September 29, 2017 / 12:40 PM / a year ago

Emergency ECB cash can slow a bank's rescue: Knot

FRANKFURT (Reuters) - The European Central Bank’s cash lifeline for banks might do more harm than good if it simply defers a struggling lender’s demise while its situation keeps worsening, ECB policymaker Klaas Knot said on Friday.

FILE PHOTO: Klaas Knot, President of the De Nederlandsche Bank, attends the 2016 Institute of International Finance (IIF) Spring Membership meeting in Madrid, Spain, May 25, 2016. REUTERS/Susana Vera

Knot’s critical comments follow the controversial failure of Spain’s Banco Popular, which in June received emergency cash from the Bank of Spain hours before it was declared likely to fail by the ECB and sold to larger rival Santander (SAN.MC).

Knot, the Dutch central bank’s governor, said such Emergency Liquidity Assistance (ELA) can have the effect of delaying the inevitable while using up precious collateral, the assets that banks pledge in return for central cash.

“The provision of ELA itself could effectively postpone the point of resolution, while further reducing the availability of collateral during and after resolution,” Knot, a policy hawk, said at an event of the Single Resolution Board in Brussels.

“In that sense, central banks and resolution authorities have a common interest in resolving banks in a timely manner, i.e. before asset encumbrance reaches uncomfortably high levels and collateral runs out.”

The SRB has been sued by dozens of Popular investors over its handling of the case, which saw the bank fold for failing to come up with enough collateral to access more ELA funding.

Knot, who did not mention Popular in his speech, said banks and the SRB should not always count on ELA, which is provided by national central banks after approval from the ECB.

“This is because, firstly, central banks will critically assess the viability of the bank post-resolution and need assurance that support would indeed be only temporary,” he said.

“Second, the bank needs to have sufficient eligible collateral, after haircuts, to access central bank facilities.”

Reporting by Francesco Canepa; Editing by Catherine Evans

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