ANNUAL REPORT 2008 - Polymer Bank Notes of the World

function, and by the Governing Council with theassistance of BUCOM.4 FINANCIAL RESULTFINANCIAL ACCOUNTSUnder Article 26.2 of the Statute of the ESCB,the Annual Accounts of the ECB are drawn upby the Executive Board, in accordance withthe principles established by the GoverningCouncil. The accounts are then approved by theGoverning Council and subsequently published.PROVISION FOR FOREIGN EXCHANGE RATE,INTEREST RATE AND GOLD PRICE RISKSSince most of the ECB’s assets and liabilities areperiodically revalued at current market exchangerates and security prices, the ECB’s profitabilityis strongly affected by exchange rate exposuresand, to a lesser extent, interest rate exposures.These exposures stem mainly from its holdingsof foreign reserve assets held in US dollars,Japanese yen and gold, which are predominantlyinvested in interest-bearing instruments.In 2005, taking into account the ECB’s largeexposure to these risks and the size of itsrevaluation accounts, the Governing Councildecided to establish a provision against foreignexchange rate, interest rate and gold pricerisks. As at 31 December 2007, this provisionamounted to €2,668,758,313. In accordancewith Article 49.2 of the Statute of the ESCB,the Central Bank of Cyprus and the CentralBank of Malta also contributed the amountsof €4,795,450 and €2,388,127 respectivelyto the provision with effect from 1 January2008. Taking the results of its assessment intoaccount, the Governing Council decided totransfer as at 31 December 2008 an additionalamount of €1,339,019,690 to the provision.This transfer increased the size of the provisionto its permitted maximum of €4,014,961,580.The Governing Council has decided that theprovision, together with any amounts held in theECB’s general reserve fund, may not exceed thevalue of the capital shares paid up by the euroarea NCBs.This provision will be used to cover realisedand unrealised losses, in particular valuationlosses not covered by the revaluation accounts.Its size and continuing requirement is reviewedannually, taking a range of factors into account,including in particular the level of holdings ofrisk-bearing assets, the extent of materialisedrisk exposures in the current financial year,projected results for the coming year, and a riskassessment involving calculations of Valuesat Risk (VaR) on risk-bearing assets, which isapplied consistently over time.FINANCIAL RESULT FOR 2008The net income of the ECB prior to the transferto the provision against risks was €2,661 million,compared with €286 million in 2007. The netprofit of €1,322 million after the transfer wasmade was distributed to the NCBs.In 2007, the appreciation of the euro vis-à-visthe US dollar and, to a lesser extent, the Japaneseyen resulted in write-downs in the euro valueof the ECB’s holdings of assets denominated inthese currencies. These write-downs amounted tosome €2.5 billion and were expensed in the Profitand Loss Account. In 2008, the depreciationof the euro vis-à-vis the Japanese yen and theUS dollar resulted in unrealised gains of some€3.6 billion. These gains were recorded inrevaluation accounts, in line with the commonaccounting policies that have been establishedby the Governing Council for the Eurosystem.In 2008, net interest income decreased to€2,381 million from €2,421 million in 2007,owing mainly to (a) lower net interest incomedenominated in US dollars, and (b) higherremuneration of NCBs’ claims in respect offoreign reserves transferred. The resultingdecrease in net interest income was only partiallyoffset by the increase in interest income arisingfrom the allocation of euro banknotes withinthe Eurosystem, mainly reflecting the generalincrease in euro banknotes in circulation.214 ECBAnnual Report2008