€60bn worth of covered bonds + €70bn of government bonds = €130bn of potential problem assets on the European Central Bank’s balance sheet.
A 1 per cent interest rate increase at a 3 per cent coupon with an average of seven years maturity makes just under a 5.32 per cent loss rate — which is quite a rough (but conservative) estimate by German financial consultant Achim Dübel.
Add in some forex losses and presto…
… The ECB’s subscribed (2009) capital of €5.8bn is already used up.
This is an extreme simplification, of course. The ECB will have taken haircuts on the collateral offered up by banks and (as we learned from Monday’s Deutsche Bank report) retained claims against the local banks for the entire amount of the loans. However, a claim against defaulted banks will be worthless in a restructuring scenario.
Small surprise then, that Europe’s massively leveraged central bank is reported by Reuters to be considering raising additional capital — to use as a cushion to protect the ECB from losses on its 2010 government bond-buying programme.Still, you could’ve seen trouble coming before then… and just by looking at the type of collateral the central bank was accepting in the emergency liquidity operations it started back at the height of the financial crisis. [...] ft com
La BCE veut se recapitaliser:
Exclusive: ECB eyes seeking capital hike -c.bank sources
FRANKFURT | Mon Dec 13, 2010 2:40pm EST
FRANKFURT (Reuters) - The European Central Bank is considering requesting an increase in its capital from euro zone member states, euro zone central bank sources told Reuters, as a cushion against any potential losses from its bond buying.
One source said among the options being discussed was a doubling of the ECB's capital. The other source said it was not yet clear how much the bank would ask for.
One of the sources told Reuters the bank was planning to ask for its capital to be raised. A second source confirmed the plan was being discussed, adding:
"The issue is that the ECB is worried about potential losses from its bond buying."
"At the moment we are buying very modest amounts, but what if that is increased, and what if the bonds you buy are suddenly worth 30 percent less?"
The ECB declined to comment. [...] Reuters
La zone euro a besoin d'un fossoyeur:
The eurozone is in bad need of an undertaker
The EU’s Franco-German "Directoire" and the European Central Bank have between them ruled out all plausible solutions to the eurozone’s debt crisis.Telegraph
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