Annual Accounts of the European Central Bank for the year ending 31 December 2005

16 March 2006

The Governing Council of the European Central Bank (ECB) today approved the audited Annual Accounts of the ECB for the year ending 31 December 2005.

The ECB earned a surplus of €992 million in 2005. An equivalent amount was set aside in a provision against foreign exchange rate, interest rate and gold price risks, leaving a declared net profit of exactly nil. The provision will be used to cover losses arising from the exposure to these risks, in particular valuation losses not covered by the revaluation accounts. Its size will be reviewed annually.

This result compares with a net loss of €1,636 million in 2004, which was mainly due to the appreciation of the euro against the US dollar and the Japanese yen. In 2005, the euro depreciated against these currencies.

The ECB’s regular income is derived primarily from investment earnings on its holding of foreign reserve assets and its paid-up capital of €4.1 billion, and from interest income on its 8% share of the euro banknotes in circulation. Interest income in 2005 was favourably affected by higher interest rates on US dollar-denominated assets.

The ECB earned total net interest income of €1,270 million from all sources, compared with €690 million in 2004. Excluding the interest income of €868 million earned on the share of banknotes in circulation, net interest income amounted to €402 million, compared with a net interest expense of €43 million in 2004. The ECB paid remuneration of €710 million to the national central banks (NCBs) on their claims in respect of the foreign reserve assets transferred by them to the ECB.

The ECB’s administrative expenses on staff, rental of premises, professional fees, and other goods and services amounted to €316 million (€340 million in 2004). Staff costs decreased primarily due to a change in the accounting treatment applied to the recognition of net actuarial gains and losses in respect of the ECB’s retirement plan and other post-employment benefits. This decrease was partially offset by the effect of an increase in staff numbers on total salaries. At the end of 2005, the ECB employed 1,351 staff (including 131 at managerial levels) compared with 1,309 one year earlier. Other administrative expenses also declined, primarily due to a reduction in consultancy and professional fees. Depreciation charges on fixed assets amounted to €32 million.

The Annual Accounts will be published, together with a management report for the year ending 31 December 2005, in the ECB’s Annual Report on 25 April 2006.

Notes for editors

Accounting policies of the ECB: Common accounting policies have been established by the Governing Council for the Eurosystem, including the ECB, in accordance with Article 26.4 of the Statute of the European System of Central Banks and of the European Central Bank (Statute of the ESCB), and have been published in the Official Journal of the European Union.^[1] Although generally based on internationally accepted accounting practice, these policies were designed with special regard to the unique circumstances of the central banks of the Eurosystem. They pay particular attention to the issue of prudence given the large foreign exchange exposures of most of these central banks. This prudent approach applies particularly to the differing treatment of unrealised gains and unrealised losses for the purpose of recognising income, and to the prohibition against netting unrealised losses on one asset against unrealised gains on another. Unrealised gains are transferred directly to revaluation accounts, whereas unrealised losses at year-end that exceed revaluation account balances are treated as expenses. All NCBs are required to follow these policies for the purpose of reporting their operations as part of the Eurosystem, which are included in the Eurosystem’s weekly consolidated financial statements. All NCBs voluntarily apply broadly the same policies as the ECB in preparing their own annual financial statements.
Remuneration of foreign reserve assets transferred to the ECB: On transferring foreign reserve assets to the ECB upon joining the Eurosystem, each NCB acquired a remunerated claim on the ECB for the value of the amount it transferred. The Governing Council has decided that these claims should be denominated in euro, and should be remunerated on a daily basis at the latest available marginal rate for the Eurosystem’s main refinancing operations, adjusted to take account of the zero rate of return on the gold component. In 2005 this remuneration resulted in an interest expense of €710 million, compared with net interest income of €889 million earned on the foreign reserve assets.
Distribution of the ECB’s income on euro banknotes in circulation
: The Governing Council decided in 2002 that this income would be distributed separately to the NCBs in the form of an interim distribution after the end of each quarter.
^[2]
It is distributed in full unless the ECB’s net profit for the year is less than its income earned on euro banknotes in circulation. The latter was the case in 2005, due to the decision by the Governing Council to make transfers to the provision for foreign exchange rate, interest rate and gold price risks. Based on the ECB’s estimated financial result for the year, the Governing Council decided in December 2005:
1. to recall the three quarterly interim distributions already paid to the NCBs during the year, amounting to €634 million in total;
2. to withhold the final quarterly interim distribution of €234 million.

^[1]Decision of the European Central Bank of 5 December 2002 on the annual accounts of the European Central Bank (ECB/2002/11), OJ L 58, 3.3.2003, p. 38, as amended.
^[2]Decision of the European Central Bank of 21 November 2002 on the distribution of the income of the European Central Bank on euro banknotes in circulation to the national central banks of the participating Member States (ECB/2002/9), OJ L 323, 28.11.2002, p. 49. This Decision was repealed by Decision ECB/2005/11, OJ L 311, 26.11.2005, p.41, which became effective on 18 November 2005. From 2006, this distribution will occur at the end of the year only.

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