The ECB as Lender of Last Resort: Banks versus Governments

Summary The OMT programme has been strongly criticized as being incompatible with the ECB’s mandate. Applying standard lender of last resort (LoLR) theory in the assessment of the OMT we find that when de facto operating as a LoLR for governments, the ECB is as much is line with its mandate as when performing as a LoLR for banks. None of four arguments used to explain why it is acceptable to have the ECB as a LoLR for banks, while a LoLR role for governments has to be rejected, namely a) the missing euro area fiscal backstop, b) the long-term nature of the euro crisis, c) the example of the US as a monetary union without a LoLR for sub-states and d) the claim that central bank purchases of government bonds ultimately always lead to inflation, is convincing. However, decisive steps towards fiscal and banking union are needed to stabilize the euro area.