ECB Increase Subscription Capital by 5 bln Euros

The ECB announced its subscription capital base of 5.8 bln euros would effectively be doubled to 10.8 bln euros effective at the end of the year. The move is not surprising and has been hinted for the better part of a week at least.

It does not have market implications. The ECB will have 10.8 bln euro capital base and asset holdings that are just below 2 trillion euros. In the private sector, this is a gearing ratio or leverage of about 175x. In comparison the Fed has a capital base of about $57 bln with assets in excess of $2.2 trillion. Its leverage is around 45 times. The private sector comparison is interesting, but the importance or value is not immediately evident.

In any event, the ostensible reason for the increase is the stepped up volatility in the markets, currencies, gold and bonds. Behind the scenes, we are under the impression that at least some at the ECB are concerned about the potential losses emanating from the ECB's growing bond portfolio. Some estimates of the unrealized losses from their sovereign bond purchases put it close to...5 bln euros. Since the ECB is going to hold the bonds it purchases until maturity, unlike the Federal Reserve, it is also not clear the significance of paper losses at the ECB.

Separately we do note some European officials have expressed concern about the ECB becoming a "bad bank", holding distressed sovereign debt, accepting weak collateral and allowing banks who cannot borrow from the private sector, borrow unlimited amounts (3-months at a time) from the ECB, so that some countries' banks are borrowing 25-30% of GDP.