ECB may seek capital increase

Germany threw its weight behind a potential capital increase by the European Central Bank, saying it would react positively to such a move if the ECB deems it necessary.

Euro zone central bank sources said the ECB is considering requesting an increase in its capital from euro zone member states as a cushion against any potential losses from its bond buying programme.

"If such a request comes, we will judge it positively," a German official said, briefing reporters on the government line ahead of a summit of European Union leaders on Thursday and Friday.

"I don't rule out that Mr (ECB president Jean-Claude) Trichet will mention this at the (summit) dinner," the official added when asked about a possible ECB capital increase.

Asked what the ECB would expect to achieve by raising additional capital, the German official said: "I imagine the ECB would hope to strengthen its basis in order to show the markets that it was well capitalised, if for example, it wanted to buy additional sovereign bonds."

Any new money would come from the 16 national central banks which use the euro and contribute most of the ECB's €5.8 billion capital base, the ECB's statutes show.

The debate suggests the ECB is concerned its program to buy the bonds of strained governments such as Portugal and Ireland, which now totals €72 billion, may end up saddling its balance sheet with losses.

Bundesbank president Axel Weber opposed the purchases when they were introduced in May and the risk is that seeking support could raise new questions about the ECB's independence from politics.

"The link to this potential hike in ECB capital and what's going on in the markets is certainly the fact that the ECB is buying government bonds which are not AAA-rated and are more risky than bunds," said Marco Valli, chief euro-region economist for UniCredit SpA in Milan.

An ECB spokeswoman declined to comment. The ECB's potential capital request was reported by Reuters late yesterday.

Any increase would be supplied by the national central banks according to their capital subscription keys, according to the ECB website. The formula is calculated using the respective country's share in the total population and gross domestic product of the European Union.

Germany's Bundesbank is the largest contributor with 18.9 per cent, followed by the French and Italian central banks, with 14.2 per cent and 12.5 per cent, respectively. The Bank of England and other non-euro members contribute 7 per cent of the ECB's subscribed capital.

According to the ECB's statutes "the Governing Council, acting by the qualified majority" shall "determine the extent to which and the form in which the capital shall be paid up."

ECB officials have been putting pressure on the governments to do more to end the region's sovereign-debt crisis on concern the central bank is shouldering too much of the burden. President Jean-Claude Trichet said late yesterday leaders should consider extending and broadening the region's bailout fund.

Austrian central bank Governor Ewald Nowotny raised the issue of capital increases for national central banks last week.

"We are clearly seeing that risks are increasing in the system for European central banks because we are having to take on a whole range of extra risks," Mr Nowotny said in Vienna on Friday. "So in the whole European system we'll have to get a better capital base for central banks."

Bloomberg/Reuters