Can a Central Bank go bust?

There is a simple answer to this question which is usually correct – “No”.

If you regarded Central Banks as normal businesses, or even as normal banks, you would be mighty alarmed by their balance sheets today. Several of the leading western Central Banks are doing what they condemned commercial banks for doing in the run up the Credit bubble. They are gearing their balance sheets massively. The Bank of England has a £245 billion balance sheet, with equity and reserves of just £4.4 billion. In other words, its total liabilities are 55 times its capital.

The Governor and Directors of the Bank do however retain some sensible caution. The Bank of England’s balance sheet is massively distorted by the £200 billion of Quantitative easing the Bank has carried out so far. Here the acquired assets, UK government bonds, are matched by a Treasury loan. The Treasury gives a guarantee against loss. The UK state is expected to stand behind the Bank if it started losing significant sums on these assets at market prices, and it could hold them to redemption at par anyway. If you take this off the Bank’s balance sheet, it looks altogether more prudent.

Over at the European system of Central banks, before we factor in the mega loans to EU banks announced this week, a balance sheet of Euro 2.4 trillion is supported on Euro 81 billion of capital. That means they are 30 times geared.

These same central banks now think that maybe 10 times geared is about as risky as a commercial bank ought to go. So what makes them different?

There are two characteristics of a Central Bank that enable it to gear much more than other businesses in certain conditions. The first is single country Central Banks have the country standing behind them. Like the Bank of England they are usually owned by the state on behalf of taxpayers. The full taxable capacity of the country stands behind them to pay any losses. If need arose the state could put in more capital.

The second is a Central Bank usually has the power to create more of its own currency, with or without the control of the government. So a Central Bank should always be able to meet its payment schedules, at least in the currency of the day, as it can create some more. If it does this on too big a scale it will of course damage the foreign exchange value and the purchasing power of the money it presides over, but should always be able to meet its legal nominal obligations.

We need, however, to ask if these two very special characteristics of single country state controlled Central Banks fully apply to the European central Bank. We have to ask which country or countries stands behind it? If the ECB lost large sums on its assets, would all the shareholder members of the ECB put in new capital in the amounts required? Do the countries standing behind it have enough taxable capacity to carry the risks their Bank is running?

We also need to ask how much new Euro money the ECB is empowered to create? Given the understandable German fears of excess money creation, and the rules against state financing by the ECB, can we rely on the Bank always being able to print its way out of pressing obligations, if tax revenue from member states is not forthcoming?

The European central Bank is building a portfolio of assets in the form of loans to weak banks, and a bond portfolio with the emphasis on weaker sovereigns. Armed with such assets, and given the high gearing of the Bank. we do need to know what if these assets cause substantial losses? Who stands behind the Bank? Is it now full Central Bank, with all the powers it needs to finance its large portfolio?
I assume the answer to our central question is for the ECB as for the others, that a Central Bank cannot go bust. It would be good to have official confirmation on how any possible future losses could be covered and how much conventional Central Bank power the ECB now has.

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74 Comments

  1. freddy
    Posted December 26, 2011 at 6:21 am | Permalink

    “The Bank of England’s balance sheet is massively distorted by the £200 billion of Quantitative easing the Bank has carried out so far. Here the acquired assets, UK government bonds, are matched by a Treasury loan. ”

    Sorry, I’m confused. Where did the Treasury get the £200bn from ?

    Reply: It was created or printed.

    • Acorn
      Posted December 26, 2011 at 10:09 am | Permalink

      freddy, see following. Where you see the phrase “reserve balances” is the printed money the banks have parked at the BoE. It is balanced by the junk “other assets” on the assets side of the balance sheet. As long as those reserves remain inside the BoE as a liquid reserve asset for the commercial banks, we are safe from hyperinflation. Not much chance that any bank will lend out those reserves at the moment, certainly not at a ten to one multiplier. http://www.bankofengland.co.uk/markets/balancesheet/index.htm

  2. Single Acts
    Posted December 26, 2011 at 7:35 am | Permalink

    A central bank gives the state enormous power, the ability to create money out of thin air and engage in any manner of financial jiggery-pokery. I know of few if any people I would trust with such a power.

    Whereas commodity backed money pretty much eliminates much of the potential for abuse as well as removing the vast inflationary effect of an ever increasing money supply.

  3. Gary
    Posted December 26, 2011 at 8:07 am | Permalink

    Central banks, all of them, are the reason that we have the crisis. Banks knew that no matter how badly they ran their loan books, no matter how insane their risks and leverage, the central banks ie. The taxpayers (who ultimately underwrite the central banks), would underwrite the banks. This is a blank cheque to loot and wreck a country, if not the world.

    There are no public audits of the central banks, their operations are done in secret and they use an exclusive bunch of private broker dealers to deal on the central banks behalf. The ultimate inside traders.

    And it is the Fed , not the ECB that is providing the bulk of the liquidity to the EU, through currency swaps.

    According to this study at the University of Missouri, the FED has doled out $29 trillion in this crises, in secret, out the back door in programs with acronyms like TAF,
    TALF, TSLF, PCDF, etc. No public audit, all liable to the taxpayers.

    This system is (wrong-ed)

    – James Felkerson,
    $29, 000,000 ,000, 000: A Detailed Look
    at the Fed’s Bailout by Funding Facility
    and Recipient (University of Missouri:
    Kansas City, December 2011); Levy
    Economics Institute of Bard College,
    Working Paper No. 698.

    reply: I think the Fed would deny it had doled out anything like the featured amount, and would argue that it helped guide a weak banking system through the troubles of 2008.

    • zorro
      Posted December 26, 2011 at 7:25 pm | Permalink

      The FED, of course, could quickly deny these rumours by agreeing to a better audit process and more transparency in their operations.

      Bearing in mind that the Fed has destroyed the value of the dollar by excess expansion of the money supply. This can be shown from the start and end purchase power amounts below, which are from http://www.measuringworth.com

      It took US$1,202.05 in the year 1912 for the same purchase power as US$1,000 in the year 1774 (a 17.7% loss in 138 yrs, or 0.13 % per yr).

      It took US$22,427.40 in the year 2008 for the same purchase power as US$1,000 in the year 1913 (a 95.5% loss in 95 yrs, or 1.0% per yr). A particularly poor comparison when compared to the time before the FED….

      Admittedly, a good proportion of this loss will have taken place over the last forty years since Nixon decoupled the dollar from gold.

      So, all in all, the FED needs to be more convincing in its explanation of its strategy.

      zorro

  4. lifelogic
    Posted December 26, 2011 at 8:21 am | Permalink

    What is the point of all this shifting of paper debts around just another way of, back door taxing people, through inflation and the creation of pointless jobs I assume?

    For any like Clegg still keen on taxing the rich out of the country, it is interesting to see just how dependent the UK is on top earners for income tax receipts. The top 10% of income tax payers actually pay about 56% of total income tax receipts. The sooner the idiotic 50% goes the better for all.

    • uanime5
      Posted December 26, 2011 at 12:41 pm | Permalink

      The top 10% pays so much because they have 53% of the wealth. By contrast the bottom 50% only have 7% of the wealth.

      Removing the 50% tax rate will only result in the rich not paying their fair share of taxes, rather than a fair tax system.

      • lifelogic
        Posted December 26, 2011 at 2:09 pm | Permalink

        It is far better that the wealth stays with the people who clearly know how it invest, accumulate and use it wisely.

        Far far better than having it redistributed to government or the feckless in general as you seem to want.

        • Bazman
          Posted December 26, 2011 at 5:22 pm | Permalink

          What makes you think they do other than your church like beliefs? Are we to be ever at the whim of the super rich?

        • BarmyBob
          Posted December 28, 2011 at 10:21 pm | Permalink

          @lifelogic
          “It is far better that the wealth stays with the people who clearly know how it invest, accumulate and use it wisely”
          Presumably you’re talking about bankers and the like.

      • Disaffected
        Posted December 26, 2011 at 2:55 pm | Permalink

        The really rich do not pay tax as they should because they get accountants to sidestep existing laws to avoid tax.
        But the uk still needs the tax from the rich.

        • lifelogic
          Posted December 26, 2011 at 7:24 pm | Permalink

          No, they need more rich far more the higher rates, then they get more tax with lower percentage rates and a virtuous circle of jobs, growth and further money and the wealthy thus attracted.

          • uanime5
            Posted December 26, 2011 at 9:17 pm | Permalink

            All evidence shows that lower tax rates mean less tax revenue. Even the Laffer curve shows this.

            Also jobs can be created without attracting the wealthy by encourages small and medium businesses.

        • libertarian
          Posted December 26, 2011 at 8:12 pm | Permalink

          Really how do they avoid VAT, road tax, fuel tax, energy tax, council tax, business rates, TV tax etc etc etc.

          Accountants can only arrange ones affairs to minimise the income, corporation and capital gains tax that is due by using the rules as laid down by HMRC.

          Oh and whilst I don’t have the figures to prove this I would guess that as many if not more of the less wealthy avoid capital gains tax by switching primary residence on homes as do very rich people avoiding capital gains on investments

          @uanime5

          You do distort things to make them fit your story. Once again I’ll tell you this, money is NOT a zero sum game, until you understand what this means you will be forever spouting drivel. There is no such thing as “The Wealth” there isn’t a percent of an overall pot that someone can have.

          The top 10% of wealthy people pay 53% of ALL the tax collected, which means that the other 90 % of people ( i.e. a far far far larger number of people) only pay 47% between them. And you laughingly talk about fairness

          • uanime5
            Posted December 26, 2011 at 9:32 pm | Permalink

            Since you don’t understand what ‘percentage of the wealth’ means allow me to explain.

            By determining the total amount of wealth held by all the people of the country you can determine what percentage of the wealth each person or groups of people possess. At present the richest 10% of the population have 53% of the wealth so they should pay at least 53% of the taxes. By contrast the poorest 50% only have 7% of the wealth so they cannot contribute more than 7% of the total taxes.

            Where we to live in a more equal society where the top 10% only had 10% of the wealth they would only need to pay 10% of the taxes.

          • lifelogic
            Posted December 27, 2011 at 9:24 pm | Permalink

            We understand “% of wealth” just fine – 100% tax rates of very little income is very little and 10 % of a great deal of income is rather a lot.

          • Alex purser
            Posted December 29, 2011 at 10:56 pm | Permalink

            I would say that it is fair to consider “wealth” as the material (ie mineral, agricultural, infrastructure) capabilities as well as the fruits of labour (whether physical or intellectual). The so called “wealth creation” of the top 10pct of our society seems always to be focused on monopolising the former as opposed to sweating the latter. In the absence of a level playing field, taxing wealthy scroungers all the way to switzerland seems a fair way to oppose their tyrany

      • libertarian
        Posted December 26, 2011 at 7:58 pm | Permalink

        Really? Define fairness, do you mean someone who chooses to stay in a lesser paid job , earn less money and pays 10 times LESS tax that someone who works harder, earns more and pays 10 times MORE tax for the same basic services .

        You really need to take an objective look at this and stop spouting jealousy based rhetoric.

        • uanime5
          Posted December 26, 2011 at 9:34 pm | Permalink

          They pay 10 times more tax on what they earn because they earn 10 times more. This would occur even if there was a flat tax.

          Also earning 10 times more money doesn’t mean you work 10 times harder.

          • David Price
            Posted December 27, 2011 at 9:36 am | Permalink

            Fairness is being paid the value of the goods or services you provide to the customer.

            Or, should someone who digs a hole in the ground be paid the same as a heart surgeon, architect or someone who generates export revenue?

            I don’t understand what your figures mean or where you got them but I wonder if you are confusing income with wealth. Wealth is what you accumulate after you have paid taxes on income. If I chose not to invest that money rather than spend it on holidays why should I pay yet more taxes on what I have saved?

            If by wealth you are refering to income then as Libertarian suggests an alternative view would be that only 10% of the population generate the majority of the wealth, so what exactly are the “bottom” 50% doing?

          • alan jutson
            Posted December 27, 2011 at 9:53 am | Permalink

            uanime5

            It depends on what you call “work harder”.

            If you mean actual physical work, or hours worked, then you are correct, but working harder can also mean working more efficiently, taking a higher risk with your own money, ideas, and above all taking the risk of employing other people to work on your behalf, etc.

            Thus the RISK has to be worth the REWARD, otherwise why would people bother.

            With the present tax system the Government take taxes from any profit made, but do not subsidise a loss, hence its heads they win, tails you lose, and that is why on balance, and to be fair, taxes need to be lower.

  5. Posted December 26, 2011 at 8:37 am | Permalink

    If the ECB is relying on the Eurozone states guarantee, and they are bust, surely it is also bust?

  6. A.Sedgwick
    Posted December 26, 2011 at 8:58 am | Permalink

    I suppose the answer for all, apart from the ECB, is Central Banks cannot go bust but countries can. Part of the chaotic scenario the Euro has created concerns the ECB. Will Germany support the ECB in all circumstances – I doubt it. Is there embedded in some obscure clause in the myriad of treaties a requirement for all EU countries to bail out the ECB?

  7. Alan Hill
    Posted December 26, 2011 at 9:10 am | Permalink

    I guess you wouldn’t have asked the question unless you already knew the answer which is (?)……

    …The ECB is no more a real central bank than the euro is a real currency, consequently the bank can go bust…………probably about the time the Germans decide that enough is enough.

  8. Posted December 26, 2011 at 9:30 am | Permalink

    “The European central Bank is building a portfolio of assets in the form of loans to weak bank”

    These are only assets if they are repayable. Clearly, loans to Greece are not repayable, therefore those loans are liabilities to the ECB.

    That one question alone spotlights the disingenuousnous, to put it mildly, of the players in this theatre. It is a contradiction which they have not tackled convincingly.

    The market, in its rawest form, is something of a natural creature. There being no contradictions in nature (only misunderstanding of it). It is hardly surprising, therefore, that there’s a ‘cognitive dissonance’ in the markets.

    The political players and bankers must know that they peddle untruths … as things currently stand. But they hope to be able to push through the ESM Treaty before the markets fully wake up to their curate’s egg.

    If we are fortunate, the markets will punish the imrisoned EZ country so brutally, that no amount of sticking plaster will hold together the rickety Euro and Greece, Ireland, Portugal and others will be ejected from the EZ after defaulting on most, if not all of their debts. The deteriorating competitiveness ratio between the richer and poorer parts of the EZ will only make the inevitable explosion all the worse, as the ‘leaders’ play for time.

    Speaking of which, I am incensed that the government, in the person of Mark Hoban, deems that no bankers or regulators broke any laws in the roles they played in this catastrophe. Do MPs really believe that?

    There was no bribery? No insider trading? No fraud? No breach of contract? No conflict of interest? No tax evasion?

    Nothing at all?

    How can the Conservative Party honestly hope to ditch the “nasty” tag bestowed on it by May, if justice is not seen to be done?

    Here, again there is cognitive dissonance: the people know that men and women guilty of causing the most monstrous depression in history are being rewarded with bonuses and more power. They see ordinary, law-abiding citizens being arrested for the most trivial and unjust of reasons. They see Chris Huhne on course to devastate our economy with his freaking windmills and ‘carbon’ targets,(with questions over a past speeding offence-ed). They see MPs who were jailed for fiddling their expenses emerge from jail after a few months only (so that they can return to government, should they so wish!). And they see MPs who fiddled their expenses to a fraudulent degree getting off Scott-free – simply because they have more power.

    Observe the dissonnance. It is the fuse of the EZ debt bomb whose time is running out.

    I hope you had a Merry Christmas, JR.

    Reply: No-one believes the financial markets have been crime free. There have been prosecutions for fraud and insider dealing. If there is evidence of other offenders and offences you or others who have it should send it to the authorities. There does have to be evidence, and everyone, even a banker, deserves a fair trial and is innocent until proved otherwise.
    I think it very unlikely that an MP who has served time for false accounting or theft will make it back into government. It is very unlikely they would stand again for election, and unlikely they would be elected if they did.

    • witteringwitney
      Posted December 26, 2011 at 4:49 pm | Permalink

      “I think it very unlikely that an MP who has served time for false accounting or theft will make it back into government. It is very unlikely they would stand again for election, and unlikely they would be elected if they did.”

      No doubt you will disagree with me, Mr. Redwood, but I have to take exception to your use of the words ‘served time’. Was not Alan Keen guilty of false accounting and was it not suggested by the Parliamentary Commissioner for Standards he should repay £5,678 for a serious breach of the rules? Did not the Commons Standards and Privileges Committee reduce that figure to £1,500? Was not Alan Keen re-elected on 6 May 2010?

      Alan Keen may not have served time, but the man (broke the rules in a way which was censured-ed). Yet on November 23rd David Cameron delivers a eulogy to the man? Alan Keen was not alone in having ‘broken the rules’ and I note we still await news with regard to the Member for Rotherham; and his fate. Why Alan Keen was not one of those thrown to the wolves, I know not. Divine intervention? At least we can be satisfied that it was not Devine intervention. That MPs knew they were breaking the principles of the old expenses system is not in doubt with many using the excuse that what was claimed was allowable.

      And MPs are all Honourable, or Rt. Honourable, members?

      • Posted December 26, 2011 at 7:09 pm | Permalink

        what about the conservative lord of warwick….served time for expense fiddle..going back to the house of lords………no election

        • lifelogic
          Posted December 26, 2011 at 9:43 pm | Permalink

          Lord Taylor of Warwick certainly should not be re-admitted under any circumstances. I even have a bit more sympathy for Jeffrey Archer though not very much more.

  9. Posted December 26, 2011 at 9:55 am | Permalink

    Surely the most substantial threat to a central bank is if the people it represents cease to be politically unified in a way which is unplanned?

    In the case of the ECB the political union was never sufficiently there for it to be secure against that criterion. It seems things will get a whole lot worse. Let’s hope the German national sense of guilt for WWII is strong enough make them determined to prevent another war at all costs.

    • alan jutson
      Posted December 27, 2011 at 10:00 am | Permalink

      Rebecca

      Agree with your point, the ECB will eventually fail when a number of Country’s start to become nationalistic, and governments cease to want to underwrite another nations spending and debt.

      Had all Country’s had a referendum to agree a joint single bank account, and by that all of its implications, and voted yes, then it would have stood a better chance.

      My forecast:
      Germany will eventually cease to fund the ECB.

  10. william
    Posted December 26, 2011 at 9:56 am | Permalink

    The ECB may certainly become insolvent,that is the written down value of its assets( not their book/cost value),as derived from market prices,does not match its liabilities.It may be insolvent already,for all we know.Whether or not it goes bust depends on its accounting policies,its auditors,market pressures and the strength or weakness of it’s shareholders.The (problem-ed) for the euro and the ECB is the stance of surplus nations like China and OPEC countries.Markets have a habit of testing ‘banks’ with dubious foundations!

    Reply: it is clearly not insolvent today, as it is accepted as a credit worthy trader in the market.

  11. Brian Tomkinson
    Posted December 26, 2011 at 10:13 am | Permalink

    What happens to the assets and liabilities of the ECB when/if countries leave or are expelled from the eurozone?

    Reply: If they hold exit country assets they may lose on devaluation, depending on the legal arrangements for those assets. The exit country would presumably sell its shareholdings in the ECB back the ECB or remaining members, though this is not a priority. The countries owing or owed money by the ECB would still have contracts to fulfill.

  12. Ken
    Posted December 26, 2011 at 10:15 am | Permalink

    I assume that the ECB runs the risk of a technical bankruptcy. The problem is that the national central banks have accounts at the ECB and what is actually happening is that the ECB is acting as an intermediary for Germany to lend to Greece. Now in a normal situation, say that the Greek central bank defaulted the national government of Greece would be expected to step in and bail them out and thus make the ECB whole. But since it will be Greek government default that bankrupts the Bank of Greece, this will not be possible – thanks to the Euro, the Greek government cannot just print money (which is what sovereign nations do in this situation). This blows away ECB capital, but I assume that the remaining EZ governments make their central banks “whole”. However, if this spreads to the likes of Italy, the bottom line is that the ECB is so deep in the hole that bad things happen. Legally it looks pretty murky – but political economy makes it more murky still.

  13. Optingout
    Posted December 26, 2011 at 10:33 am | Permalink

    The UK state is expected to stand behind the Bank if it started losing significant sums on these assets at market prices, and it could hold them to redemption at par anyway

    ============

    Doesn’t work. Your assumption is that there is no default on the junk they have bought.

    Reply: The UK Bank has only bought UK gilts, so there will be no default. The ECB’s holdings are not gilts, as the article makes clear.

  14. Nick
    Posted December 26, 2011 at 10:38 am | Permalink

    Whereas commodity backed money pretty much eliminates much of the potential for abuse as well as removing the vast inflationary effect of an ever increasing money supply.

    ================

    It’s not without other problems. Look at Greece. It has a currency that has the same effects as a commodity based currency. It can’t devalue, so it can’t cause inflation to erode its debts. The outcome isn’t particularly attractive. However, this is a symptom of something else.

    The real cause is governments who spend and put the debts on to future generations by using Enron style accounting. The UK is doing that. Not even John Redwood will admit to the government debts that are off the books as he promised.

    7,000 bn of debts of which only 1,050 bn are on the books. That debt doesn’t included bailing out those with no savings.

    Given the government ‘income’ of 550 bn, they can’t afford it. So something has to give.

    1. State pension to be frozen.
    2. State pension to be means tested.
    3. Private pensions will be confiscated. [Like Hungary and Argentina]

    Reply: Of course I have set out the old off balance sheet debts, and these have been stated clearly by the new government. They have consolidated the baniing, PFI and PP debts and quantified the public sector pension debts. The government does not put the basic state retirement pension on as a debt, as it has always been pay as you go, but even so we have attempted to capitalise and quantify it here for the purists. The truth is you could capitalise all future promises of governments – free health, free education and free pensions, and ignore all future tax revenues to pay for them. That would make every state look bust, but would be meaningless. It is like saing a company is bust because you think it has to pay all future costs without the benefit of any turnover or revenue.

    • Posted December 26, 2011 at 6:04 pm | Permalink

      “It is like saing a company is bust because you think it has to pay all future costs without the benefit of any turnover or revenue.”

      Not quite. A company can be [technically] insolvent if the sum of its liabilities exceeds the sum of its assets, notwithstanding that it has the cash balances to continue operating.

      In the case of the UK, it is arguable that the basic state pension is not a liability of the government because in extrmis the government could decide not to pay it and the average citizen would have no legal recourse (although they might have recourse at the ballot box).

      The unfunded pensions of public sector workers are a different matter because they are employee rights and state liabilities arising from employment contracts. As I understand it, the UK government leaves the net pension deficit out of the government accounts because according to successive it is “too difficult” to work out the exact number (£900 billion seems to be in the ballpark), so they decide to leave the whole amount out of the accounts, which is one of the more risible acts of UK public sector flim-flam.

      I believe that in the USA, Federal employee pension schemes are backed by US Treasuries. Scheme contributions (the schemes are fully funded) are used to purchase US treasuries, so the cash goes straight back to the government, but crucially the government debt obligations show up as part of the US National Debt.

    • zorro
      Posted December 26, 2011 at 7:50 pm | Permalink

      I suspect the time will come eventually when the state pension is means tested. But, as John says, it is unrealistic to only assume the state liabilities on pension costs without considering the income from current workers under the ‘pay as you go’ arrangement.

      After all folks, the position is hopeless enough without needing to exaggerate it.

      Remember, strong central banks can print money on the back of being able to extract taxes from current and future workers. The government considers your future labour as their buying power. The government is, of course, counting on you continuing to pay those taxes…..

      zorro

  15. Gary
    Posted December 26, 2011 at 11:05 am | Permalink

    Even if that paper I referenced is 100% out, half that quoted $29 trillion outlay by the FED is enormous. Here is the breakdown :

    When all individual transactions are
    summed across all facilities created to
    deal with the crisis, the Fed
    committed a total of $29,616 .4 billion
    dollars. This includes direct lending
    plus asset purchases. Three facilities —
    CBLS, PDCF, and TAF — overshadow all
    other facilities, and make up 71.1
    percent ($22,826 .8 billion) of all
    assistance.

    Totals (in billions) and
    percent of total, by facility are as
    follows. Any outstanding loans are in
    in parantheses.
    Term Auction Facility: $3, 818.41,
    12.89%
    Central Bank Liquidity Swaps:10, 057.4
    (1. 96), 33.96%
    Single Tranche Open Market
    Operation: 855, 2.89%
    Terms Securities Lending Facility and
    Term Options Program: 2,005 .7,
    6.77 %
    Bear Stearns Bridge Loan: 12.9, 0.04 %
    Maiden Lane I: 28.82, (12.98) 0.10%
    Primary Dealer Credit Facility: 8,950 .99,
    30.22%
    Asset- Backed Commercial Paper
    Money Market Mutual Fund Liquidity
    Facility: 217. 45, 0.73%
    Commercial Paper Funding Facility:
    737. 07, 2.49%
    Term Asset-Backed Securities Loan
    Facility: 71.09, (.794 ) 0.24 %
    Agency Mortgage-Backed Security
    Purchase Program: 1,850 .14, (849 .26)
    6.25 %
    AIG Revolving Credit Facility: 140.316 ,
    0.47 %
    AIG Securities Borrowing Facility:
    802. 316, 2.71 %
    Maiden Lane II: 9.5 (9.33 ) 0.07 %
    Maiden Lane III: 24.3 , (18.15) 0.08%
    AIA/ ALICO: 25, 0.08%
    Totals $29,616 .4, 100.0 %

    http://www.levyinstitute.org/publications/?docid=1462

    • Michiel
      Posted December 27, 2011 at 12:33 am | Permalink

      This 29trn is derived by silly calculation methods. If the Fed provides overnight liquidity to a bank for 1 day, in say 1bn, this is counted as 1bn. If the bank does this for 10 days, it counts it as 10bn, doing it for a year provides 360bn… In reality, the bank in questions, only got 1bn of liquidity and so on. The actual peak liquidity provision provided is estimated by many others, also in recent articles – see Bbg for example to be a fraction of the numbers quoted, and that is for obvious reasons.

      • Gary
        Posted December 27, 2011 at 8:57 am | Permalink

        Your numbers against mine.

        We do know that the Govt Auditing Office in the USA found the number secretly shovelled out the back door by the FED to the private banks was $16Trillion. Even that is enormous.

        http://www.forbes.com/sites/traceygreenstein/2011/09/20/the-feds-16-trillion-bailouts-under-reported/

        Note : this was not a full audit by the GAO, that was not allowed. It was a restricted audit :

        http://www.gao.gov/products/T-GGD-94-44

        Until somebody does a FULL public audit of the FED nobody really knows. THAT is the scandal. How can a body that is supposed to be owned by the govt ie the people, or so we are told, be so opaque to the people ?

        What is 100% true is that the FED is unconstitutional. Literally. That should be the starting point in investigating the FED.

  16. Alan Hill
    Posted December 26, 2011 at 11:09 am | Permalink

    In the UK we we have pretty well complete control over all aspects of our financial life- including the BOE – (one of the benefits [if not the benefit] of being a sovereign state with its own currency).
    In the eurozone the nation states have neither control of the ECB or therefore control of their finances. result = chaos.

    I guess they were hoping calm economic conditions would prevail until the EU had consolidated into a state…well it didn’t work out like that.

  17. Duyfken
    Posted December 26, 2011 at 11:14 am | Permalink

    The paid-up capital of the ECB is about €5 billion (from what I recall having seen elsewhere, or have I got this wrong?) and therefore the rest of its balance-sheet must represent borrowings and loans. If it came to the crunch, I wonder if the member-state shareholders would be liable for more than the capital amount, and also whether by their separate Constitutions would be permitted to meet all of the bank’s liabilities even if they were so minded.

  18. electro-kevin
    Posted December 26, 2011 at 11:29 am | Permalink

    A Central Bank may not go bust but the ordinary people funding it can still end up enduring terrible austerity in spite of its preventative measures.

    Whether or not a Central Bank survives is academic.

    Off topic:

    It’s a little unfair that the 80’s boom is marked as the era of Thatcherist greed. The greed during the boom of the noughties dwarfed that of the 80s and yet Nu Lab got away with it Scot free in some media quarters.

  19. lifelogic
    Posted December 26, 2011 at 1:06 pm | Permalink

    I see that Lord Winston has criticised the cost of IVF and the exploitation of desperate couples:- ‘My view is that both NHS and private clinics are charging much more than the cost of delivering the treatment.’ he says.

    So we pay massive taxes spend nearly 50% of GDP on the state sector and then get charge desperate couples massively over the going rate by the NHS anyway.

    Doubtless it will be reported by the BBC as:

    “Massive profiteering by private fertility clinics” or something similar as the NHS, public transport, the EU and quack greenery are all gods to the BBC thinkers.

    I even see that Joan Bakewell great BBC thinker is on the BBC talking about her conversion to Islam.

    I also notice the the C 0f E Bishops always keen to kick someone when they are down is still attacking bankers when most had no blame for anything. Brown, C0f E type socialism (and the useless regulators) are where the true blame should lie.

    • lifelogic
      Posted December 26, 2011 at 1:41 pm | Permalink

      A good letter in the telegraph today illustrates the yet more insanity of the EU. The gist of it is that due to to EU and GMC rules/regulations. A UK doctor is allowed practice anywhere in the EU (save the UK) and other EU doctors can practice in the UK (even if they cannot speak English and without and GMC revalidation). He/she cannot however practice in the UK without doing onerous 5 year revalidations, as required by the GMC, which are just not worth the trouble in his/her case.

      • Bazman
        Posted December 26, 2011 at 5:28 pm | Permalink

        I had a read of the Telegraph and the Daily Mail on Christmas day as there was no other new newspapers. The Telegraph is for old gits and the Mail is for young old gits. Mail was missing a Nazi gold story, but did have a story about a Tory MP at a party where everyone was dresses as a Nazi. What is it with the middle and upper classes and Nazi’s?

      • uanime5
        Posted December 26, 2011 at 9:40 pm | Permalink

        Don’t worry the letter is completely wrong as hospitals can refuse to hire doctors from the EU if they can’t speak English. There was even an article about it in the Daily Mail.

        http://www.dailymail.co.uk/health/article-2076367/Doctors-EU-face-language-tests-following-landmark-ruling.html

  20. Posted December 26, 2011 at 2:44 pm | Permalink

    Central banks may be backed by governments yet can’t they go bust? Isn’t ours arguably bust?

  21. Graham
    Posted December 26, 2011 at 3:08 pm | Permalink

    “Like the Bank of England they are usually owned by the state on behalf of taxpayers.”

    Most central banks are PRIVATE, and NOT owned by the state.
    The most famous example is the Federal Reserve in the US.

    The Bank of England is _supposed_ to be nationalised, but then there is the curious case of the Bank of England Nominees Ltd, a privately owned subsidiary of the BOE created in 1977; its shareholders are not made public and it has not traded in all its years of existence.

    It has been alleged that this was a re-privatization by stealth where the BOEN has effective control of the BOE through the shares owned by the secret shareholders.

    See: http://forumnews.wordpress.com/about/bank-of-england-nominees/

    Additionally a central bank is NEVER owned on behalf on the taxpayers – that’s a little sick because the best currency for the taxpayers is a credit currency that is issued by the government and attracts to interest. central bank interest rates robs wealth from the taxpayer and funnels this wealth to the people running the central banks. That’s the purpose of the interest (which also makes loans impossible to pay – because the loan the capital, and you cannot ever pay the interest because the money to do that has never been issued).

    Reply: The Bank of England is wholly owned by the Treasury on behalf of taxpayers. It is a nationalised industry of a special type.

    • Denis Cooper
      Posted December 27, 2011 at 1:13 pm | Permalink

      Since nationalisation in 1946 all the shares of the Bank of England have been held by the Treasury Solicitor on behalf of the Treasury.

      Here’s the website of the Office of the Treasury Solicitor:

      http://www.tsol.gov.uk/

      which gives an email address for inquiries:

      thetreasurysolicitor@tsol.gsi.gov.uk

      and here’s the email I sent in November 2010:

      “Dear Mr Jenkins

      There are persistent rumours, an element in a wider conspiracy theory, that the Bank of England is no longer wholly owned by the Treasury in accordance with the Bank of England Act 1946, but instead is now owned wholly or in part by private individuals or organisations whose identity is being kept from the general public.

      I would be grateful if you could clarify whether as Treasury Solicitor you still hold all of the shares in the Bank of England on behalf of the Treasury, or whether some or all of the shares have since been transferred to other persons or organisations, and also state what legal instruments would be required to effect any such transfer; and also in more general terms whether there are any other beneficial rather than purely nominal owners of the Bank.

      Thanking you for your attention,

      Yours etc”

      The hardcopy reply I received from Patrick Driscoll, Freedom of Information Officer, confirmed that the Treasury Solicitor still holds all the shares in the Bank of England on behalf of the Treasury, and I still have that letter here in front of me as I write.

      There’s more than a whiff of anti-semiticism about the propagation of this myth that the Bank of England is somehow really, secretly, mysteriously owned by unidentified private individuals, who as it eventually turns out happen to be of a certain faith.

      However I’ve learnt that if people prefer to believe something which is untrue then they’ll carry on believing it even when it’s been repeatedly shown to be untrue.

  22. ian wragg
    Posted December 26, 2011 at 4:25 pm | Permalink

    And Clegg wants 80% elected to the House of Lords as it is undemocratic.
    No mention of EU Commissioners I see.

    • lifelogic
      Posted December 26, 2011 at 7:28 pm | Permalink

      Or the EU in general, or the fact that the Libdems currently hold so much power with so little voter support and with so few MP’s.

    • uanime5
      Posted December 26, 2011 at 9:43 pm | Permalink

      The 27 EU Commissioners are chosen by the EU Council and approved by the EU Parliament, both of which are democratically elected. By contrast the House of Lords is unelected and the Prime Minister can create as many peers as they want (which is why there are over 800 of them).

  23. Bernard Otway
    Posted December 26, 2011 at 4:46 pm | Permalink

    Slightly off topic,but very topical to all that I have said about the eu /eurozone and why we should be OUT,and HOW we can and SHOULD trade with the rest of the world.
    In the Boxing Day papers,the Mail has a full page, BRAZIL has just gone SIXTH in world
    economies DISPLACING the UK to SEVENTH,ONLY 4 out of the top 10 are in the eu,the list is 1]USA,2]CHINA,3]JAPAN,4]GERMANY,5]FRANCE,6]BRAZIL,7]UK,8]ITALY,9]RUSSIA
    10]INDIA.Alex Brummer says in his headline “Forget the eu…..this is where we need to do business,with a picture of the Rio carnival. I said in a recent post that when we joined the Common Market [NOT the eu] europe in a smaller version accounted for 35% of world GDP
    in five years time it is forecast to be DOWN to 15% AND out of then 27 or maybe more members,I said we had shackled ourselves to a WITHERING corpse.HOW TRUE !!!

    • uanime5
      Posted December 26, 2011 at 9:55 pm | Permalink

      1) The EU’s percentage of the world’s GDP has been falling because of the collapse of Communism, and the rise of the BRICs and other NIEs (newly industrialized economies). The EU’s GDP had been increasing every year, not decreasing

      2) The GDP of each country is misleading. It’s far better to use the GDP per capita (per person). Here is the GDP per capita for the top ten countries.

      United States $46,860
      Germany $36,081
      United Kingdom $35,059
      France $33,910
      Japan $33,885
      Italy $29,480
      Russia $15,612
      Brazil $11,273
      China $7,544
      India $3,408

      The BRICs still have a long way to go before the average person in their country has a living standards comparable to those in Western Europe. They also won’t be able to afford many of our exports.

      • Willy Wireworm
        Posted December 27, 2011 at 10:23 am | Permalink

        Where’s Switzerland?

  24. Bazman
    Posted December 26, 2011 at 6:22 pm | Permalink

    Interesting piece of Daily Mail think in their comments today.
    ‘While Europe wastes its energies squabbling over the doomed single currency, freer, more dynamic countries like Brazil, China and India forge ahead.’
    The interesting word is ‘freer’ Lets get this right they are not ‘freer’ by any means. Much of their economic success so far has be founded upon lack of democracy and accountability allowing western companies to outsource such things a health and safety, workers rights and pollution and to avoid planning regulations, by paying an elite to allow this to happen.

  25. Martyn
    Posted December 26, 2011 at 6:29 pm | Permalink

    What I know about international finance and central banks could be written on the back of a rather small postage stamp. However, if the 26 (or whatever number do so) sign up to fiscal regulation (i.e. governance) by the EU commission, could they then claim to be a new and independant nation state whose central bank is the ECB?
    If so, and this new nation and its central bank got into serious finanicial difficulties, would it like any other nation in difficulties and whose central bank couldn’t raise enough money to remain creditable then be able to call on the IMF for support?
    OK, I know that there are a thousand imponderables in all this, but I can’t help wondering if this might not be being thought of somewhere in the world…

  26. The Slog
    Posted December 26, 2011 at 6:43 pm | Permalink

    If one examines what the CBs have ploughed into eurobank liquidity since September 21st, it comes to nigh on $2 trillion.
    They’ve done it 3 times. The first kept them going to 3 months, and the 2nd for 3 weeks.
    The last one was December 21st. At this rate, the private banks will be back for more around January 6th.
    The assumption here (and it’s a ridiculously expensive one) is that it is more important to keep banks afloat than simply give lenders the risk-monies back and write off the ClubMed debts.
    The authorities call this ‘the importance of sovereigns repaying debt’, but in the real world it’s drivel: the money this operation will end up costing is more than enough to solve 90% of the entire problem at a stroke.
    http://hat4uk.wordpress.com/2011/12/23/eurobank-liquidity-how-much-more-are-we-going-to-waste/

  27. Posted December 26, 2011 at 7:47 pm | Permalink

    i do a third page column in the local papers property magazine each week.
    although we are solicitors not estate agents many of my articles dwell on the relationship between values and the euro zone and the problems which flow.
    i recently tried to explain why our property values were holding up yet in greece,ireland and spain,amongst others there had been a massive collapse in prices.
    whilst factors such as cheap interest rates may help the other side of that is the absense of a steady supply of money and strict borrowing requirements which are geared against first time buyers.so could it be that the main reason for the values holding up is the fact that we are not in the euro and this has persuaded the public that a further property crash is not around the corner.sadly we may yet be in for a shock in that market in 2012.

  28. colin
    Posted December 27, 2011 at 3:11 am | Permalink

    I believe the FED is privately owned.The BOE used to be privately owned and the change of ownerskip to the State does not seem to have been totally clear cut.

    • Denis Cooper
      Posted December 27, 2011 at 1:19 pm | Permalink

      On the contrary it was perfectly clear cut; since 1946 the Treasury Solicitor has held all the shares in the Bank of England on behalf of the Treasury, and still does.

  29. David Price
    Posted December 27, 2011 at 11:06 am | Permalink

    I didn’t realise that despite the UK not being a Euro member we are a significant sharholder of the ECB, to the tune of 14.5%. This makes us the second largest shareholder after Germany – http://www.ecb.int/ecb/orga/capital/html/index.en.html.

    So we clearly have every interest in the proper management of the ECB and despite what Mr Sarkozy, France has a lower shareholding than us, we also have the right to question the finances.

    Independent of whether the ECB might fold etc, if the ECB is handing out funds, at such a high gearing, in return for very low grade assets why isn’t the Euro losing relative value anyway? Or is this another slight of hand like the “voluntary haircuts” to avoid defaults triggering CDS events?

    Reply: Our cash commitment to shares in the ECB is small. We have not paid up most of our shares, which was based on the assumption of Euro membership which we have declined to pursue.

    • Denis Cooper
      Posted December 27, 2011 at 1:26 pm | Permalink

      If you click on the “Non-euro area national central banks” tab you’ll see:

      “The EU’s 10 non-euro area NCBs are required to contribute to the operational costs incurred by the ECB in relation to their participation in the European System of Central Banks (ESCB) by paying up a minimal percentage of their subscribed capital. Since 29 December 2010 these contributions represent 3.75% of their subscribed capital … ”

      For the Bank of England that’s €59 million, cf the Bundesbank’s €1,407 million.

      • David Price
        Posted December 27, 2011 at 3:10 pm | Permalink

        Thanks for clarifying, I had mis-understood the Capital Key item. We are sharholders but very small compared to the Euro members

  30. sm
    Posted December 27, 2011 at 11:28 am | Permalink

    Central banks , confidence and power politics?

    Why are deposits flowing into the ECB than some national banks, maybe fear and no confidence. What happens if this deposited money tries to leave the ECB for lets say another alternative world bank and it cant? I think we have seen the Fed backstop the ECB/World but will this continue indefinitely and who will backstop the Fed.
    Lets hope the US economy can begin a real recovery in 2012.

  31. Willy Wireworm
    Posted December 27, 2011 at 1:05 pm | Permalink

    You ask how many euros the ECB is empowered to create. A Evans-Pritchard http://blogs.telegraph.co.uk/finance/ambroseevans-pritchard/100013911/ is interesting on this. It seems the Bundesbank is ‘on the hook’ for much of the recent dole-out to banks (in exchange for ‘bus ticket collateral’, whatever that means), and that the longer this goes on the more inextricably trapped Germany becomes in the rescue mechanism. Clearly the Bundesbank is in some way standing behind the ECB and digging itself in ever deeper, but some explanation of this relationship would be very welcome.

  32. Denis Cooper
    Posted December 27, 2011 at 2:35 pm | Permalink

    About a year ago I simply put the question:

    “Can a central bank go bust?”

    into google, and this 1992 paper came up:

    http://econpapers.repec.org/article/blamanch2/v_3a60_3ay_3a1992_3ai_3a0_3ap_3a85-98.htm

    I can only read the abstract, but that talks about “the impairment of central bank balance sheets by the acquisition of substandard assets” and suggests that “a central bank can go bust when it has acquired liabilities of greater market value than the present value of its seigniorage revenue calculated for any steady-state inflation rate.”

    However, whatever the theory, I think it has to be assumed that in practice the ECB falls into the “too big to fail” category.

    If it was the central bank of a small country then other central banks might decide that it wasn’t systematically important on a global scale and refuse to prop it up, but it’s almost inconceivable that would happen with the ECB.

    On other hand at some point its shareholders, especially the Bundesbank, might object to the prospect of having to sink more capital into it to cover its losses, and conceivably other central banks around the world might start to raise concerns that they could end up having to bail it out.

  33. Paul Homewood
    Posted December 27, 2011 at 5:21 pm | Permalink

    Maybe I am being simplistic, but why should the govt ever repay the BOE when the gilts mature? After all it owns the BOE.

    If I owed my wife £1000, would I go and borrow it from a bank? Of course not.

  34. Barbara Stevens
    Posted December 27, 2011 at 6:58 pm | Permalink

    I find the whole issue confusing, numbers always frighten me. However, I now understand Quantitive Easing, and that frightens me even more. Should we keep printing money? I do believe the government should insist that the High Street Banks should be firewalled from the Investment Banks, as the taxpayers cannot keep paying out in support, and why should they? People have no where else to put their money, they have to rely on the banks, and building societies etc; therefore protection for their funds should be paramount. Perhaps if this was done and made law, banks would then be more reliable, and not take risks like they have. With law and order not as it should be keeping funds under the mattress or the floorboards is not a very good idea!!

  35. Disgusted of Neasden
    Posted December 28, 2011 at 3:44 pm | Permalink

    Back in Victorian days, the failure of a single retail bank in practice affected few people. There was a greater number of banks, and most of the population worked on a cash basis, and though it may have been a disaster for some, most people were little affected. If one of today’s retail banks were to fail, this could leave perhaps 25% of the population without day-to-day finance or savings, with knock on effects for everybody else. That is why banks are “too big to fail”.

    Whilst admiring the Thatcher government generally, I believe that part of the blame must be laid at the door of the “Big Bang” deregulation, which removed the previous (small-c) conservative restraints on banks, and led to the situation in which we now find the commercial banking sector.

    Having allowed banks to become too big to fail, governments have had to “invent” ways to re-finance them. Ultimately the taxpayers will have to bear the burden of this, sooner or later, but the pain is spread across the whole population, and day-to-day commercial life is able to continue.

    The real problem comes when it is impossible for a government to raise taxes to meet the debt obligations it has entered into. Sometimes this may be because lenders have believed in an over-optimistic prospectus, at other times it may be because the populace is unwilling to pay up. It is interesting to note that the people of Ireland have submitted to meet these obligations, with hefty cuts in public sector salaries, whilst the Greeks are either evading tax or protesting in the streets.

    The ECB is clearly different from other central banks. Its future rather depends on whether German taxpayer (or their elected representatives) are willing to keep the whole system afloat. They should bear in mind, however, that the collapse of the money transmission system would probably leave them worse off, and nobody better off.

    I saw a quote from a European politician recently to the effect that “we all know what we need to do to fix the system, but we don’t know how to do it and get re-elected afterwards”. Many have voiced the opinion that the new governments in Greece and Italy are undemocratic. On the contrary, they are there by the will of the people’s representatives, and do provide a solution to this conundrum.

    Sorry, I’ve rambled a bit away from the main topic, but one needs to look at this matter in the context of the whole financial system.

    Reply: The idea that the Credit Crunch of 2007-8 was caused by banking changes in 1989 is one of the more absurb criticisms of Thatcher that the left has manufactured. In the late 1980s there were three very important differences from the regulatory system of the noughties which prevenetd any such catastrophe on the Conservative watch. 1. The regulators kept gearing of the banks much lower than the noughties permitted. 2. There was a tough competition policy, which would oto have allowed the mega mergers which cut competition in the UK market in the noughties. 3. The Bank of England was resposnbile for individual banks as well as for systemic risks, which made effective supervision easier.Labour changed these 3 important features with the dreadful results we saw.

  36. Jon
    Posted December 28, 2011 at 8:57 pm | Permalink

    So the covert plan by Nicholas and Angela is to devalue the currency and create a bit of inflation without having to tell their electorate what they are doing.

    At some point late next year a German will go to the cash point thinking it doesn’t work coz it says insufficient funds when in fact it is working, its just that their money went to the mediterranean.

    Nicholas and Angela didn’t have the b@llocks to tell their electorate what they were doing. Re-mortgaging their electorates houses to give the med countries loans of 1% interest. Asset transfer, what I think I remember seeing Angela thumping a lecturn saying no no no. Not a Margaret Thatcher, when she said no I recon it was no.

  37. tim
    Posted December 30, 2011 at 12:36 pm | Permalink

    the gilts purchased are not shown on the BoE balance sheet. the gilts are held by BEAPFF ltd (capital £100) and not consolidated into the Bank’s balance sheet.

  38. Posted November 1, 2012 at 12:50 am | Permalink

    Outstanding story there. What happened after? Take care!

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  • By OSK - Guido Co-conspirators’ Top 12 Book Buys on December 27, 2011 at 4:57 am

    […] Can the ECB Go Bust? | John RedwoodHannan, Farage, Thatcher Most Popular on YouTube | BBCTo Succeed, Government Must be Willing to Fail | Ruth PorterMargaret Thatcher Doesn’t Deserve a State Funeral | Peter OborneEd Miliband Wrecked Labour Party Fundraiser | Dan HodgesThe Hypocrisy of Vince Scrooge and the Lib Dems | Quentin LettsNick Clegg is a Worse Deputy PM than John Prescott | Norman TebbitYour 5 Point Guide to Balls’s Shifting Position | Peter HoskinWhy ‘Starving the Beast’ May Not Work | James ForsythPresident Ron Paul? | SpeccieDossier of Union Abuse of Taxpayer Funding | Taxpayers’ AllianceEd Should Ignore Jackie Ashley | Dan HodgesWith a Bit of Help Ed Can Win | Jackie AshleyEd Miliband Makes Labour Unelectable | Trevor Kavanagh […]

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    […] the inestimable cost of propping up euro*ankers, and in the meantime Earthbound alien John Redwood has written this piece about whether central banks can go bust. The profoundly daft thing about the whole ‘liquidity […]

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    John Redwood won a free place at Kent College, Canterbury, He graduated from Magdalen College Oxford, has a DPhil and is a fellow of All Souls College. A businessman by background, he has been a director of NM Rothschild merchant bank and chairman of a quoted industrial PLC.

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