Limits to the Greek bank run

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Limits to the Greek bank run

An important question has emerged this week as regards the role of the ECB as a lender of last resort to banks in Greece. The press has widely reporte

Publishing date: 19 February 2015
Authors: Guntram B. Wolff

An important question has emerged this week as regards the role of the ECB as a lender of last resort to banks in Greece. The press has widely reported Greeks withdrawing cash from their deposits as well as shifting deposits to other countries. The ECB therefore increased its amount of Emergency Liquidity Assistance (ELA) from 60 billion to 65 billion. This has triggered negative reactions from conservative German economists, among them Hans-Werner Sinn in the , arguing that ELA should be much more limited than that.

The Greek banking system has a pretty large deposit base of 243.8 billion

So what are the theoretical and political limits to liquidity provisioning by the ECB? In a normal bank-run, a central bank needs to provide unlimited liquidity to allow all depositors to withdraw their cash if they wish to. For the Greek banking system, the theoretical limit would be the size of all deposits. The graph below shows the deposits in billion and in percent of total assets. The Greek banking system has a pretty large deposit base of 243.8 billion (December 2014) which is 61% of the total size of the balance sheet of 397. billion. This deposit base has come down since January 2012, when it was still above 75%.

Source: and Bruegel calculations

If no agreement between euro area partners can be found, then the ECB cannot provide unlimited funding.

So could the ECB go ahead and just fund the 243.8 billion with ELA? This is a tough call and my answer would clearly be "it depends". If there is certainty that Greece stays in the euro, its banks remain solvent and a political compromise is reached, then the answer is an unambiguous "yes". More problematically, if there is a clear political consensus that no agreement between euro area partners can be found, then the ECB cannot provide unlimited funding. The reason is simply that the ECB would know that in the case of a certain exit, the Greek banks would be insolvent as the economy is collapsing and therefore the value of the assets of the banks would be inferior to the liquidity provided. And even if Grexit wasn't certain but government default was, parts of the banking system would be insolvent requiring limits on ELA.

The ECB is caught in extremely difficult political discussions.

In between, there is a "grey" zone, in which the ECB has to provide liquidity as they are doing it now, but where fully replacing capital outflows can be problematic as it materially changes the terms of the political discussion between the different parties. Unavoidably and nolens volens, the ECB is caught in extremely difficult political discussions. These political discussions are difficult also because the costs of Greece leaving the euro are very high (as shown here and here). It is a tough call what the limits to liquidity provisioning are in such a situation but the limits should be set politically, not by the ECB. Overall, the limits on political union define the limits on monetary union.

About the authors

Guntram B. Wolff

Guntram Wolff is a Senior fellow at Bruegel. He is also a Professor of Economics at the Université libre de Bruxelles (ULB).

From 2022-2024, he was the Director and CEO of the German Council on Foreign Relations (DGAP) and from 2013-22 the director of Bruegel. Over his career, he has contributed to research on European political economy, climate policy, geoeconomics, macroeconomics and foreign affairs. His work was published in academic journals such as Nature, Science, Research Policy, Energy Policy, Climate Policy, Journal of European Public Policy, Journal of Banking and Finance. His co-authored book “The macroeconomics of decarbonization” is published in Cambridge University Press.

An experienced public adviser, he has been testifying twice a year since 2013 to the informal European finance ministers’ and central bank governors’ ECOFIN Council meeting on a large variety of topics. He also regularly testifies to the European Parliament, the Bundestag and speaks to corporate boards. In 2020, ranked him one of the 28 most influential “power players” in Europe. From 2012-16, he was a member of the French prime minister’s Conseil d’Analyse Economique. In 2018, then IMF managing director Christine Lagarde appointed him to the external advisory group on surveillance to review the Fund’s priorities. In 2021, he was appointed member and co-director to the G20 High level independent panel on pandemic prevention, preparedness and response under the co-chairs Tharman Shanmugaratnam, Lawrence H. Summers and Ngozi Okonjo-Iweala. From 2013-22, he was an advisor to the Mastercard Centre for Inclusive Growth. He is a member of the Bulgarian Council of Economic Analysis, the European Council on Foreign Affairs and advisory board of Elcano. He is also a fellow at the Kiel Institute for the World Economy.

Guntram joined Bruegel from the European Commission, where he worked on the macroeconomics of the euro area and the reform of euro area governance. Prior to joining the Commission, he worked in the research department at the Bundesbank, which he joined after completing his PhD in economics at the University of Bonn. He also worked as an external adviser to the International Monetary Fund. He is fluent in German, English, and French. His work is regularly published and cited in leading media.