Eurosystem Monetary Policy Operations in 2008

The year 2008 has been exceptional, also in terms of Eurosystem’s monetary policy operations. The intensification of the market turmoil and the changes to Eurosystem refinancing operations led to an increased level of activity by the Eurosystem to support the financial sector and, through it, the entire economy.

The Eurosystem income from monetary policy operations is expected to amount to some € 28.7 billion in 2008, higher than in 2007 (€ 23.2 billion). The income from Eurosystem monetary policy operations is redistributed among national central banks (NCBs) in proportion to their shares in the ECB’s capital. However, net results of individual NCBs follow different patterns, due to the historical structure of their balance sheets, some specific national responsibilities and national accounting practices. The aggregate net result of the Eurosystem NCBs, including the distribution of the net result of the European Central Bank (ECB) that they receive, is estimated to amount to approximately € 16.8 billion for 2008. The year before, the aggregate net result was € 15.2 billion. The result of the ECB itself for 2008 amounted to EUR 1.3 billion in 2008, compared with zero in 2007 (see today’s ECB press release on the ECB annual accounts for 2008).

At the same time, the specific circumstances of 2008 also implied higher financial risks in Eurosystem credit operations. In autumn 2008, five counterparties defaulted on refinancing operations undertaken by the Eurosystem, namely Lehman Brothers Bankhaus AG, three subsidiaries of Icelandic banks, and Indover NL. The total nominal value of the Eurosystem’s claims on these credit institutions amounted to some €10.3 billion at end-2008. The monetary policy operations in question were executed on behalf of the Eurosystem by three NCBs, namely the Deutsche Bundesbank, the Banque centrale du Luxembourg and de Nederlandsche Bank. The Governing Council has confirmed that the monetary policy operations in question were carried out by these NCBs in full compliance with the Eurosystem’s rules and procedures, and that these NCBs had taken all the necessary precautions, in full consultation with the ECB and the other NCBs, to maximise the recovery of funds from the collateral held.

The counterparties in question submitted eligible collateral in compliance with the Eurosystem’s rules and procedures. This collateral, which mainly consisted of asset-backed securities (ABSs), is of limited liquidity under the present exceptional market conditions and some of the ABSs need to be restructured in order to allow for efficient recovery. Under current market conditions, it is difficult to assess when the eventual resolution will be achieved by the Eurosystem.

The Governing Council decided that any shortfall, if it were to materialise, should eventually be shared in full by the Eurosystem NCBs in accordance with Article 32.4 of the Statute of the ESCB, in proportion to the prevailing ECB capital key shares of these NCBs in 2008. The Governing Council also decided, as a matter of prudence, that the NCBs should establish their respective shares of an appropriate total provision in their annual accounts for 2008 as a buffer against risks arising from the monetary policy operations which were conducted with the counterparties mentioned above. The size of the total provision will amount to € 5.7 billion, and it is already accounted for in the net result figures stated above. The level of the provision will be reviewed annually pending the eventual disposal of the collateral and in line with the prospect of recovery.