European Central Bank Hikes Capital From €5.76 To €10.76 Billion, Cuts Its 331x Leverage In Half
As we speculated earlier in the week, the ECB just confirmed it is doubling its reserve capital from a token €5.8 billion to €10.8 billion. The bank cited increased volatility in FX rates, interest rates, gold prices and higher credit risks as the cause for the increase. Of course, even with this hike, the capitalization of the European central bank is still woefully insufficient. As we noted previously: "the ECB has €5.8 billion of capital [now €10.8 billion] on €1.924 trillion of assets: roughly 331x leverage. As a reminder the Fed has $57 billion capital on $2,385 billion in assets, or a 42x leverage ratio. On the other hand, the ECB only holds €72 billion in directly purchased bonds as part of its "assets", whereas the bulk of the Fed's assets are rate-sensitive instruments: roughly $2.1 trillion in "securities held outright."" In other words, the only global hedge fund that has a greater leverage than the Fed, has just cut its gross leverage from a stunning 331 to only 178x.
From Dow Jones:
The European Central Bank Thursday said it decided to increase its subscribed capital by EUR5 billion to EUR10.76 billion, because of increased volatility in foreign- exchange rates, interest rates, gold prices and higher credit risks.
"From a longer-term perspective, the increase in capital--the first general one in twelve years--is also motivated by the need to provide an adequate capital base in a financial system that has grown considerably," the ECB said in a press release.
The capital hike had been expected. It will take effect Dec. 29.
Whether this means that the Fed will follow suit as well, following well over $15 billion in rates-related P&L losses in just the past week on surging intereat rates, is as of now unclear.
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