Sunday, May 4, 2008

Who is the daddy

All the major central banks are now busy using their own assets to support their respective banking systems. However, which one has the most resources?

No surprises here; by some distance, it is the ECB. In fact, in terms of assets, it is over twice as big as the Fed, and over ten times bigger than our dear old Bank of England.

The ECB won't need any special liquidity scheme. They still have plenty of space on their balance sheets for any rotten Irish or Spanish banks that need a little support.

With a central bank balance sheet like the ECB's, UK banks must be wailing and gnashing. If only the UK had accepted the euro.


  1. I believe it's very fair to compare US with EU on currency level...think about the currency has appreciated by almost 100% in 9 years... The Euro will start to fall against the dollar once Spain, Ireland and co have their real estate go south...

    UK...sorry as log as you have Gordon Brown at the helm, nothing good will happen and the gap will widen...

  2. I think that countries in the ECB are going to find it rough going. The Fed can bail out Bear Stearns and the Bank of England can bail out Northern Rock. The ECB isn't going to bail out any bank. The country it's in will have to bail out the bank with real money.

    The beauty of the Fed and Bank of England is that they can print money to fix the problem. You can't print Euros without a group agreement.

    Inflation is a great taxing mechanism, quick and easy

  3. What is the correct way to interpret the level of central bank assets?

    Is it good or bad for a central bank to have a lot of assets? That's not obvious... there's definitely more risk underwritten by the central bank - but, I wonder if the risk is proportional to the asset valuation? Do the relatively small volume of assets at the BoE/Fed actually represent confidence in the currency - where banks manage the risk in a commercial context?

    Does a larger balance sheet empower or constrain a central bank?

  4. Asteve

    Under normal circumstances, you question doesn't have a clear answer. However, when a central bank is using its stock of assets to support the banking system, then it pays be to big.


  5. :-) I see your point, but wonder if you need to also ask what is the quality of its assets.

    It is possibly also interesting to note that the BoE is in a different position to the ECB (and possibly to the Fed too - not too sure) because both it and the treasury are responsible to the same politicians. The BoE could, for example, expand its asset base arbitrarily (with the assistance of the Treasury) if it was considered desirable. Shrinking its asset base, however, would be far more difficult.