New instrument would require joint euro-area public guarantee.
The European Central Bank is considering a new policy tool that would allow it to inject cash into banks that are being rescued from the threat of insolvency, tackling a gap in rules for dealing with troubled lenders.
The proposal would allow the ECB to fund viable parts of a lender as they are spun out of a failing financial institution, according to a confidential document obtained by Bloomberg News and based on a March 21 presentation to the ECB’s Governing Council. The suggested framework for Eurosystem Resolution Liquidity (ERL) lays out conditions including a far-reaching public guarantee to safeguard against central-bank losses.
The measure is potentially controversial because the ECB is banned by law from financing actions that should be undertaken by public authorities, such as bank resolution. Executive Board member Yves Mersch warned in January that “resolution planning should not assume that central-bank liquidity will fill the gaps...”