Some Preliminary Thoughts On The ECB’s Capital Key

The ECB’s asset purchase program is constrained by the self-imposed guidelines. As it QE continues, the ECB seems to be bumping against some of these parameters. The situation is thought to be coming to a head shortly, perhaps as early as this week’s ECB meeting. 

One of the constraints is the country exposure capped at a third of the sovereign debt. This limit may be reached for German in the first part of next year. Smaller countries may be nearer their limit. 

The ECB has already demonstrated its flexible approach. It has added instruments, such as corporate bonds. It has increased the range of agency bonds it can buy.The ECB also allows negative yielding instruments to be bought provided the yield is not lower than the minus 40 bp deposit rate.  

The broad principle determining the Eurosystem’s allocation of purchases is the capital key. It is based on the contribution to the ECB’s capital in the first place. EU members, but not EMU members, such as the UK, Sweden and several central and eastern European countries, also contributed to the capitalization of the ECB.  

However, their shares are excluded in determining the allocation of purchases under EMU QE. The capital key is more or less a function of the size of the country. Germany is the largest. It has an 18% overall weight in the capital key, but for ECB QE purposes its shares rise to 25%.  

Yesterday the ECB updated its QE purchases report. There continues to be a modest deviation from the capital key. In August, German purchases were about 3% below what the capital key would have suggested, and the Dutch purchases were about 4% below the capital key target. However, this is not so problematic. August is a light month of purchases due to lighter volumes in any event. Rather than buy 60 bln euros of assets in August as it targets on average, it only bought 43 bln.