ANNUAL REPORT 2008 - Polymer Bank Notes of the World

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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
conducted 73 operations in connection with theUS dollar Term Auction Facility of the FederalReserve System (57 reverse transactions againsteligible collateral and 16 through EUR/USDforeign exchange swaps), providing US dollarliquidity to the Eurosystem’s counterparties,and 15 Swiss franc-providing operations incooperation with the Swiss National Bank(for more details, see Box 10).1.3 INVESTMENT ACTIVITIESThe ECB’s investment activities are organisedin such a way as to ensure that no insiderinformation about central bank policy actionsmay be used when making investmentdecisions. A set of rules and procedures, knownas the Chinese wall, separates the business unitsinvolved in operational investment activitiesfrom other business units.FOREIGN RESERVE MANAGEMENTThe ECB’s foreign reserve portfolio wasoriginally set up through transfers of foreignreserve assets from the euro area NCBs. Overtime, the composition of the portfolio reflectschanges in the market value of the invested assets,as well as foreign exchange and gold operationsof the ECB. The main purpose of the ECB’sforeign reserves is to ensure that, wheneverneeded, the Eurosystem has a sufficient amountof liquid resources for its foreign exchangepolicy operations involving non-EU currencies.The objectives for the management of the ECB’sforeign reserves are, in order of importance,liquidity, security and return.The ECB’s foreign reserve portfolio consists ofUS dollars, Japanese yen, gold and SDRs. TheUS dollar and Japanese yen reserves are activelymanaged by the ECB and the euro area NCBs,as agents for the ECB. Since January 2006 a“currency specialisation model” has been inoperation to increase the efficiency of theEurosystem’s investment operations. Under thisscheme, each NCB is as a rule allocated a sharein either the US dollar or the Japanese yenportfolio, with two NCBs currently managingtwo. 2 During 2008 two arrangements were putin place which enable certain NCBs to pooloperational activities for the management oftheir shares of the ECB’s foreign reserves: theCentral Bank of Cyprus has pooled with theBank of Greece and the Central Bank of Maltahas pooled with the Central Bank and FinancialServices Authority of Ireland since January2008. As of January 2009 Národná bankaSlovenska manages a US dollar portfolio as anagent for the ECB.During 2008 the ECB sold 30 tonnes of goldin total. These sales were in full conformitywith the Central Bank Gold Agreement of27 September 2004, to which the ECB is asignatory. The proceeds of the gold sales wereadded to the US dollar portfolio.The value of the ECB’s net foreign reserveassets 3 at current exchange rates and marketprices increased from €42.8 billion at end-2007 to€49.5 billion at end-2008, of which €38.5 billionwas in foreign currencies – the Japanese yenand the US dollar – and €11 billion was in goldand SDRs. Applying the exchange rates of end-2008, US dollar-denominated assets represented77.5% of the foreign currency reserves, whilethose denominated in Japanese yen accountedfor 22.5%. The increase in value of the foreigncurrency portfolio, of 19.9%, mainly reflectedcapital gains and interest income generated byportfolio management activities, particularlywith regard to US dollar-denominated assets.The appreciation of the Japanese yen (by30.8%) and the US dollar (by 5.8%) versus theeuro also contributed to the increase in valueof the currency portfolio. Finally, the ECB’sforeign currency reserves also rose as a result ofthe investment of the proceeds of the gold salesmentioned above. The value of both the gold2 For more details, see the article entitled “Portfolio managementat the ECB” in the April 2006 issue of the ECB’s MonthlyBulletin.3 Net foreign reserve assets are calculated as official reserve assetsexcluding the net, marked-to-market value of foreign currencyswaps, plus deposits in foreign currency with residents, minusfuture predetermined net drains on foreign currency holdingsowing to repurchase and forward transactions. For detailedinformation on the data sources, see http://www.ecb.europa.eu/stats/external/reserves/templates/html/index.en.html110 ECBAnnual Report2008
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EN2008EUROPEAN CENTRAL BANK ANNUAL
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© European Central Bank, 2009Addre
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CHAPTER 4FINANCIAL STABILITY AND IN
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7 Statistical accounting consequenc
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ABBREVIATIONSCOUNTRIESOTHERSBE Belg
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in the course of the year, in line
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currencies, T2S will be a major ste
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CHAPTER 1ECONOMICDEVELOPMENTS ANDMO
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Chart 1 ECB interest rates and mone
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Despite moderating, the annual grow
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substantial downward revisions in r
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in July, annual inflation in the OE
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As regards the Chinese economy, rea
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generally tighter financing conditi
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were recorded in December, but thes
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was driven mainly by developments i
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market tensions, particularly for l
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anking and financial system. At the
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cash flows to compensate for a redu
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quarter of 2008 and -0.1% in Decemb
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whereby investors’ uncertainty su
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September onwards, amid the great u
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Chart C Trading volumes for governm
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sponsored rescue plans were initiat
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The annual growth rate of consumer
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end of 2007. By December 2008 this
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calculated as the balance between g
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commodity prices (see Box 4). Conve
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Chart D Longer-term inflation expec
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Page 64 and 65: Table 3 Composition of real GDP gro
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Page 68 and 69: Box 5LABOUR MARKET DEVELOPMENTS IN
Page 70 and 71: Chart C Breakdown of employment gro
Page 72 and 73: Box 6DEVELOPMENTS IN THE ISSUANCE A
Page 74 and 75: Chart B Government bond yield sprea
Page 76 and 77: Box 7STATISTICAL ACCOUNTING CONSEQU
Page 78 and 79: warranted because of the need to co
Page 80 and 81: sharp depreciation of the euro was
Page 82 and 83: prices in the first eight months of
Page 84 and 85: focused more on the production rath
Page 86 and 87: segments and, in turn, affected eur
Page 88 and 89: and Bulgaria registered robust grow
Page 90 and 91: In the remaining non-euro area EU c
Page 92 and 93: Estonian kroon and the Lithuanian l
Page 94 and 95: Table 10 Official monetary policy s
Page 96 and 97: the Bank of England and Sveriges Ri
Page 98 and 99: CHAPTER 2CENTRAL BANKOPERATIONSAND
Page 100 and 101: Box 10MONETARY POLICY OPERATIONS DU
Page 102 and 103: Chart A Liquidity supply through op
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Page 106 and 107: MINIMUM RESERVE SYSTEMCredit instit
Page 108 and 109: with the ample allotments in the fi
Page 112 and 113: and SDR holdings increased by aroun
Page 114 and 115: and the ECB). As a result of carefu
Page 116 and 117: cross-CSD settlement. T2S will thus
Page 118 and 119: ELIGIBLE LINKS BETWEEN NATIONAL SEC
Page 120 and 121: Chart 48 Number of euro banknotes i
Page 122 and 123: 3.3 BANKNOTE PRODUCTION AND ISSUANC
Page 124 and 125: 4 STATISTICSThe ECB, assisted by th
Page 126 and 127: iii) payments statistics and iv) de
Page 128 and 129: 5 ECONOMIC RESEARCHThe main functio
Page 130 and 131: were organised to disseminate resea
Page 132 and 133: the Financial Collateral Directive,
Page 134 and 135: on the Banque centrale du Luxembour
Page 136 and 137: standards by individual Eurosystem
Page 138 and 139: CHAPTER 3ENTRY OF SLOVAKIAINTO THE
Page 140 and 141: Table 13 Main economic indicators f
Page 142 and 143: As of January 2009 Slovakia is thus
Page 144 and 145: 3 OPERATIONAL ASPECTS OF THE INTEGR
Page 146 and 147: 4 THE CASH CHANGEOVER IN SLOVAKIATH
Page 149 and 150: Willem F. Duisenberg accepting the
Page 151 and 152: 1 FINANCIAL STABILITYThe Eurosystem
Page 153 and 154: With regard to merger and acquisiti
Page 155 and 156: with the principles set out in Octo
Page 157 and 158: 2.2 BANKINGCAPITAL REQUIREMENTS DIR
Page 159 and 160: 3 FINANCIAL INTEGRATIONThe Eurosyst
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The market for short-term paper in
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de France and the Banca d’Italia.
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and the Eurosystem’s business con
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4.2 RETAIL PAYMENT SYSTEMS ANDINSTR
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for Clearing and Settlement, and th
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Willem F. Duisenberg at his farewel
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1 EUROPEAN ISSUESIn 2008 the ECB co
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for financial institutions, to faci
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1.3 DEVELOPMENTS IN AND RELATIONS W
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On a number of occasions in 2008, t
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countries have voiced support for t
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Former Italian President Carlo Azeg
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1 ACCOUNTABILITY VIS-À-VIS THE GEN
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implementation of the steps foresee
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CHAPTER 7EXTERNALCOMMUNICATION
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2 COMMUNICATION ACTIVITIESThe ECB a
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Panel at the Fifth ECB Central Bank
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1 DECISION-MAKING BODIES AND CORPOR
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Council decided on the main aspects
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1.3 THE EXECUTIVE BOARDThe Executiv
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1.4 THE GENERAL COUNCILThe General
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The Eurosystem/ESCB committees have
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members of the Executive Board. 13
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for their current position. On the
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statistical office (Statistisches B
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4 ANNUAL ACCOUNTS OF THE ECB212 ECB
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function, and by the Governing Coun
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BALANCE SHEET AS AT 31 DECEMBER 200
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PROFIT AND LOSS ACCOUNT FOR THE YEA
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mid-market prices on 30 December 20
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The defined benefit obligation is c
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NOTES ON THE BALANCE SHEET1 GOLD AN
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Eurosystem (see “Banknotes in cir
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(see “Banknotes in circulation”
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values at which the transactions we
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15 CAPITAL AND RESERVESCAPITALPursu
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epresenting the remainder of its ca
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NOTES ON THE PROFIT AND LOSS ACCOUN
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individual circumstances. Basic sal
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5 CONSOLIDATED BALANCE SHEET OF THE
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ANNEXES
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Number Title OJ referenceECB/2008/1
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Number Title OJ referenceECB/2009/1
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Number 2 Originator SubjectCON/2008
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Number 4 Originator Subject OJ refe
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oth the marginal lending facility a
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OVERVIEW OF THE ECB’S COMMUNICATI
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y the respective NCBs will also be
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OPEN MARKET OPERATIONS BY CURRENCYE
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USD operationsType oftransaction 1)
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DOCUMENTS PUBLISHED BY THEEUROPEAN
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95 “Financial stability challenge
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1012 “Petrodollars and imports of
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GLOSSARYThis glossary contains sele
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Economic analysis: one pillar of th
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Financial stability: condition in w
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MFIs (monetary financial institutio
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Reserve base: the sum of the eligib
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ANNUAL REPORT 2008 - Polymer Bank Notes of the World

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