My earlier post about the FT’s story on ECB “rejecting” the plan to recapitalise Bankia by providing them with €19bn of sovereign bonds was critical of both the substance of any such ECB intervention, if it existed. It was also critical of the reporting of the story by the FT on the grounds that it confused solvency and liquidity issues, something I try hard to explain to my undergraduate students.
Now it appears that the confusion of solvency and liquidity isn’t confined to the FT reporters but includes ECB officials as well.
The ECB this morning tweeted a denial of sorts of the FT story:
Contrary to media reports published today, the European Central Bank (ECB) has not been consulted and has not expressed a position on plans by the Spanish authorities to recapitalise a major Spanish bank. The ECB stands ready to give advice on the development of such plans.
I say “denial of sorts” because the “blunt rejection” of the plan from the ECB reported by the FT may have occurred in an unofficial way e.g. the ECB explaining what there response to the plan would be if it they were to be officially consulted on it. This allows room for a statement that ECB hasn’t been consulted.
Then an emailed statement was sent out. Then, things get more interesting. A second email statement was sent out. Here it is. If you’re too lazy to click, here’s the full text.
Contrary to media reports published today, the European Central Bank (ECB) has not been consulted and has not expressed a position on plans by the Spanish authorities to recapitalise a major Spanish bank. The ECB stands ready to give advice on the development of such plans.
It should be noted, however, that the funds needed to ensure banks’ compliance with capital requirements, can not be provided by the Eurosystem.
Now why should this be noted? Does the ECB official who wrote this paragraph actually believe that the Spanish plan involves providing funds from the Eurosystem to meet capital requirements? If so, they need to go back to Money and Banking 101.
Bank capital is the gap between assets and liabilities.Taking on a loan increases both assets and liabilities and so has no effect on capital. The Bankia proposal only affects capital because the provision of new government bonds to the bank raises its assets without raising its liabilities. Whether it then pledges these bonds to the ECB in return for a loan affects the bank’s liquidity but has no influence on its capital\solvency ratios.
Next up, the ECB issues a statement saying this additional sentence had been “published erroneously”. Well perhaps, but it didn’t write itself.
Since it seems highly unlikely that the ECB press office makes up these statements on its own, one can only assume that the sentence was written by a senior official. Moreover, this senior official apparently believed, at some point today, that it was necessary to make a point about Bankia’s capital requirements that was based on a complete misunderstanding of how the Spanish plan affects the bank’s capital ratios.
And these are the people we’re relying on to save the world! Now I’m scared.