Posted on December - 17 - 2010
ECB announces a EUR 5bn capital increase
The ECB has just announced a EUR 5bn increase in its subscribed capital, which will almost double the existing amount to a total of EUR 10.76bn. The decision and the size of the increase were correctly anticipated by press leaks in the last few days. Importantly, the decision to hike capital stems from an assessment of capital adequacy conducted in 2009, i.e. before the beginning of the Securities and Markets Program. This means that government bond purchases carried out since May seem not to be the specific reason behind today’s decision. Rather, the ECB links higher capital needs to a generalized increase in the riskiness of its assets due to the heightened volatility in FX, interest rates, gold prices, and credit risk. Moreover, the ECB considers appropriate the move given the considerable growth of the financial system in the last years – we recall that this is the first general capital hike since the ECB inception in 1999. Technically speaking, the capital increase requires that euro area national central banks should pay an additional capital contribution of EUR 3.5bn in three equal installments, starting on 29 December 2010 and then at end-2011 and end-2012. Non-euro area national central banks will face minor adjustments to their capital share.
Today, the ECB announced also some changes to the framework for the implementation of monetary policy. In particular, fixed-term deposits enter the list of assets eligible as collateral for Eurosystem operations, without any valuation haircut. We recall that fixed-term deposits are used by the ECB to sterilize government bond purchases, and today’s move makes these tools more palatable for banks. Moreover, the ECB decided to establish loan-by-loan information requirements for ABSs in the Eurosystem collateral framework.
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