Opinion of the European Central Bank of 16 December 2024 on the provision of emergency liquidity assistance (CON/2024/40)

OPINION OF THE EUROPEAN CENTRAL BANK of 16 December 2024 on the provision of emergency liquidity assistance (CON/2024/40) Introduction and legal basis

On 4 November 2024 the European Central Bank (ECB) received a request from Българска народна банк (Bulgarian National Bank (BNB)) for an opinion on an ordinance of the Bulgarian National Bank on the provision of emergency liquidity assistance (hereinafter the ‘draft ordinance’). The ECB’s competence to deliver an opinion is based on Articles 127(4) and 282(5) of the Treaty on the Functioning of the European Union and Article 2(1), third and sixth indents, of Council Decision 98/415/EC , as the draft ordinance relates to BNB and rules applicable to financial institutions insofar as they materially influence the stability of financial institutions and markets. In accordance with Article 17.5, first sentence, of the Rules of Procedure of the European Central Bank, the Governing Council has adopted this opinion.

1. Purpose of the draft ordinance

1.1 The draft ordinance aims to implement Article 48 of the Law on Bulgarian National Bank (hereinafter the ‘Law on BNB’) and to regulate the conditions, rules and procedures under which BNB, in its future capacity as a Eurosystem central bank and outside the scope of Eurosystem monetary policy operations, may provide emergency liquidity assistance (ELA) to a credit institution experiencing liquidity stress . 1.2 The draft ordinance provides that BNB may provide ELA in compliance with the Treaty, the Law on BNB, the Agreement on emergency liquidity assistance (hereinafter the ‘ELA Agreement’) adopted by the Governing Council on 27 September 2024 on the basis of Article 14.4 of the Statute of the European System of Central Banks and of the European Central Bank (hereinafter the ‘Statute of the ESCB’), and other applicable acts of the ECB . The draft ordinance explicitly clarifies that BNB may provide ELA at its discretion . 1.3 The draft ordinance provides that BNB may provide ELA only in euro .

1.4 The draft ordinance provides that BNB may grant ELA only to a solvent credit institution that experiences liquidity stress for which it cannot quickly provide liquidity from other sources . For this purpose, a credit institution is to be considered solvent if its Common Equity Tier 1 capital ratio, Tier 1 capital ratio and total capital ratio, as well as the leverage ratio on an individual and (when applicable) consolidated basis, are in line with the minimum capital requirement levels laid down in Regulation (EU) No 575/2013 . Furthermore, a credit institution is to be considered solvent where this requirement is not met but there is a strong likelihood of recapitalisation that would restore the regulatory capital to the specified levels within 24 weeks after the end of the quarter for which the data shows that the credit institution does not comply with the relevant requirements. In duly justified exceptional cases, BNB may request the Governing Council to extend the abovementioned 24-week period . 1.5 The draft ordinance specifies that ELA will be granted in exchange for collateral and contains detailed rules concerning such collateral . The draft ordinance provides that if ELA is not reimbursed by a credit institution within the agreed period, BNB must proceed with compulsory collection, without initiating legal proceedings, selling the received collateral or acquiring the ownership rights in respect of assets pledged by the recipient bank, up to an amount that satisfies all BNB’s claims arising from the ELA granted . 1.6 The draft ordinance provides that ELA may be granted for a term of up to six months and if necessary up to 12 months , but also provides that under certain conditions this term may be extended beyond 12 months . 1.7 The draft ordinance provides that BNB is to establish an interest rate for the ELA granted that cannot be lower than the Eurosystem’s marginal lending facility rate, increased by 100 basis points. In the case of intra-day ELA reverse transactions, BNB is to establish an interest rate that cannot be lower than 1 % on an annual basis . 1.8 The draft ordinance contains detailed provisions governing the procedure for the granting of ELA to a credit institution and the information to be provided by the credit institution to BNB and the ECB when ELA is granted .

2. General observations

2.1 The provision of ELA refers to the provision by a Eurosystem national central bank (NCB) of central bank money and/or any assistance that may lead to an increase in the provision of central bank money to a solvent financial institution or a group of solvent financial institutions facing temporary liquidity problems, where this operation is not part of the single monetary policy . 2.2 The ELA Agreement is based on the understanding that the main responsibility for the provision of ELA lies with the NCB concerned. This means that any costs and risks arising from the provision of ELA are incurred by the relevant NCB. However, pursuant to Article 14.4 of the Statute of the ESCB, the Governing Council may object to the provision of ELA by limiting or prohibiting ELA operations if it finds that these interfere with the objectives and tasks of the ESCB. As the Governing Council must be informed of such operations in a timely manner in order for it to adequately assess such interference, the ELA Agreement imposes corresponding obligations on NCBs. As the ELA Agreement was adopted by the Governing Council on the basis of Article 14.4 of the Statute of the ESCB, it applies to BNB upon the latter’s accession to the Eurosystem.

3. Specific observations

3.1 As noted in paragraph 2.1 of this opinion, the ELA Agreement contemplates the possibility that ELA may be granted to a financial institution or a group of financial institutions facing liquidity problems . The ECB understands that the limitation under the draft ordinance whereby ELA may only be extended to credit institutions stems from Article 48 of the Law on BNB, under which the draft ordinance is to be adopted. 3.2 The ELA Agreement also contemplates the possibility that an NCB might enter into a liquidity arrangement with a non-Eurosystem central bank or monetary authority with the purpose of facilitating the provision of emergency foreign currency liquidity . However, the ECB notes that the draft ordinance does not include a provision covering this possibility. 3.3 The draft ordinance contains several provisions on the collateralisation of ELA, including a reference to ‘collateral principles approved by the ECB’s GC’. In contrast to Eurosystem monetary policy operations, the ECB has not set out any publicly available collateral principles for ELA other than the condition that ELA collateral should sufficiently protect the NCB against risks emerging from ELA operations . 3.4 The ECB welcomes the provision in the draft ordinance that if ELA is not reimbursed by the institution within the agreed period, BNB is to proceed with compulsory collection, without initiating legal proceedings, selling the received collateral or acquiring the ownership rights in respect of assets pledged by the recipient bank, up to an amount that satisfies all BNB’s claims arising from the ELA

granted . This should facilitate BNB’s enforcement of its collateral rights against defaulting counterparties in the event that ELA is provided. This opinion will be published on EUR-Lex. Done at Frankfurt am Main, 16 December 2024. [signed]

The President of the ECB

Christine LAGARDE