Before a Bailout, E.C.B. minutes showed doubts over keeping a Cyprus Bank afloat
As the Cypriot economy reeled from the collapse of its second-largest bank in 2013, the European Central Bank faced a thorny question: Should it keep the institution, Cyprus Popular Bank, alive with short-term loans or pull the plug?
By many financial measures, the bank was failing. Stung by a disastrous bet on Greek government bonds, Cyprus Popular Bank had been in trouble for the better part of 2012 and depositors were withdrawing their savings in ever larger numbers.
It needed cash and fast.
Under E.C.B. rules, troubled banks that can no longer raise funds on the open markets are allowed to borrow from their national central bank, which assumes responsibility for this so-called emergency liquidity assistance, or E.L.A.
Still, strict rules govern this process. The bank in question must be solvent. And if the loans surpass 2 billion euros, or $2.56 billion, the E.C.B. reserves the right to refuse additional requests for money. The methodology for valuing the collateral used to secure the credit also has to be disclosed.
As 2013 approached, the short-term loans to Cyprus Popular Bank had grown to €9 billion, about two thirds the size of the Cypriot economy, and Jens Weidmann, the hawkish head of the German Bundesbank, had begun to forcefully argue that this exposure was too large, according to the minutes of governing council meetings.
By approving the loans — which were disbursed by the central bank of Cyprus — Mr. Weidmann said that the E.C.B. was violating a core tenet. That rule holds that banks on the verge of failure should not be bailed out with additional loans.
“It was not the governing council’s job to keep afloat banks that were awaiting recapitalization and were not currently solvent,” he said at a meeting in December 2012, according to internal documents from the bank.
Unlike the Federal Reserve and the Bank of England, which release the minutes of rate-setting meetings in a matter of weeks, the E.C.B. decrees that its internal deliberations must be kept under wraps for 30 years.
And these strains, particularly between Germany, an economic powerhouse, and smaller eurozone countries like Cyprus and Greece are frequently laid bare during these meetings, internal documents reveal.
In January 2013, just two months before the Cyprus rescue package, Mr. Weidmann repeated his complaint that the E.C.B. was putting itself at risk in propping up Cyprus Popular Bank — which subsequently changed its name to Laiki Bank.
Under a section in the minutes called “solvency information,” the governing council noted that it had received a draft report from the asset management company Pimco that said the bank needed about €10 billion in fresh cash — or about 10 times its capital at the time.
There would seem to be little doubt that the bank was finished, but the consensus was to keep the bank alive until an agreement could be reached on a broad rescue program with the Cyprus government.
Source: NYT- Before a Bailout, E.C.B. Minutes Showed Doubts Over Keeping a Cyprus Bank Afloat
