ANNUAL REPORT 2008 - Polymer Bank Notes of the World

2008. By contrast, the average share of centralgovernment bonds dropped from 15% in 2007 to10% in 2008. The new asset classes which weretemporarily eligible accounted for around 3% ofthe total marketable collateral put forward.RISK MANAGEMENT ISSUESThe Eurosystem mitigates the risk of acounterparty default in a Eurosystem creditoperation by requiring counterparties to submitadequate collateral. However, the Eurosystem isstill exposed to a number of financial risks if acounterparty defaults, including credit, marketand liquidity risk. In addition, the Eurosystem isexposed to currency risk in the context ofliquidity-providing operations in foreigncurrencies against euro-denominated collateral,such as those conducted in 2008. In order toreduce these risks to acceptable levels, theEurosystem maintains high credit standards forassets accepted as collateral, valuates collateralon a daily basis and applies appropriate riskcontrol measures. As a matter of prudence, theEurosystem has established a buffer againstpotential shortfalls resulting from the eventualresolution of collateral received from fivespecific counterparties that defaulted in 2008,the level of which will be reviewed annually,pending the eventual disposal of the collateraland in line with the prospect of recovery. 1 Moregenerally, financial risks in credit operations arequantified and regularly reported to the ECB’sdecision-making bodies.Every two years a review of the risk controlmeasures for Eurosystem credit operationsis conducted. These risk control measuresare applied to the assets put forward by theEurosystem’s counterparties as collateral for thecredit the Eurosystem provides through its openmarket operations and the marginal lendingfacility, as well as in the form of intradaycredit for payment systems purposes. Whilefully preserving the principle of accepting awide range of collateral, the biennial reviewin 2008 led to some technical refinements ofthe risk control framework for Eurosystemcredit operations. These refinements reflect,among other things, improvements in themethodological framework, the assessmentof market and liquidity risk characteristics ofeligible assets, the actual use of eligible assetsby counterparties and new developments infinancial instruments. They were announcedon 4 September 2008 and entered into force on1 February 2009.In the context of these refinements, valuationhaircuts for asset-backed securities anduncovered bank bonds have been revised. Inaddition, the prohibition to submit collateral thatis issued or guaranteed by entities closely linkedto the submitting counterparty has been extendedto include special forms of close links that mayarise when asset-backed securities are used ascollateral. As of 1 February 2009, enhancedtransparency is required for credit assessmentsof asset-backed securities issued by an eligibleexternal credit assessment institution.Finally, the Eurosystem has the possibilityto limit or exclude the use of certain assets ascollateral for its credit operations if required,also at the level of individual counterparties,to ensure adequate risk protection of theEurosystem in line with Article 18.1 of theStatute of the ESCB.1.2 FOREIGN EXCHANGE OPERATIONSIn 2008 the Eurosystem did not undertake anyinterventions in the foreign exchange marketfor policy reasons. The ECB’s foreign exchangetransactions were exclusively related toinvestment activity. Furthermore, the ECB didnot undertake any foreign exchange operationsin the currencies that participate in ERM II.The standing agreement between the ECB andthe IMF to facilitate the initiation of specialdrawing right (SDR) transactions by the IMF onbehalf of the ECB with other SDR holders wasactivated on 17 occasions in 2008.In the context of the continuing financialmarket volatility in 2008, the Eurosystem also1For further details, see the press release of 5 March 2009.ECBAnnual Report2008109