What is the ECB’s Emergency Liquidity Assistance or ELA Program

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Ever since the recent Greece crisis hit the news headlines, a constant abbreviation “ELA” has been mentioned in the same breathe. For most investors and traders alike, the ELA might initially come across as yet another ‘complex financial jargon’ (think: EFSF, ESM, etc) put together by the technocrats in the EU Commission and the ECB. The ELA has grown to become an increasingly important tool in the Greece crisis. More importantly, it (the ELA) has allowed Greek banks to remain solvent while an agreement is chalked out by Greece and its lenders.

So what is the Emergency Liquidity Assistance or ELA for short?

The ELA is one of the many programs run by the European Central Bank and is described as financial support offered by the ECB in ‘exceptional circumstances or on a case-to-case basis’ to ‘temporarily illiquid institutions’ in order to ride over a ‘temporary liquidity crisis’ issue.

In simple terms, the ECB’s ELA program is merely a short term funding program that is offered to banks and other financial institutions in the EU which experience a period of liquidity crisis. The ELA is strictly offered to only ‘solvent banks’ meaning that financial institutions or banks that are insolvent are not eligible to gain access to the ELA funding.

The ELA is a kind of a loan offered by the European Central Bank to the respective national banks, which then use the money to address the issues of liquidity. ELA loans attract an interest rate of 100 – 150 bps above the ECB’s benchmark interest rates, or about 1 – 1.5% above the ECB’s rates (which is currently at 0.05%).

How does the ELA program differ from other loans from the ECB?

The ELA was primarily designed as a way for easy but short term access to funds from the Central Bank. While the interest rates on the ELA loans are much higher, it is deliberately kept this way in order to avoid banks from using this funding mechanism.

With the ELA, unlike other funding programs from the ECB, the risks are completely borne by the national banks. In other words, the ELA loans stays on the balance sheet with the National Bank in question. A collateral is required to be posted by the National Banks (where a lower than average quality of the collateral is accepted) and also full details needs to be furnished such as the banks to which the ELA funds will go to, the interest charged to the counterparties and other risks involved. ELA’s are also faster to access and require that a National Central Bank request ELA assistance within two business days. Ireland, Cyprus are some of the other countries that have tapped into the ELA during the Eurozone crisis in 2012.

Role of the ELA in keeping Greek banks solvent

The ELA funds have played a vital role in keeping the financial markets up and running while the negotiations continue between Greece and its creditors. With the negotiations practically stalling at every point and no significant progress made, the ELA program has helped to resolve a temporary liquidity issue with Greek banks. Due to the heightened uncertainty involving Greece and its lenders, the Greeks at large have started withdrawing massive funds from their banks (often referred to as a bank run and to avoid capital controls). Due to this vast outflow of funds, the Greek banks had faced shortage of funds to service its customers. With no bailout agreement in sight, the Central Bank ‘Bank of Greece’ turned to the ECB’s ELA program. As of last month (May 2015), the total amount of borrowing via the ELA increased by 77.58 billion Euros (according to Reuters).

At the time of writing, the Greece crisis is still underway with the second meeting with the Eurogroup stalling as Greece rejected the IMF’s counter-proposals in order to unlock 7.2 billion Euros in aid, money that the country needs desperately to avoid a default on the 30th of June. So far, the ECB has been offering the ELA assistance but it is only a matter of time before the ECB starts to tighten its purse which could make things a lot more tighter for Greece.

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