Posted by: Dirk | June 13, 2013

Asmussen on negative equity at the ECB

The German constitutional court is hearing from experts about the policy of the ECB. Jörg Asmussen, director of the ECB from Germany, said the following according to the  SPIEGEL:

EZB-Direktor Jörg Asmussen hattediese Argumentation auch am Dienstag vor Gericht vorgetragen – allerdings ohne eine konkrete Zahl zu nennen. Sollte es jemals zu Verlusten bei der EZB kommen, wären diese “nicht sofort und vollumfänglich” von den Mitgliedstaaten auszugleichen, sagte Asmussen. Eine Notenbank könne notfalls auch über mehrere Jahre mit negativem Eigenkapital agieren. Die Risiken seien “tragbar und kontrollierbar”.

So, if there are ever losses at the ECB, these would “not instantly and not fully” have to be compensated by the member states. Of course, these accumulating losses might lead to negative equity at the ECB. There was a dispute some time ago between the ECB and the Czech Central Bank, which is described by Karl Wheelan in paper from November 2012:

The final argument, which Buiter and Rahbari advocate as a more convincing one, is perhaps best illustrated via an ongoing dispute between the ECB and the Czech National Bank. The Eurosystem has no legal requirement that its participating central banks have positive capital. Nonetheless, in its 2010 and 2012 Convergence Reports, the ECB has admonished the Czech National Bank because it has a negative capital position. Specifically, ECB (2010) recommends that the negative capital situation should be rectified “in order to comply with the principle of financial independence.”

According to this argument, negative capital compromises a central bank’s independence because it requires them at some point to request funds from the government to restore their positive capital position. Governments could then look for more influence over monetary policy in return for honouring this request. However, this is a completely circular argument. It relies on the assumption that positive central bank capital is required, so central banks must request recapitalisation and have their independence compromised. If positive capital is not required, then no request for recapitalisation is required and independence is not compromised.

Consistent with this point, the Czech National Bank has issued a statement (CNB, 2010) to say that it considers the ECB’s statement “completely unacceptable”. Specifically, it notes that “Throughout its existence, its capital position has never undermined its independence or limited its decision-making and operational capacity in any way. The CNB is therefore convinced that there can be no doubt about its legal and factual independence. Negative capital presents no problem for the CNB, and the central bank is able to meet its obligations.”

So, there is no problem with negative equity at the ECB, it seems. It’s just that the rules – once again – that had been put into place do not allow the ECB to function properly as a central bank. Without a major change in the rules regarding the ECB the crisis will never stop. The existing system is faulty and only “works” because Mario Draghi broke the rules. “Works” means here that the financial system does not collapse. However, the problems in the real economy are still there. The euro zone is in recession, some countries have mass unemployment and young people face the worst job market since the end of WW II.


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