ECB reallocates subscribed capital after Brexit

The European Central Bank will maintain its subscribed capital at €10.8 billion ($11.9 billion) following Brexit, the ECB said on January 30, but contributions will be reallocated.

The Bank of England’s departure from the European System of Central Banks means the contribution of eurozone central banks will increase by €1.2 billion in order to make up for the BoE’s 14.3% share, or capital key. The 19 eurozone central banks will pay up their increased subscriptions in full, across two annual instalments, with the first due in 2021.

Although UK’s capital key was 14.3%, as a non-eurozone member its paid-up contribution was much smaller. Eurozone central banks pay up 100% of their subscriptions to the ECB’s capital, while other members pay up just 3.75%.

This explains why the Banque de France’s contribution is more than €1.5 billion, while the BoE’s was just €58 million, despite similar capital keys.

The BoE’s pre-paid capital “will be repaid by the ECB under the terms of the Withdrawal Agreement between the UK and the EU”, says the ECB.

This means the combined paid-up capital of the 18 eurozone central banks will increase from €7.6 billion in 2020 to €8.8 billion in 2022. Meanwhile, the total contribution of the nine non-eurozone member states declines to €75.7 million from $123 million. The BoE’s withdrawal from the system is the only factor accounting for the reduction.

The increase will be especially important for the central banks of the eurozone’s four largest economies: France, Germany, Italy, and Spain. The capital key is calculated taking into account the economic and demographic weight of member states. The ECB adjusts the shares every five years and whenever there is a change in the number of national central banks contributing to its capital.

As a result, the capital key of the Deutsche Bundesbank increases from 17.9% to 21.4% in 2019; for the Banque de France it is raised from 14.1% to 16.6%; for the Bank of Italy it grows from 12.3% to 13.8%; and for the Bank of Spain it means an increase from 8.8% to 9.7%.

In this new environment, the Bundesbank’s subscription will increase from €1.99 billion in 2020 to €2.15 billion in 2021 and the Bank of Italy’s will increase from €1.27 billion to €1.49 billion. For the Banque de France, it will be raised from €1.5 billion to €1.8 billion, and for the Bank of Spain from €902 million to more than €1 billion.

Implications for QE

The increase in capital key could have repercussions for the future implementation of the ECB’s asset purchase programme.

This is due to the fact that the operations of its most important part, the public sector purchase programme, are aligned to countries’ capital keys. Among other restrictions, the share of sovereign bonds bought by the ECB from individual member states cannot be bigger than their capital keys.

Although the central bank has repeatedly stated it still has a margin to spare before it hits these limits, the new allocation allows it to buy more German bunds, or Spanish and Italian bonds, than was the case before Brexit.