ECB raises its capital..

After much talks and hype, ECB raised its capital from EUR 5.76 bn to EUR 10.76 bn.

This decision resulted from an assessment of the adequacy of statutory capital conducted in 2009. The capital increase was deemed appropriate in view of increased volatility in foreign exchange rates, interest rates and gold prices as well as credit risk. As the maximum size of the ECB’s provisions and reserves is equal to the level of its paid-up capital, this decision will allow the Governing Council to augment the provision by an amount equivalent to the capital increase, starting with the allocation of part of this year’s profits. From a longer-term perspective, the increase in capital – the first general one in 12 years – is also motivated by the need to provide an adequate capital base in a financial system that has grown considerably.

The capital will be provided in 3 equal annual installments:

In order to smooth the transfer of capital to the ECB, the Governing Council decided that the euro area national central banks (NCBs) should pay their additional capital contributions of €3,489,575,000 in three equal annual instalments. Consequently, the current euro area NCBs will pay €1,163,191,667 as their first instalment on 29 December 2010. The remaining two instalments will be paid at the end of 2011 and 2012, respectively. Moreover, the minimal percentage of the subscribed capital, which the non-euro area NCBs are required to pay as a contribution to the operating costs of the ECB, will be reduced from 7.00% to 3.75%. The non-euro area NCBs consequently will make only minor adjustments to their capital shares, which will result in payments totalling €84,220 on 29 December 2010.

This is a decision which ECB has taken with some urgency. After all the talks about ECB planning to raise capital started at the start of last week. And by the end, it had acted on it. Unlike the ECB decisions in the crisis where it has weighed and deliberated on a decision for many days and months.

Eurointelligence as always has a nice comment on this:

It is funny that Lorenzo Bini Smaghi publishes an article defending a  No default position on the same day when the ECB decides to raise its capital as an insurance against default. The governing council yesterday decided to raises the equity capital in the ECB from €5bn to €10.8bn. Frankfurter Allgemeine says in a comment that the risks of the bond purchases were significantly larger than officially admitted. The paper wonders whether the Bundesbank, too, would have to raise its capital, but the Bundesbank refused to answer that question.

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