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How Much Fiscal Backing Must the ECB Have? – The Euro Area is not the Philippines

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  • Ansgar Belke

    ()

Abstract

The ECB has accepted increasing amounts of rubbish collateral since the crisis started leading to exposure to serious private sector credit risk (i.e. default risk) on its collateralised lending and reverse operations (“repo”). This has led some commentators to argue that the ECB needs “fiscal back-up” to cover any potential losses to be able to continue pursuing price stability. This Brief argues that fiscal backing is not necessary for the ECB for three reasons. Firstly, the ECB balance sheet risk is small compared to the FED and BoE as it neither increased its quasi-fi scal operations as much as the Fed or the BoE nor did it engage to a very large extent in outright bond purchases during the financial crisis. Secondly, the ECB’s specific accounting principles of repo operations provide for more clarity and earlier recognition of losses. Thirdly, the ECB can draw on substantial reserves of the euro area national banks.

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Bibliographic Info

Paper provided by Rheinisch-Westfälisches Institut für Wirtschaftsforschung, Ruhr-Universität Bochum, Universität Dortmund, Universität Duisburg-Essen in its series Ruhr Economic Papers with number 0184.

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Length: 17 pages
Date of creation: Apr 2010
Date of revision:
Handle: RePEc:rwi:repape:0184

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Related research

Keywords: Central bank independence; central bank capital; counterparty risk; repurchase agreements; collateral; fiscal backing; liquidity; haircuts;

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Cited by:
  1. Ansgar Belke & Christian Dreger, 2011. "Ramifications of Debt Restructuring on the Euro Area: The Example of Large European Economies' Exposure to Greece," Discussion Papers of DIW Berlin 1141, DIW Berlin, German Institute for Economic Research.
  2. Christian Fahrholz & Andreas Freytag, 2011. "Realwirtschaftliche Aspekte der gegenwärtigen Krise im Eurosystem: Ursachen, Wirkungen und Reformansätze," Global Financial Markets Working Paper Series 21-2011, Friedrich-Schiller-University Jena.

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