ANNUAL REPORT 2008 - Polymer Bank Notes of the World

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eflected discretionary deleveraging of riskweightedassets by individual banks, awidespread raising of capital despite challengingbusiness conditions and, to some degree, theimpact of both the implementation of theBasel II Framework and prudential filters.The prospects for profitability to return to preturmoillevels do not look very promising in theshort term. Significant further declines in thevalues of other structured finance products –including US consumer asset-backed securitiesand euro area residential mortgage-backedsecurities – cannot be ruled out. Lower growthrates for loans to households and firms, a virtualstandstill in securitisation activities, and reducedincome from fees and commissions as well astrading are likely to pose challenges to the financialperformance of banks in 2009. In response, bankshave tightened their lending standards and cutcosts. Against this background, significant policyactions were taken by the Eurosystem and byeuro area governments to bolster market liquidity,confidence and capital buffers.The financial performance of large euro areainsurers deteriorated in the first half of 2008,with most insurers witnessing reductions inpremiums compared with the same periodof 2007. A significant reason for this was afall in demand for life insurance productsfollowing the equity and credit market turmoil.The financial market turbulence and knockoneffects for the real economy will continueto pose further challenges for many insurancefirms. In addition, insurers which offer bankingservices or are part of a financial conglomeratecontinue to be affected by the challenges facingthe banking sector.Global hedge fund returns were strongly negativeacross almost all investment strategies by theend of September 2008. Volatile asset pricereversals, forced deleveraging and margin calls,sudden bans on short sales by public authoritiesand investor redemptions contributed to thisweak performance. While the hedge fund sectoris known to have deleveraged considerably sincethe start of the market turmoil, thereby reducingits vulnerability to further margin calls orunexpected cuts in bank credit lines, hedge funds’vulnerability to the risk of investor redemptionsappears to have grown during 2008 as investorredemptions tend to be sensitive to hedge funds’performance. Looking ahead, if hedge fundsincreasingly fail to retain their investors, thepossibility of further sizeable asset sales by thesector may represent a non-negligible threat tothe stability of the financial markets.STRUCTURAL DEVELOPMENTSThe major structural trends in the EU bankingsystem are in line with those observed inprevious years. 2 Consolidation continued, despiteshowing signs of a moderate slowdown. Trendsvaried across the 15 older EU Member States,while the number of credit institutions in thecountries that have joined the EU since 2004remained broadly unchanged, with Cyprus beinga notable exception owing to the ongoingconsolidation in the cooperative banking sector.Altogether, the number of credit institutions inthe EU declined by 166 in 2007 (from 8,514 to8,348), while the corresponding figure in theprevious year was 175.At the same time, the EU banking landscapecontinued to be dominated by domestic creditinstitutions (which had a 71.3% market share),with the remainder equally divided betweenbranches and subsidiaries of foreign institutions.It should be highlighted, however, that there aresignificant differences among countries, withthe newer Member States characterised by theprominence of foreign entities, especially thosewith a parent company in one of the older EUcountries. It is noteworthy that, in contrast to thesituation in 2006, branches of foreign institutionsin the EU showed an increase in terms of marketshare of total assets. This was particularly true inthe countries that have joined the EU since 2004,where the market share of foreign branchesincreased by approximately 1 percentage point,while that of foreign subsidiaries saw a declineof approximately 4 percentage points.2 The data in this section are taken from the ECB’s report entitled“EU banking structures”, which only contains data up to 2007.ECBAnnual Report2008151
With regard to merger and acquisition (M&A)activity, the total number of transactionsdeclined in 2007. However, a significantincrease was recorded in the number ofacquisitions by EU credit institutions of bankslocated in countries outside the EU, which haveexceeded the figures for domestic deals over thepast three years. The value of M&As has beengrowing since 2003, with 2007 being the secondconsecutive year in which the total value ofM&A transactions exceeded the peak recordedin 2000. Concentration increased, reflecting, onthe one hand, continuing market consolidationand, on the other hand, the dynamic growth ofcertain banking groups, partly as a result of theirM&A activity. It should be noted that smallercountries tend to have more concentratedbanking sectors, with the notable exceptions ofAustria and Luxembourg, the former having astrong savings and cooperative banking sector,and the latter hosting a large number of foreigncredit institutions.Finally, banking intermediation was strengthened,as evidenced by the fact that the total assets ofcredit institutions grew at a higher rate thanGDP. However, the growth of total assets(10.7%) in 2007 at the EU level decelerated incomparison with previous years (2005: 13.7%;2006: 11.9%). 3 It should be noted that thisaggregate figure conceals strong fluctuations: thenewer Member States experienced above averagegrowth of nearly 25% in nominal terms, whilethe United Kingdom, whose financial sectoraccounts for approximately a quarter of the EUbanking sector’s assets, reported only a 2.3%increase in total assets. With the structuralchanges in the financial system and the declinein investment funds and hedge funds, corecommercial banks will become more central tocredit intermediation.1.2 FINANCIAL STABILITY ARRANGEMENTSInitiatives were launched both internationallyand in the EU to address the weaknesses of theoverall financial stability framework revealedby the financial turmoil.In April 2008 the Financial Stability Forum(FSF) proposed recommendations to enhancemarket and institutional resilience. In thiscontext, authorities are expected to clarifyand strengthen national and cross-borderarrangements for dealing with weak banks,as well as to review and, where necessary,strengthen deposit insurance arrangements.In terms of bank resolution arrangements andcross-border crisis management, the BaselCommittee on Banking Supervision (BCBS)carried out a review of national practices.Meanwhile, the FSF is developing a setof high-level principles for financial crisismanagement.In May 2008 the ECOFIN Council updatedthe EU roadmap on strengthening financialstability arrangements adopted in October2007. In accordance with this roadmap, theMemorandum of Understanding (MoU) oncross-border financial stability among EUsupervisory authorities, finance ministriesand central banks entered into force on1 June 2008. 4 The BSC – through a dedicatedtask force – has been assisting the relevantauthorities in the implementation of thisMoU, focusing on implementing the commonanalytical framework for assessing the systemicimplications of a financial crisis. In addition, theBSC has reviewed the key crisis managementfunctions currently in place in the MemberStates, providing input on initiatives to reviewthe tools at the authorities’ disposal.In October 2008 EU Member States took anumber of initiatives to ensure that the designof national stabilisation measures to resolvethe financial turmoil does not lead to negative3 It should be noted that this analysis is based on stockon-balance-sheet data. The analysis of trends with regard tototal assets would be improved by the availability of flow dataon securitised assets (both publicly and privately placed). Thelack of data on securitised assets has less of an impact on theanalysis for the countries that have joined the EU since 2004,where asset securitisation is not so developed. In addition, fornon-euro area countries, figures are not exchange rate-adjusted,so developments could be partially influenced by changes in theexchange rate between local currencies and the euro.4 http://www.ecb.europa.eu/pub/pdf/other/mou-financialstability2008en.pdf152 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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apidly to 1.7% in December, mainly
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productivity slowed to 0.2% in the
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Table 3 Composition of real GDP gro
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Corporate investment, which had exp
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Box 5LABOUR MARKET DEVELOPMENTS IN
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Chart C Breakdown of employment gro
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Box 6DEVELOPMENTS IN THE ISSUANCE A
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Chart B Government bond yield sprea
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Box 7STATISTICAL ACCOUNTING CONSEQU
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warranted because of the need to co
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sharp depreciation of the euro was
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prices in the first eight months of
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focused more on the production rath
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segments and, in turn, affected eur
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and Bulgaria registered robust grow
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In the remaining non-euro area EU c
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Estonian kroon and the Lithuanian l
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Table 10 Official monetary policy s
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the Bank of England and Sveriges Ri
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CHAPTER 2CENTRAL BANKOPERATIONSAND
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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
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Page 114 and 115: and the ECB). As a result of carefu
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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
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Page 128 and 129: 5 ECONOMIC RESEARCHThe main functio
Page 130 and 131: were organised to disseminate resea
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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: 1 FINANCIAL STABILITYThe Eurosystem
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Page 157 and 158: 2.2 BANKINGCAPITAL REQUIREMENTS DIR
Page 159 and 160: 3 FINANCIAL INTEGRATIONThe Eurosyst
Page 161 and 162: The market for short-term paper in
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Page 167 and 168: 4.2 RETAIL PAYMENT SYSTEMS ANDINSTR
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Page 171 and 172: Willem F. Duisenberg at his farewel
Page 173 and 174: 1 EUROPEAN ISSUESIn 2008 the ECB co
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Page 177 and 178: 1.3 DEVELOPMENTS IN AND RELATIONS W
Page 179 and 180: On a number of occasions in 2008, t
Page 181 and 182: countries have voiced support for t
Page 183 and 184: Former Italian President Carlo Azeg
Page 185 and 186: 1 ACCOUNTABILITY VIS-À-VIS THE GEN
Page 187: implementation of the steps foresee
Page 190 and 191: CHAPTER 7EXTERNALCOMMUNICATION
Page 192 and 193: 2 COMMUNICATION ACTIVITIESThe ECB a
Page 195 and 196: Panel at the Fifth ECB Central Bank
Page 197 and 198: 1 DECISION-MAKING BODIES AND CORPOR
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Page 201 and 202: 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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