y 2016 two major developments hit MBS Bank (the second biggest Italian bank, operating in a cross-border fashion) severely: An immediate need for liquidity as a consequence of the failed risky investment strategies and a shortage of available liquidity due to a dried up interbank lending market. Liquidity was needed as MBS Bank used financial products with a shorter maturity period than the one of the investments that were refinanced by them. MBS erred in the quality of the securities underlying these financial products that lost during their maturity period practically their entire value. After the expiry of the maturity of these financial products, MBS was hence in an immediate need for liquidity in order to meet its refinancing obligations. The loss in value of the securities underlying the financial products required a downward correction of the balance shee which put MBS' solvency at risk. On top of that, its demand for liquidity could not b accommodated by private markets since most of the banks in in Europe and in the world that still had liquid assets used them for stabilizing their liquidity reserve instead of lending them out to other banks. MBS filed a request for financial support to the Italian government. Given the circumstances, the only remaining liquidity channel was to rely on the Emergency Liquidity Assistance programme (ELA) a) What does last resort lending entail? What are the conditions for using last resort lending and i MBS eligible for the ELA programme? (10 points) In October 2016 the ECB Governing Council met in order to discuss the situation of MBS and came to the conclusion that the ELA programme did not work out that well. The likelihood of a sovereign default in Italy led the supervisors to the verdict that "the assets of the MBS Bank will be in the near future, less than its liabilities and the lack of access to liquidity would soon r situation where MBS will be unable to pay its debts as they fall due" (15 points) b) Which tools could be deployed in order to MBS Bank? Assess the appropriateness of each of them y 2016 two major developments hit MBS Bank (the second biggest Italian bank, operating in a cross-border fashion) severely: An immediate need for liquidity as a consequence of the failed risky investment strategies and a shortage of available liquidity due to a dried up interbank lending market. Liquidity was needed as MBS Bank used financial products with a shorter maturity period than the one of the investments that were refinanced by them. MBS erred in the quality of the securities underlying these financial products that lost during their maturity period practically their entire value. After the expiry of the maturity of these financial products, MBS was hence in an immediate need for liquidity in order to meet its refinancing obligations. The loss in value of the securities underlying the financial products required a downward correction of the balance shee which put MBS' solvency at risk. On top of that, its demand for liquidity could not b accommodated by private markets since most of the banks in in Europe and in the world that still had liquid assets used them for stabilizing their liquidity reserve instead of lending them out to other banks. MBS filed a request for financial support to the Italian government. Given the circumstances, the only remaining liquidity channel was to rely on the Emergency Liquidity Assistance programme (ELA) a) What does last resort lending entail? What are the conditions for using last resort lending and i MBS eligible for the ELA programme? (10 points) In October 2016 the ECB Governing Council met in order to discuss the situation of MBS and came to the conclusion that the ELA programme did not work out that well. The likelihood of a sovereign default in Italy led the supervisors to the verdict that "the assets of the MBS Bank will be in the near future, less than its liabilities and the lack of access to liquidity would soon r situation where MBS will be unable to pay its debts as they fall due" (15 points) b) Which tools could be deployed in order to MBS Bank? Assess the appropriateness of each of them
