ECB Official Defends Central Bank’s Balance Sheet
By Brian BlackstoneThe European Central Bank‘s (rhetorical) defense of its balance sheet continues, this time from executive board member Lorenzo Bini Smaghi. Days after his ECB colleague Juergen Stark rebuffed the notion that the ECB’s peripheral debt and collateral holdings are turning into a “bad bank,” Bini Smaghi called the analysis behind such claims “fundamentally flawed.”
“This argument is based on a clear misunderstanding of the type of operations conducted by the Eurosystem and of the risk control measures applied to those operations,” he said in a speech in Amsterdam.
Officials have taken aim at suggestions that by buying peripheral government bonds '09 Ford F-150 wins Truck of Texas award_26605, and lending tens of billions of euros to Greek, Irish and Portuguese banks — loans that are backed by government bonds and other types of collateral — the ECB’s balance sheet is dangerously exposed to any Greek default and the contagion that would ensue.
A study from the think tank Open Europe last week estimated that if the value of the ECB’s asset holdings falls just 4.25%, “its entire capital base would be wiped out.”
The ECB is in safer shape than that cheap oakley sunglasses beats headphones and Asiaet al Worl, Bini Smaghi counters. According to Bini Smaghi, the Eurosystem’s capital plus reserves is more than 80 billion euros. But when its “revaluation accounts” (which are unrealized gains that can serve as buffers against losses) are included, the total rises to nearly 390 billion euros, against around 1.9 trillion euros in total assets.
The Eurosystem includes the ECB and the 17 national central banks that make up the euro.
In addition, the ECB’s stream of seigniorage income from printing money provides “an additional financial buffer,” Bini Smaghi said, and thus “needs to be considered when assessing the economic capital of a central bank.”
The ECB’s financial heft “cannot be fully captured by using capital adequacy metrics such as those applicable to private banks for regulatory purposes, as it has been done in a rather simplistic way by some commentators,” he said.
Bini Smaghi makes three other points about its bond and collateral holdings.
On bonds: “Not being a liquidity-constrained institution, we can act as a buy-side counterparty in markets where sell-offs are taking place beats headphones Pink Bra SweetIf y, and our investment in those markets can be held to maturity, so that only default risk could threaten our profit and loss accounts.”
On collateral: “Assets held as collateral only constitute a guarantee, not a direct exposure. Accordingly, related price decreases could only induce Eurosystem losses if those decreases took place after the default of the counterparty.”
On taking on these risks in the first place: It is “inherent in the financial stability function of central banks. The central bank is the only patient investors who can intervene at times of crisis as a counterpart to distressed short term investors with a view to ensuring market liquidity and restoring confidence.”
Of course, many observers say that it is the very occurrence of a Greek default that would trigger losses on both the ECB’s bond and collateral holdings. ECB officials are dead set against default, but insist their opposition isn’t driven by concerns over their balance sheet.
