The ECB may not release its minutes to the public (opting instead to keep these secret for 30 years) at least for now, but earlier today a transcript of its internal deliberations was made public by the NYT [9], which revealed how the ECB governing council once again snubbed its responsibilities, and in January 2013 bailed out a failing Cyprus bank, Cyprus Popular Bank, just months ahead of the now infamous Cypriot "bail-in" i.e., deposit confiscation. The story in a nutshell: following much internal wrangling and posturing by the "northern" states, notably the usual suspects such as Wiedmann and Knot, the Cypriot bank, which the ECB continued to bail out even though it should not have as the bank had obtained an ECB lifeline based on fake financials and glaringly impossible assumptions, the bank ultimately failed. Who was left holding the bag? Why Cyprus' depositors of course.
The NYT explains [10]how Popular Bank was "stung by a disastrous bet on Greek government bonds" and had been "in trouble for the better part of 2012 and depositors were withdrawing their savings in ever larger numbers" - this is largely known. What is not know is how the ECB once again trampled its mandate, which clearly is just for show, when it came to keeping the bank solvent for just a few more months so as to avoid yet another European market crash:
[Cyprus Popular Bank] 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.
Fearing possible contagion if the bank failed, the E.C.B.’s governing council, a decision-making arm consisting of 24 members, had approved an emergency loan request by one its members, the Central Bank of Cyprus, in late 2011.
In early 2013 things were coming to a head, and the collapse of Cyprus seemed inevitable. By then "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 here that the now traditional posturing and data fabrications started: In December 2012 Weidmann said that “It was not the governing council’s job to keep afloat banks that were awaiting recapitalization and were not currently solvent." A month later he followed up:
In January 2013, just two months before the controversial 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.
Moreover, Mr. Weidmann said that the value of the collateral posted at the central bank was inflated — which, if true, would allow it to secure more credit.
This was a powerful charge as it questioned whether the Cyprus central bank, under its new governor, Panicos Demetriades, was trying to play down the bank’s problems in order to keep it alive.
To buttress his claim, Mr. Weidmann told his colleagues that the E.C.B.’s own risk analysts had concluded that the assets that Cyprus Popular had posted at its central bank were overstated by about €1.3 billion.
Others jumped on the bandwagon:
Christian Noyer, the head of the French central bank, said that he was “very much concerned” by the aggressive way that the Cyprus central bank was valuing the collateral, adding that it “doubled the risk” for the E.C.B.
Klaas Knot of the Dutch central bank also chimed in, saying the collateral issue made him feel “very uncomfortable.”
“If E.L.A. was provided without adequate collateral, this would be a grave issue,” Mr. Weidmann concluded, according to the minutes, as he pushed for the loans to be withdrawn.
He pushed, and pushed and... nothing, as usual.
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 that 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.
The governing council decided “not to object”– in E.C.B. parlance — to the continuance of the lifeline.
Draghi, and the firm he worked for prior to joining the ECB, had won again. Not once did ut occur to the ECB to warn the population of Cyprus - because it wasn't just Russian billionaires who lost their deposits in Cyrpiot banks - that one of its largest banks was about to fail and wipe out years of savings.
So why is this a story?
The concern has been that the airing of these discussions would reveal national strains and weaken the E.C.B.’s federal mandate. The governing council consists of the heads of the 18 central banks that make up the currency union and a six-member executive board over which Mario Draghi presides.
Apparently the ECB cared enough to release the following statement [11]shortly after the NYT story hit:
The ECB neither provides nor approves emergency liquidity assistance. It is the national central bank, in this case the Central Bank of Cyprus, that provides ELA to an institution that it judges to be solvent at its own risks and under its own terms and conditions. The ECB can object on monetary policy grounds; in order to do so at least two thirds of the Governing Council must see the provision of emergency liquidity as interfering with the tasks and objectives of euro area monetary policy.
In this specific case there was full consensus in the Governing Council on the need to get assurances from the Central Bank of Cyprus that this bank was solvent. This was confirmed explicitly by the Central Bank of Cyprus, which also confirmed the proper valuation of collateral after an intense dialogue between it and the ECB.
The ECB was not the supervisor and fully relied on the assessment of the Central Bank of Cyprus. Therefore to draw conclusions about the ECB’s future banking supervision role on the basis of ELA to Cyprus is tendentious.
And with that, the ECB will continue pretending that all is well, it will continue to bail out borderline insolvent banks until it no longer can, at which point European depositors will continue to, first rarely and then all at once, fund Europe's creeping bank insolvency wave because for all its talk, the ECB has done nothing to address the real elephant in the room: several trillion in bad loans spread across Europe's banking system, the direct result of Europe's historic depression, and which can only be "fixed" one bank at a time when its deposits are "realligned" in line with its viable assets, or to use the parlance of Jon Corzine "vaporized."
