Solvency as a requirement for emergency liquidity support

Highlights

• Most central banks require firms to which they lend to be solvent. This applies also for emergency liquidity support.
• In all jurisdictions surveyed in this paper, the solvency concept applied for emergency liquidity support purposes considers broadly a firm's capacity to meet its financial obligations. However, approaches differ in the extent to which they focus on a snapshot of a firm's balance sheet or on a general, possibly forward-looking, assessment of viability.
• As a matter of principle, the forward-looking assessment of viability for the purposes of emergency liquidity support should be consistent with the forward-looking assessment of a firm's likelihood to fail for the purposes of resolution. This calls for close coordination between central banks, supervisors and resolution authorities when dealing with weak banks under their respective responsibilities.
• A certain degree of ambiguity in applying these conditions is inevitable and may help to increase authorities' flexibility and optionality in times of distress.

The views expressed in this publication are those of the authors and do not necessarily reflect the views of the BIS, its member central banks or the Basel-based standard-setting bodies.