ECB Considering Requesting A Rise In Capital

Reuters is reporting that the ECB is considering requesting a rise in capital. It is unclear how much would be requested, but a "doubling" is considered. The current subscribed capital at the ECB is  €5.8 billion currently, and  payments for the ECB capital hike would be staggered. Presumably this is to validate that the backstopper of all those other insolvent, pardon, stress test-passing banks (just like the Irish ones during stress test 1) that will soon pass Euro stress test 2 with flying colors, is not itself insolvent. And now for some compare and contrast: the ECB has €5.8 billion of capital on €1.924 trillion of assets: roughly 331x leverage. As a reminder the Fed has $57 billion leverage 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." The bottom line: the ECB uses about 8 times more leverage than the Fed, which means that the two biggest hedge funds in the world can sustain a combined $65 billion in asset value reductions before they are technically insolvent. Of course, that would be the case in an ideal world where data actually mattered, and capital deficiencies could not be plugged up by just printing some more worthless linen.

From RTE:

The European Central Bank is reported to be considering asking for an increase in its capital from euro zone member states. This is according to a report from the Reuters news agency, which quoted euro zone central bank sources.

One source said among the options being discussed was a doubling of the ECB's capital. Another source said it was not yet clear how much the bank would ask for.

The report quoted one source as saying that the ECB was worried about potential losses from its purchases of euro zone government bonds.

The bank's subscribed capital is almost €5.8 billion, compared with a balance sheet of almost €138 billion, according to its latest annual report.

All of the EU's 27 national central banks contribute to the ECB's capital. The 16 countries already using the euro make up 705 of the money.

National central banks can increase their capital in a number of ways, including government injections, selling off assets, using reserves or by maintaining profits.

A decision to bolster the ECB's capital now would come at a time when central banks and governments are struggling with the cost of the financial crisis and recent turmoil on the euro zone's financial and debt markets.

Greece and Ireland have been bailed out to the tune of almost €200 billion while many parts of Europe are straining under intense austerity programmes. Reuters quoted one of its sources as saying that it was not clear whether any new money would come from the central banks or from government.

As the euro zone's largest economy, Germany currently contributes almost a fifth of the ECB's capital. France pays in just over 14%.


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