The European Central Bank said on Thursday it had decided nearly to double its subscribed capital by injecting 5 billion euros, citing greater market volatility, credit risk and a growing financial system.

ECB sources told Reuters this week the bank was considering a capital hike to cover the risk of losses on government debt of peripheral countries it has bought to support the 16-nation single currency area.

Yields on peripheral sovereign debt fell slightly after the ECB's announcement. But analysts said the decision should be seen as a defensive measure and there was no reason to believe the bank was planning to step up its purchases.

The ECB wanted to stress that the hike is due to increased volatility on markets in general and not just government bonds, said Unicredit's chief euro zone economist Marco Valli.

Of course now they will have more capital at their disposal if they want to buy more bonds, but that is absolutely not the message they are giving.

The ECB's capital will rise to 10.76 billion euros from 5.76 billion euros in three equal annual tranches from euro zone national central banks, it said in a statement following its final policymaker meeting of the year.

The capital increase was deemed appropriate in view of increased volatility in foreign exchange rates, interest rates and gold prices as well as credit risk, the ECB said.

However ING analyst Carsten Brzeski said what was officially a purely administrative move in the interests of sound risk management, was more explosive in the context of the euro zone's debt crisis.

Today's capital increase can be seen as a precautionary measure for possible future losses, potentially stemming from peripheral bonds on the ECB's balance sheet, he wrote in a research note.

MESSAGE TO LEADERS

It certainly does not signal any future stepping up of the program, Brzeski said, but the decision sends a clear message to European leaders discussing the debt crisis in Brussels, namely that the bond purchase program is not risk free.

Valli said the size of the hike was in line with that given by Reuters' reports this week and so was no surprise to markets.

Germany had quickly come out in support of the idea of boosting the ECB's capital, as the euro zone grapples with the sovereign debt crisis hitting its weakest members.

From a longer-term perspective, the increase in capital -- the first general one in 12 years -- is also motivated by the need to provide an adequate capital base in a financial system that has grown considerably, the ECB said.

The capital increase decided was the maximum possible under EU and ECB regulations.

The ECB said the minimum percentage of subscribed capital which non-euro area central banks are required to pay as a contribution to the operating costs of the ECB, will be reduced from 7.00 percent to 3.75 percent.

As a result, these central banks will make only minor adjustments to their capital shares, which will result in payments totaling 84,220 euros on December 29.

Separately, the ECB also announced it would set loan-by-loan information requirements for asset-backed securities (ABSs) in the Eurosystem collateral framework over the next 18 months.

The new requirements will be introduced first for retail mortgage-backed securities (RMBS) and thereafter gradually for other ABS, it said.

For the EC statement on the capital hike click on:

www.ecb.int/press/pr/date/2010/html/pr101216_2.en.html (Reporting by Gavin Jones; Editing by Hugh Lawson)

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