... For the euro area, [the stylised conventional balance sheet of the central bank] is the consolidated balance sheet of the ECB and the 15 NCBs of the euro area.

Okay, so what does a central bank balance sheet look like?

On the right-hand-side of the T-account are the liabilities and shareholder equity of the central bank. First, there are its monetary liabilities, M, sometimes called base money or high-powered money. It is the sum of currency in circulation and balances or reserves held

For simplicity, I shall treat the whole of the base money stock as non-interest-bearing. This is certainly the case for currency, but interest is sometimes paid on commercial bank reserves held with the central bank. The central bank also has non-monetary liabilities, O. This can be debt to the government, to the domestic private sector, to international organisations like the IMF, or to the rest of the world. It can be denominated in domestic currency or in foreign currency.

As assets the central bank has Treasury debt, D, that is, sovereign bonds (Treasury bills and bonds), sovereign-guaranteed debt and, in federal systems, sometimes the debt of lower-tier governments (state, provincial, municipal); private debt, L, that is, outright or collateralised loans to the private sector and other private securities and instruments of all kinds (domestic or foreign); and official foreign exchange reserves, R. The currency denomination of assets other than foreign exchange reserves can be either domestic or foreign.

For simplicity, think of all asset and liabilities - M, O, D, L and R - as marked-to-market. Where there is no market, fair value valuation is applied. The financial net worth or (conventional) equity of the central bank, W, is residually determined as the excess of the value of the assets over the value of the other liabilities

So, what does the ECB balance sheet look like? (Or, rather, what did it look like in mid-2008?)

The balance sheet of the ECB for end-year 2006 and 2007 is given in Table 4, that for the consolidated Eurosystem (the ECB and the 15 NBCs of the Eurosystem) as of 29 February 2008 in Table 5. The consolidated balance sheet of the Eurosystem is about 10 times the size of the balance sheet of the ECB, but the equity of the Eurosystem is about 17 times that of the ECB. Gearing of the Eurosystem is therefore quite low by central bank standards, with total assets just over 19 times capital.

Between the end of 2006 and end-February 2008, the Eurosystem expanded its balance sheet by €237bn. On the asset side, most of this increase was accounted for by a €67bn increase in claims on the euro area banking sector and a €150bn increase in other assets. Both items no doubt reflect the actions taken by the Eurosystem to relieve financial stress in the interbank markets and elsewhere in the euro area banking sector.

Now for the ECB equity: who owns it?

The ECB is owned by the 27 national central banks (NCBs) that make up the EU's European System of Central Banks (ESCB). Note that it is the NCBs of all EU members (currently 27) that constitute the shareholders of the ECB, not just those who are part of the Eurosystem and have adopted the euro (currently 15). The NCBs themselves have a variety of formal ownership structures.

In detail:

The capital of the ECB is ECU 5 000 million. The capital may be increased by such amounts as may be decided by the Governing Council acting by the qualified majority provided for in Article 10.3, within the limits and under the conditions set by the Council under the procedure laid down in Article 42. The national central banks shall be the sole subscribers to and holders of the capital of the ECB. The subscription of capital shall be according to the key established in accordance with Article 29. Article 29 states that 'Each national central bank shall be assigned a weighting in this key which shall be equal to the sum of: - 50% of the share of its respective Member State in the population of the Community in the penultimate year preceding the establishment of the ESCB; - 50% of the share of its respective Member State in the gross domestic product at market prices of the Community as recorded in the last five years preceding the penultimate year before the establishment of the ESCB. ... The weightings assigned to the national central banks shall be adjusted every five years after the establishment of the ESCB by analogy with the provisions laid down in Article 29.1.'

Now, on to the interesting question of the interaction between the European Central Bank and fiscal policy:

However, the fact that the central bank is, from a financial point of view, an integral part of the state, does not depend on the formal legal niceties of stock ownership. Even if the central bank has formal or de facto operational independence, it is an integral part of a sovereign state. Their balance sheets and profit and loss accounts should be included in the consolidated financial accounts of the nation state to which they belong. The special issues this creates for a supranational central bank like the ECB will be discussed below. The common practice of analyzing public sector debt and deficits using the general government measure of the public sector, which includes Federal/central, state/provincial and local/municipal governments but excludes the central bank, is an unfortunate one.

(my emphasis)

Now for the lender of last resort function

Unique complications arise in the euro area, where each national fiscal authority stands financially behind its own NCB, but no fiscal authority stands directly behind the ECB. The lender of last resort function in the EMU is assigned to the NCB members of the ESCB (see Padoa-Schioppa (1999), Goodhart (1999) and Lastra (2000)). This will work fine when a troubled or failing bank or other financial institution deemed to be of systemic importance has a clear "nationality", legally and politically, as most euro area-domiciled and registered banks and other financial institutions do today.

Note, however, that lender of last resort action involves the creation of "high-powered" or "base" money by the Central Bank. Does this mean the National Central Banks retain the independent ability to create "base" or "high-powered" base money independently of the ECB or the ESCB?

Buiter is mostly concerned with the issues of cross-border banking, the distinction between subsidiaries and branches of a foreign bank, and the possibility of a bank being "incorporated solely under European Law" - which is at the moment hypothetical but which might well happen. The problems this creates are as follows:

It would seem natural that the ECB itself rather than one of the euro area NCBs would provide lender of last resort facilities for EU-banks. But who stands behind the ECB as recapitaliser of last resort? Not the European Community, which has a tiny budget, (just over 1 percent of EU GDP), no discretionary taxation powers and no borrowing powers. Also, even if the European Community were to evolve into a serious supranational budgetary entity, with independent powers to tax and to borrow, it would not be the appropriate fiscal back-up for the ECB, unless all EU members were also members of the euro area. As of today, there are still 12 EU members that are not part of the euro area.

If it is to be the euro area national Treasuries that will provide fiscal back-up for the ECB, in what proportions will they share the fiscal burden of recapitalising the ECB, should the need arise?

There is one readily available key for distributing the fiscal burden of recapitalising the ECB if in the future its balance sheet is impaired as a result of lender of last resort operations or market maker of last resort actions vis-à-vis EU-banks. This would be for each euro area Member State national Treasury to pay a share of the bail-out costs equal to the share of its NCB in the total share capital of the ECB, divided by the sum of the shares of all euro area NCBs in the total share capital of the ECB. Other formulae can be thought of, but it would be wise to have something agreed before the first EU Bank incorporated under EU statute law pops up and goes belly-up.

But in his analysis of the hypothetical, Buiter keeps putting his finger on a key feature of the actual, that is, the National Treasury-Central Bank team is the one with the responsibility (and the legal capacity, one must assume) for resolving and recapitalizing failing banks. Again, and excuse me if I repeat myself, does this mean the National Treasury-Central Bank team has the ability to create "high-powered" or "base" money independently of the ECB or ESCB?

The central bank-Treasury team is naturally, indeed umbilically, linked in conventional nation states with a single national central bank and a single national Treasury. The euro area has a single central bank, the ECB, which works through an operationally decentralised system of national central banks, the Eurosystem, but works alongside (and at times at crosspurposes with) 15 national fiscal authorities. As long as the nationality of a bank is clear (legally through clear rules of domicile, registration and incorporation and politically through the importance of the bank in the national financial system or as an employer) the appropriate NCB and national Treasury can handle the necessary lender of last resort and recapitalisation responsibilities. Even today, the growing complexity of cross-border banking activities in the euro area may be creating ambiguities and doubt as to who are the lender of last resort and recapitaliser of last resort for specific banks with a range of border-crossing activities, branches and subsidiaries.

In this connection, when Spain created its bank restructuringbailout fund, the FROB, it was designed so that it would have to raise capital in the money markets. No "high-powered"/"base" fiat money was injected directly by the Bank of Spain. I suspect the same is true of other bailout funds created in other EU states in the last 3 years. Indeed, how does Buiter's claim that the national Treasury/Central Bank team is joined umbilically and can adequately cary out lender of last resort and recapitalization functions square with the following provision of the EU Treaties?

Article 123
(ex Article 101 TEC)

1. Overdraft facilities or any other type of credit facility with the European Central Bank or with the central banks of the Member States (hereinafter referred to as "national central banks") in favour of Union institutions, bodies, offices or agencies, central governments, regional, local or other public authorities, other bodies governed by public law, or public undertakings of Member States shall be prohibited, as shall the purchase directly from them by the European Central Bank or national central banks of debt instruments.

2. Paragraph 1 shall not apply to publicly owned credit institutions which, in the context of the supply of reserves by central banks, shall be given the same treatment by national central banks and the European Central Bank as private credit institutions.