ECB to almost double capital reserves in effort to offset risks


RESERVES BOOST:THE EUROPEAN Central Bank has moved to strengthen its financial firewall with a decision to boost its share capital by €5 billion, bringing its reserves close to €11 billion as the bank battles the sovereign debt and banking crises.

The move will see the subscribed ECB capital of the Central Bank of Ireland rise to €119.52 million on December 29th from €63.98 million at present.

The capital increase will be made in three equal contributions over three years, however, so the paid-up share capital of the Central Bank will rise on that date to €82.5 million from €63.98 million.

The development came as EU leaders discussed how they might escalate their own efforts to tackle the crisis, with Portugal under pressure amid fears it will be unable to avoid a bailout following Ireland’s application for emergency aid. While political leaders remain divided over the scope and strength of the measures required to step up their defence of the euro, the ECB’s independent status means it has greater operational flexibility under its mandate to promote stability in the single currency area.

The move was seen by market analysts as an insurance measure to offset potential losses on the ECB’s increasing portfolio of securities holdings and to offset the risk of collateral losses.

As well as providing emergency financial aid to euro zone banks – including massive support for Irish institutions – the ECB has also acquired sovereign debt worth more than €72 billion since its decision last May to buy the debt of euro countries for the first time.

The ECB has been trying to unwind its emergency bank support but has been unable to do so because of sustained pressure in financial markets.

For example, Ireland’s institutions are largely shut out of inter-bank markets and their reliance on ECB funding is out of all proportion to the size of the Irish industry.

In a statement issued from its Frankfurt headquarters, the ECB said its governing council has agreed to raise its subscribed capital to €10.76 billion from €5.76 billion by the end of 2012. Never before in its 12-year history has the bank increased its capital.

“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,” said the ECB. “From a longer-term perspective, the increase in capital . . . is also motivated by the need to provide an adequate capital base in a financial system that has grown considerably.”