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Title:How much fiscal backing must the ECB have? The euro area is not the Philippines PDF Logo
Authors:Belke, Ansgar
Issue Date:2010
Series/Report no.:Discussion papers // German Institute for Economic Research 996
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-fiscal 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.
Subjects:Central bank independence
central bank capital
counterparty risk
repurchase agreements
collateral
fiscal backing
liquidity
haircuts
JEL:G32
E42
E51
E58
E63
Document Type:Working Paper
Appears in Collections:DIW-Diskussionspapiere
Publikationen von Forscherinnen und Forschern des DIW

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