Except for Greece: the ECB's special rules

You know what never happens?  Members of the Federal Reserve Board of Governors never give interviews in which they speculate that America's four largest banks are probably insolvent.  Perhaps this is because they understand that it is their role to prevent and quell financial panics, not to start them.  Or perhaps it is simply because leaking confidential information regarding the financial condition of particular institutions is, technically, illegal.

But the rules are evidently different in Europe, at least when it comes to Greece.  And so we find this, from ECB Executive Board member Benoît Cœuré, conveniently posted on the ECB's website: 

[F]irst we need detailed information about the situation. For that reason, banking supervisors at the ECB have started a new asset quality review and stress test for Greece’s four major banks. Those credit institutions were adequately capitalised, but they are now operating in an extremely difficult economic environment, and non-performing loans are likely to increase in the next few years. It is quite clear, therefore, that the banks will require more capital. How much remains to be seen. The banking supervisors will need a few weeks to conclude their assessment.  (emphasis added)

Now, Cœuré isn't telling us anything we don't already strongly suspect.  Perhaps he reasons, what harm can there be in saying so out loud?  

But it does make a difference.  First, it's one thing when, say, a semi-anonymous blogger suggests that Greece's banks might be in a bit of trouble.  It's quite another when a central bank board member declares that it is so.

Second, this sort of thing simply isn't done.  No serious central bank and/or bank regulator (and the ECB is both) would permit such a thing to happen with respect to a bank under its jurisdiction.  But, as we're learning, the ECB doesn't behave quite like any other central bank or bank regulator. While EU law specifically provides that "[n]o action, proposal or policy of the ECB shall, directly or indirectly, discriminate against any Member State or group of Member States as a venue for the provision of banking or financial services in any currency," the bank has operated as if the words, "except for Greece" were somewhere in its charter.  Cœuré's cavalier treatment of the insolvency of the Greek banking system is one more reflection of this (technically illegal) attitude.

But that's not the worst of it.

In the sentence before he declares the four largest Greek banks clearly insolvent, Cœuré explains how this state of affairs came about: "Those credit institutions were adequately capitalised, but they are now operating in an extremely difficult economic environment, and non-performing loans are likely to increase in the next few years." (emphasis added)

That is, some recent event bankrupted these four institutions.  Now, unless there was some major natural disaster that didn't make the papers, Cœuré can really be referring to only one thing: the decision by the ECB to cease providing liquidity support to the Greek banking system in June.

Take a moment to think about what that means.  What Cœuré appears to be saying is that, at the end of June, the ECB cut off liquidity to adequately capitalized Greek banks and, consequently, bankrupted them (Aside 1).

I've cited it before, but it's worth repeating the content of "whereas #30" from the regulation linked to above, which characterizes the ECB's mission with respect to banking:

The ECB should carry out the tasks conferred on it with a view to ensuring the safety and soundness of credit institutions and the stability of the financial system of the Union as well as of individual participating Member States and the unity and integrity of the internal market, thereby ensuring also the protection of depositors and improving the functioning of the internal market, in accordance with the single rulebook for financial services in the Union. In particular the ECB should duly take into account the principles of equality and non-discrimination. 

Maybe it's a problem with the English translation, but hard as I try, I can't find the words "except for Greece" in there anywhere.




Aside 1: It is, of course, open to question whether Cœuré is right -- i.e. whether the banks really were adequately capitalized.  Personally, I'm skeptical.  The point, however, is that this is the ECB's semi-official story of what happened.  The fact that it may also be false doesn't seem to make it better.