Fitch: ECB's optionality on ELA disclosure unhelpful for market

The ECB's decision on 16 September to make disclosure of emergency liquidity assistance (ELA) use optional and not mandatory means market participants may remain in the dark about a bank's true liquidity position, especially in periods of stress, says Fitch Ratings.

Disclosure of banks' liquidity positions and asset encumbrance has long been opaque, although from liquidity and recovery perspectives it is important for investors to understand the extent of a bank's unencumbered assets. Initiatives such as disclosure recommendations by the Enhanced Disclosure Task Force, established by the Financial Stability Board, have helped improve encumbrance disclosure at many banks in recent years, but central bankers have been reluctant to permit disclosure of ELA borrowing.

EU banks with listed equity or debt securities are obliged to provide timely public statements about price-sensitive information. Public disclosure may only be delayed in certain circumstances, but from July 2016 the new EU Market Abuse Regulation will introduce a clause specifically allowing banks to delay ELA disclosure. Use of the provision requires market regulators' approval, including weekly review of whether continued non-disclosure remains "in the public interest". This could make non-disclosure more difficult, which we view positively, as independent market regulators may be reluctant to accede to such requests.

Giving national central banks the freedom to decide whether public communication about ELA use is necessary opens the possibility for central banks to continue to withhold information from the market. Lack of disclosure is inconsistent with the policy to improve transparency for investors and we would argue that details about a bank's liquidity position are market-sensitive information that should be disclosed.

The ECB provides no guidance about the level of disclosure from national central banks that wish to communicate publicly about ELA. We believe it would be helpful for bank investors to have disclosure of the names of banks receiving ELA, currency and amount of drawdowns, maturity dates, applicable interest rates, and the level of collateral and guarantees provided, including valuations and haircuts applied, as well as guarantees provided. An assessment of the borrowing institution's short- and medium-term liquidity and solvency position would also be useful.

Euro area banks can, in exceptional circumstances and as long as they are deemed solvent by their prudential regulator, receive ELA from their national central banks. Greek central bank data at end-July 2015 shows that ELA, at EUR126bn, represented 26% of total banking sector liabilities, roughly equivalent to the total amount of domestic deposits held by banks at that date.

Many EU central banks have granted ELA since the start of the financial crisis. In some cases, this was disclosed after the event, which is less useful for investors. For example the Bank of England announced that Royal Bank of Scotland and HBOS had relied on GBP61bn of ELA at the height of the 2008-2009 financial crisis one year after the event. In contrast, details about Greek bank ELA borrowing during the period leading up to the country's August 2015 bailout were reported by the press on a near real-time basis.