The Lender of Last Resort in the Eurozone

Abstract

Liquidity supply by a Lender of Last Resort (LOLR) can be pivotal for both the conduct of monetary policy and safeguard of financial stability. During the financial crisis, the importance of liquidity provision significantly increased at both the macro-level – through the European Central Bank – and also for individual credit institutions in the guise of Emergency Liquidity Assistance through the National Central Banks (NCBs). This article examines the legal framework in which the ECB and the NCBs carry out their respective roles as LOLR. The question of who holds competence for liquidity supply is discussed in light of the LOLR functions pertaining to financial stability and monetary policy, as are the availability of effective measures and the legal prerequisites and limitations, particularly with regard to the prohibition of monetary State financing, the imperative of price stability and State aid rules. In view of recent reforms of banking supervision in the eurozone, the question of centralizing Emergency Liquidity Assistance within the ECB also arises.