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European Bank's Shaky Finances
Started:March 3rd, 2012 (09:39 PM) by GridKing Views / Replies:190 / 0
Last Reply:March 3rd, 2012 (09:39 PM) Attachments:0

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European Bank's Shaky Finances

Old March 3rd, 2012, 09:39 PM   #1 (permalink)
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European Bank's Shaky Finances

Quoted: "It's a very safe proposition. First, our counterpart is the ECB. It's not banks. It's not Greece. It's the European Central Bank itself, which in turn is well-capitalized and has behind it the national central banks of 17 countries."

—Federal Reserve Chairman Ben Bernanke, Feb. 29, 2012
Reality: Mr. Bernanke is trying to reassure skeptical lawmakers that $108 billion that the Fed has lent to the European Central Bank is totally safe and secure.

It's true that these dollar-for-euro swaps have many built-in safeguards, including the fact that the ECB must repay the loans with interest and in dollars, not in euros.

The Fed also can demand additional collateral from the ECB. But Mr. Bernanke is exaggerating when he claims the ECB is "well-capitalized."

After lending 800 banks about €530 billion last week, the ECB's balance sheet has expanded to around €3 trillion (that's almost $4 trillion).

Against that €3 trillion, the ECB has €82 billion in capital and reserves. That's a capital ratio of about 36 to 1. (The Fed, by the way, has about $3 trillion in assets, backed by $55 billion of capital, for a capital ratio of about 54 to 1.)

With such high leverage, it wouldn't take much of a decline in the value of the ECB's assets to eat through all of its capital.

The ECB is not well-capitalized at all.

The European Central Bank's Shaky Finances -

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