Article 123 of the Lisbon Treaty is quite clear

Genevieve Signoret

In an interview reproduced in edited form by FT yesterday, Bundesbank President en ECB Governing Council member Jens Weidmann said this about the ECB’s legal mandate in relation to proposals that the ECB print euros to make unlimited purchases of the debt of countries being attacked by runs and thus sustain a target interest rate or target credit spread on the sovereign debt (aka “Euro Style Quantitative Easing” or “big bazooka”):

JW: The eurosystem is a lender of last resort – for solvent but illiquid banks. It must not be a lender of last resort for sovereigns because this would violate Article 123 of the EU treaty [prohibiting monetary financing – or central bank funding of governments]. I cannot see how you can ensure the stability of a monetary union by violating its legal provisions.

I am among those who yearn for the Big Bazooka. But I must admit that Article 123 of the Lisbon Treaty (“the no-bailout clause”) is crystal clear:

Article 123

1. Overdraft facilities or any other type of credit facility with the European Central Bank or with the central banks of the Member States (hereinafter referred to as ‘national central banks’) in favour of Union institutions, bodies, offices or agencies, central governments, regional, local or other public authorities, other bodies governed by public law, or public undertakings of Member States shall be prohibited, as shall the purchase directly from them by the European Central Bank or national central banks of debt instruments.

2. Paragraph 1 shall not apply to publicly owned credit institutions which, in the context of the supply of reserves by central banks, shall be given the same treatment by national central banks and the European Central Bank as private credit institutions.

Note that Weidmann does say that ECB is a lender of last resort for (solvent) banks. But is not the treaty silent on this issue?

I’m no lawyer (and would love to hear from one on this question, particularly one specialized in European law), but it seems that ECB can decide unilaterally to broaden its mandate as long as it does not violate any of its mandate’s explicit prohibitions.

Can the same hypothetical lawyer specialized in EU law who happens to read this (world famous) blog please also confirm or correct my understanding that nowhere in the Lisbon Treaty is there an explicit mandate for the ECB to act as LOLR function with respect to solvent banks?

Comment from Hypothetical lawyer - 2011/11/16 at 3:03 pm

Article 123 of TFEU (ex Article 101 EC) states that monetary financing of public entities by ECB is prohibited, with the exception to publicly owned credit institutions which, in the context of the supply of reserves by central banks, should be treated as private credit institutions.
It says nothing about monetary financing of private credit institutions (banks). It appears that the Treaty is indeed silent on this.
The Treaty doesn’t say anything about ECB mandate to act as a lender of last resort for solvent banks either.
I’d say that there is nothing in the Treaty that could oppose ECB’s mandate to be a lender of last resort both to solvent and insolvent banks as long as they remain private. Furthermore, it could also act a lender of last resort for a solvent or even insolvent public banks but only in the context of the supply of reserves by central banks (please note that I am only a lawyer and not en economist, so I can’t say if that what seems legally possible makes any sense “economically wise”).

Comment from Genevieve Signoret - 2011/11/16 at 3:29 pm

Thank you very much, Hypothetical Lawyer!