IDEAS home Printed from https://ideas.repec.org/a/ysm/ypfsfc/v7y2025i2p293-312.html

Emergency Liquidity Assistance and Monetary Financing in the European Union: A Case Study in Fiscal Cooperation?

Author

Listed:

Abstract

In the European Union (EU), primary EU treaty law prohibits central banks from engaging in monetary financing, which includes lending to insolvent firms. This legal prohibition exists alongside, and in parallel to, various regulatory provisions of the Eurosystem. As a result, EU Member State central banks face unique legal limitations when acting in their roles as lenders of last resort, providing emergency liquidity assistance (ELA). In practice, European central banks--both members of the Eurosystem and not--lend to firms of questionable solvency with some frequency, often creatively employing fiscal guarantees to limit their balance sheet exposure and shift the lending risk to the fiscal authority, thereby reducing the risk of monetary financing as described in EU law. Through stylized case studies, this note explores instances where ELA intersects with issues of solvency, highlighting the challenges that European central banks face. It also discusses the role of fiscal guarantees as a policy tool for such situations, describing their benefits, risks, and limitations. The note concludes that policymakers should make plans for such scenarios ahead of time in line with applicable regulations on solvency, and should maintain coordination with fiscal authorities when appropriate.

Suggested Citation

  • Arnold, Vincient, 2025. "Emergency Liquidity Assistance and Monetary Financing in the European Union: A Case Study in Fiscal Cooperation?," Journal of Financial Crises, Yale Program on Financial Stability (YPFS), vol. 7(2), pages 293-312, April.
    • Handle: RePEc:ysm:ypfsfc:v:7:y:2025:i:2:p:293-312
    as

    Download full text from publisher

    File URL: https://elischolar.library.yale.edu/cgi/viewcontent.cgi?article=1657&context=journal-of-financial-crises
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Mrs. Oana M Croitoru & Mr. Marc C Dobler & Johan Molin, 2018. "Resolution Funding: Who Pays When Financial Institutions Fail?," IMF Technical Notes and Manuals 2018/001, International Monetary Fund.
    2. Honohan, Patrick & Donovan, Donal & Gorecki, Paul & Mottiar, Rafique, 2010. "The Irish Banking Crisis: Regulatory and Financial Stability Policy," MPRA Paper 24896, University Library of Munich, Germany.
    3. Charles Goodhart, 1999. "Myths About the Lender of Last Resort," FMG Special Papers sp120, Financial Markets Group.
    4. Karl Whelan, 2012. "ELA, Promissory Notes and All That:The Fiscal Costs of Anglo Irish Bank," The Economic and Social Review, Economic and Social Studies, vol. 43(4), pages 653-673.
    5. Oana M Croitoru & Marc C Dobler & Johan Molin, 2018. "Resolution Funding; Who Pays When Financial Institutions Fail?," IMF Technical Notes and Manuals 2018/01, International Monetary Fund.
    6. Metrick, Andrew, 2022. "Blanket Guarantees Survey," Journal of Financial Crises, Yale Program on Financial Stability (YPFS), vol. 4(4), pages 103-132, April.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Ryan Defina, 2021. "Banking Resolution: Expansion of the Resolution Toolkit and the Changing Role of Deposit Insurers," IADI Policy Briefs 3, International Association of Deposit Insurers.
    2. Andrzej R. Stopczyński, 2020. "Banki na progu upadłości – refleksje nad postępowaniem," Bank i Kredyt, Narodowy Bank Polski, vol. 51(5), pages 517-548.
    3. Jan Philipp Nolte & David Hoelscher, 2020. "Using the FSB Key Attributes to Design Bank Resolution Frameworks for Non-FSB Members," World Bank Publications - Reports 34040, The World Bank Group.
    4. Gregory Connor & Thomas Flavin & Brian O'Kelly, 2015. "Restructuring and Recovery of the Irish Financial Sector: An Economic Case History V2," Economics Department Working Paper Series n259-15.pdf, Department of Economics, National University of Ireland - Maynooth.
    5. Ahuja, Rishi & Barrett, Sean & Corbet, Shaen & Larkin, Charles, 2019. "A way forward: The future of Irish and European union financial regulation," Economic Analysis and Policy, Elsevier, vol. 64(C), pages 346-360.
    6. König, Philipp & Anand, Kartik & Heinemann, Frank, 2013. "The ‘Celtic Crisis’: Guarantees, transparency, and systemic liquidity risk," VfS Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order 79747, Verein für Socialpolitik / German Economic Association.
    7. Jorg Bibow, 2015. "The Euro's Savior? Assessing the ECB's Crisis Management Performance and Potential for Crisis Resolution," Economics Working Paper Archive wp_845, Levy Economics Institute.
    8. Jean Pisani-Ferry & André Sapir & Guntram B. Wolff, . "EU-IMF assistance to euro area countries- an early assessment," Bruegel Blueprints, Bruegel, number 779.
    9. David Byrne & David Duffy & John FitzGerald, 2018. "Household Formation and Tenure Choice: Did the Great Irish Housing Bust Alter Consumer Behaviour?," The Economic and Social Review, Economic and Social Studies, vol. 49(3), pages 287-317.
    10. Mary Everett & Jakob de Haan & David‐Jan Jansen & Peter McQuade & Anna Samarina, 2021. "Mortgage lending, monetary policy, and prudential measures in small euro‐area economies: Evidence from Ireland and the Netherlands," Review of International Economics, Wiley Blackwell, vol. 29(1), pages 117-143, February.
    11. Harrison, Richard & Li, Youwei & Vigne, Samuel A. & Wu, Yuliang, 2022. "Why do small businesses have difficulty in accessing bank financing?," International Review of Financial Analysis, Elsevier, vol. 84(C).
    12. Lunn, Pete, 2011. "The Role of Decision-Making Biases in Ireland's Banking Crisis," Papers WP389, Economic and Social Research Institute (ESRI).
    13. Rob Kitchin & Cian O'Callaghan & Justin Gleeson, 2014. "The New Ruins of Ireland? Unfinished Estates in the Post-Celtic Tiger Era," International Journal of Urban and Regional Research, Wiley Blackwell, vol. 38(3), pages 1069-1080, May.
    14. Constantin Gurdgiev & Brian M. Lucey & Ciarán Mac an Bhaird & Lorcan Roche-Kelly, 2011. "The Irish Economy: Three Strikes and You’re Out?," Panoeconomicus, Savez ekonomista Vojvodine, Novi Sad, Serbia, vol. 58(1), pages 19-41, March.
    15. Hristov, Nikolay & Hülsewig, Oliver & Wollmershäuser, Timo, 2020. "Capital flows in the euro area and TARGET2 balances," Journal of Banking & Finance, Elsevier, vol. 113(C).
    16. Marie Ryan & Huanhuan Xiong & Fergal Carton & JB Mc Carthy, 2026. "The Squeezed Middle in Digital Financial Services: Ireland's Warning for European Consumer Protection Policy," Journal of Consumer Policy, Springer, vol. 49(1), pages 1-28, March.
    17. Lunn, Pete & Shier, Adam Joachim & Belton, Cameron & McGowan, F idhlim McGowan, 2025. "Buying and selling houses in Ireland: Behavioural economic evidence for reform," Papers WP811, Economic and Social Research Institute (ESRI).
    18. Egan, Paul & Kenny, Eoin & McQuinn, Kieran, 2022. "Increasing future housing supply: What are the implications for the Irish economy," Quarterly Economic Commentary: Special Articles, Economic and Social Research Institute (ESRI).
    19. David Greenlaw & James D. Hamilton & Peter Hooper & Frederic S. Mishkin, 2013. "Crunch Time: Fiscal Crises and the Role of Monetary Policy," NBER Working Papers 19297, National Bureau of Economic Research, Inc.
    20. Sebastian Dellepiane Avellaneda & Niamh Hardiman, 2010. "The European Context of Ireland’s Economic Crisis," The Economic and Social Review, Economic and Social Studies, vol. 41(4), pages 473-500.

    More about this item

    Keywords

    ;
    ;
    ;
    ;
    ;

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ysm:ypfsfc:v:7:y:2025:i:2:p:293-312. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: the person in charge (email available below). General contact details of provider: https://edirc.repec.org/data/smyalus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.