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

Ansgar Belke

No 184, Ruhr Economic Papers from RWI - Leibniz-Institut für Wirtschaftsforschung, Ruhr-University Bochum, TU Dortmund University, University of Duisburg-Essen

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.

Keywords: Central bank independence; central bank capital; counterparty risk; repurchase agreements; collateral; fiscal backing; liquidity; haircuts (search for similar items in EconPapers)
JEL-codes: E42 E51 E58 E63 G32 (search for similar items in EconPapers)
Date: 2010
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Citations: View citations in EconPapers (13)

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Persistent link: https://EconPapers.repec.org/RePEc:zbw:rwirep:184

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