at Bruegel, about the implementation of a European Deposit Insurance Scheme (EDIS), one of the three pillars needed for the completion of banking union.

By: The Sound of Economics Topic: European Macroeconomics & Governance, Finance & Financial Regulation Date: April 3, 2018
Load more posts