ECB Raises Subscription Capital Base

By Marc Chandler

NEW YORK (BBH FX Strategy) -- The European Central Bank announced its subscription capital base of 5.8 billion euros would effectively be doubled to 10.8 billion euros effective at the end of the year. The move is not surprising and has been hinted at for the better part of a week at least.

It does not have market implications. The ECB will have 10.8 billion euro capital base and asset holdings of slightly less than 2 trillion euros. In the private sector, this is a gearing ratio, or leverage, of about 175 times. In comparison, the Federal Reserve has a capital base of about $57 billion with assets in excess of $2.2 trillion. The Fed's 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 ECB's increase is the stepped-up volatility in the markets. Behind the scenes, we are under the impression that at least some at the ECB are concerned about the potential losses emanating from the bank's growing bond portfolio. Some estimates of the unrealized losses from the bank's sovereign bond purchases put them close to ... 5 billion euros. Because the ECB -- unlike the Federal Reserve -- is going to hold the bonds it purchases until maturity, the significance of the paper losses at the ECB also is not clear.

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

--Written by Marc Chandler of BBH Forex Strategy.

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