ESM to offer credit lines in the event of bank failure as lender of last resort

The Eurogroup agreed to a revised European Stability Mechanism (ESM), the agreement is a sign that the EU is willing to provide a financial safety net should it be needed. The ESM will be able to offer credit lines should the common backstop to the Single Resolution Fund (SRF) prove insufficient, becoming the EU’s ‘lender of last resort’.

The EU had made a commitment to introduce a common backstop before the end of 2023 in 2018, but this has been brought forward to 2022. While progress has been made on risk reduction, it is understood that the pandemic will slow progress. 

The ministers have tried to steer a careful path of maintaining financial stability, while aiming to protect taxpayers. Managing Director of the European Stability Mechanism, Klaus Regling compared the new arrangement to that in the United States: “In the US when there's a big crisis, which has happened twice in the last 60 years. The FDIC has a credit line with the US Treasury, as we have no Treasury in the euro area, the European Stability Mechanism will be asked to provide such a credit line, but hopefully it will never be needed.”

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