FAQs on the ECB’s Annual Accounts

Section 1 – Questions on the financial statements

What is the legal basis for the ECB’s financial statements?

The annual financial statements of the ECB are prepared in accordance with Decision (EU) 2016/2247 of the ECB of 3 November 2016 on the annual accounts of the ECB (recast) (ECB/2016/35) (OJ L 347, 20.12.2016, p. 1).

That Decision is based on Guideline (EU) 2016/2249 of the ECB of 3 November 2016 on the legal framework for accounting and financial reporting in the European System of Central Banks (recast) (ECB/2016/34) (OJ L 347, 20.12.2016, p. 37). The accounting policies laid down in this Guideline are specific to the European System of Central Banks (ESCB) and follow the provisions of Article 26.4 of Protocol (No 4) on the Statute of the European System of Central Banks and of the European Central Bank (OJ C 202, 7.6.2016, p. 230) (Statute of the ESCB), which require a harmonised approach to accounting and financial reporting of Eurosystem operations.

What is the format of the ECB’s financial statements?

The format of the annual ECB’s financial statements has been developed to present the outcome of central bank activities, addressing the needs of users of financial statements. In particular, in order to provide information relevant for the purposes of liquidity analysis, positions denominated in foreign currency, euro or related to monetary policy instruments are shown separately on the balance sheet. The formats of the annual balance sheet and the profit and loss account of the ECB are set out in Annexes II and III of Decision (EU) 2016/2247.

Meanwhile, national central banks (NCBs) are recommended to adapt the format of their published annual balance sheets and profit and loss accounts in accordance with Annexes VIII and IX of Guideline (EU) 2016/2249.

How are foreign reserves revalued?

Foreign reserves, including gold, are revalued at market rates prevailing on the balance sheet date. In this context, assets and liabilities denominated in foreign currency, including on-balance-sheet and off-balance-sheet instruments such as foreign exchange swap and forward transactions, are converted into euro on a currency-by-currency basis.

In addition, items accounted for at market price, such as securities in foreign currencies, are revalued on an item-per-item basis either at the mid-market price or on the basis of the relevant yield curve prevailing on the balance sheet date. This market price revaluation is separate from the exchange rate revaluation.

For gold, a single revaluation takes place (i.e. no distinction is made between price and currency revaluation).

How are unrealised gains and losses treated?

Unrealised gains and losses result from the period-end revaluation of currencies, securities, other financial instruments and gold at current market rates and prices. Given that the Eurosystem applies the prudence principle when recognising income, such revaluation gains and losses are treated asymmetrically under the Eurosystem accounting rules (see Article 3 of Guideline (EU) 2016/2249):

• Unrealised gains are not recognised as income in the profit and loss account but are recorded directly under the liability item “Revaluation accounts”. Unrealised gains are therefore not part of the ECB’s result for the year, and consequently also not part of the distributable profit.
• On the other hand, year-end unrealised losses are recorded in the profit and loss account as “Write-downs on financial assets and positions” if they exceed the previous revaluation gains recorded in the corresponding revaluation account.

Unrealised losses in any currency, security or other financial instrument or in gold holdings are not netted against unrealised gains in any other currency, security or financial instrument or in gold (see Articles 15 and 17.2 of Guideline (EU) 2016/2249).

How are securities held for monetary policy purposes accounted for?

In accordance with Article 9 of Decision (EU) 2016/2247, marketable securities held for monetary policy purposes are treated as separate holdings and are valued either at market price or at amortised cost (subject to impairment), depending on monetary policy considerations.

Following the respective decisions by the Governing Council, all securities currently held by the Eurosystem for monetary policy purposes (under the Securities Markets Programme, the asset purchase programme and the pandemic emergency purchase programme) are accounted for at amortised cost subject to impairment based on monetary policy considerations (for further details on asset purchase programmes, see Asset purchase programmes). Thus the development of their market value does not influence their book value presented on the balance sheet. And since there is no revaluation, the revaluation accounts and profit and loss account are also not affected by movements in their market prices. However, for transparency purposes, in addition to the amortised cost, the notes to the ECB’s financial statements also disclose the market values of securities held for monetary policy purposes.

The impairment rules for these securities are harmonised for the Eurosystem. Impairment tests are conducted annually using year-end data.

How is the ECB’s “seigniorage” income defined?

Seigniorage is the income earned by a central bank related to the issuance of banknotes. Although banknote liabilities are not remunerated, in general the assets held against banknotes in circulation are interest-bearing and generate income for central banks. This income is called “seigniorage”.

The ECB does not physically issue banknotes itself. Instead, euro banknotes are issued by the euro area NCBs, but based on the Decision of the ECB of 13 December 2010 on the issue of euro banknotes (ECB/2010/29) (2011/67/EU) (OJ L 35, 9.2.2011, p. 26) an 8% share of the total value of euro banknotes in circulation is deemed to be issued by the ECB and is disclosed on its balance sheet under the liability item “Banknotes in circulation” (see Why does the ECB have a banknote liability?). Claims against the NCBs equivalent to the value of these banknotes are disclosed on the ECB’s balance sheet under the asset item “Claims related to the allocation of euro banknotes within the Eurosystem”.

Under Decision (EU) 2016/2248 of the ECB of 3 November 2016 on the allocation of monetary income of the national central banks of Member States whose currency is the euro (recast) (ECB/2016/36) (OJ L 347, 20.12.2016, p. 26) these claims are remunerated at the latest available interest rate used by the Eurosystem in its tenders for main refinancing operations. The remuneration earned by the ECB on these claims is the ECB’s seigniorage income and is disclosed in the profit and loss account under the item “Interest income arising from the allocation of euro banknotes within the Eurosystem”.

The concept of seigniorage is narrower than the concept of monetary income as it is limited to banknotes and does not extend to other monetary policy related aspects at the Eurosystem level (see What is the ‘monetary income’ of the Eurosystem?).

Further reference:

Explainer: What is seigniorage?

How does the ECB finance its operating expenses?

In the performance of its activities as described in the Treaty on the Functioning of the European Union and the Statute of the ESCB, the ECB incurs operating expenses.

A significant portion of the operating expenses relates to the ECB’s banking supervision tasks and is fully covered by annual fees levied on the supervised banks. In addition, the ECB’s own funds portfolio also provides the ECB with income to help fund its operating expenses (for further details on the ECB’s own funds portfolio, see Foreign reserves and own funds). The remaining part of the operating expenses is funded by the ECB’s income from other sources.

The ECB’s operating expenses are defined by the annual budget. In line with the provisions of Article 15 of the Rules of Procedure of the ECB, the Governing Council adopts the ECB’s annual budget, assisted by the Budget Committee^[1], following a proposal by the Executive Board and, for matters related to banking supervision, in consultation with the Chair and the Vice-Chair of the Supervisory Board.

Where do the ECB’s profits go?

In accordance with Article 33.1 of the Statute of the ESCB, the ECB’s net profit (i.e. after any transfers to/from the provision for financial risks), if any, is allocated in the following order:

• An amount to be determined by the Governing Council, which may not exceed 20% of the net profit, may be transferred to the general reserve fund to cover potential future losses (see How can the ECB cover its losses?), subject to a limit equal to the capital paid-up by the euro area NCBs.
• The limit of the capital paid-up by the euro area NCBs is applied jointly to the general reserve fund and the provision for financial risks (see What is the difference between provisions and reserves?). In other words, the total amount of these two items together cannot exceed the value of the ECB’s capital paid up by the euro area NCBs as at the year-end.
• The remaining net profit is distributed to the NCBs of the euro area countries in proportion to their shares in the ECB’s capital.

Non-euro area NCBs are not entitled to receive any share of the distributable profits of the ECB, nor are they liable to fund any losses of the ECB.

Further reference:

Explainer: Profits and losses of the ECB and the euro area national central banks: where do they come from?

Bunea, D., Karakitsos, P., Merriman, M. and Studener, W., Profit distribution and loss coverage rules for central banks, Occasional Paper Series, No 169, ECB, April 2016.

What impact do changes in the ECB’s key interest rates have on the ECB’s result?

The ECB’s result is affected directly and indirectly by changes in the ECB’s key interest rates.

The direct impact comes from balance sheet items whose remuneration is linked to one of the key interest rates. If interest rates increase, the ECB earns higher income on some of its assets and pays higher expenses on part of its liabilities.

The indirect effects are less obvious. For example, when the ECB increases its key interest rates, the yields of euro-denominated bonds are expected to rise as well. This rise, however, does not immediately translate into higher interest income from the fixed-coupon euro-denominated bonds already held by the ECB, most of which were bought for monetary policy purposes at a time when interest rates were low. These bonds mature only gradually and the respective redemption proceeds are only partially reinvested, so assets earning the currently higher yields only account for a fraction of the total amount of bonds held. At the same time, increases in key interest rates lead instantly to higher interest expenses on the corresponding liabilities, with no equivalent increase in interest income earned on the bonds. In other words, the ECB is subject to funding interest rate risk, which is not directly linked to any particular portfolio but rather to the structure of the ECB’s balance sheet as a whole and, in particular, the existence of yield and maturity mismatches between assets and liabilities.

Furthermore, there could be further effects, for example on the valuation of securities that are revalued at market prices.

Section 2 – Questions on capital, reserves, provisions and loss coverage

How can the ECB cover its losses?

First, the revaluation accounts can absorb the impact of unfavourable movements in the prices and/or exchange rates of corresponding items (see Can the revaluation accounts be used to cover unrealised losses?).

At the year-end, the provision for financial risks can also be used, to the extent deemed necessary by the Governing Council, to offset losses that arise as a result of exposures to financial risks (see What rules apply to the creation and use of the provision for financial risks?). This provision is considered an “above-the-line” buffer that is released before calculating the ECB’s result for the year.

Under Article 33.2 of the Statute of the ESCB, if the ECB reports a loss for the year (i.e. after any releases from the provision for financial risks), this loss may be offset against the general reserve fund, which is built up from undistributed profits of previous years (the general reserve fund currently stands at zero, see What is the difference between provisions and reserves?). The Governing Council may also decide to offset the ECB’s loss against the monetary income earned by the euro area NCBs in the same financial year (see What is the ‘monetary income’ of the Eurosystem?). Contrary to the provision for financial risks, the general reserve fund and the NCBs’ monetary income are considered “below-the-line” buffers, which means they are used after establishing the result for the year.

Uncovered year-end losses are carried forward on the ECB’s balance sheet, to be offset against future profits.

Can the revaluation accounts be used to cover unrealised losses?

The asymmetric treatment of revaluation results, leads to the recording of unrealised gains directly under the liability item “Revaluation accounts”, thereby preventing their distribution (see How are unrealised gains and losses treated?). These buffers can absorb the impact of future unfavourable movements in exchange rates and/or prices. However, unrealised gains in any currency, security or other financial instrument or in gold holdings can only be used to offset future unrealised losses arising from the same currency, security or other financial instrument or gold (see Article 15 of Guideline (EU) 2016/2249).

Unrealised losses exceeding previous revaluation gains recorded in the corresponding revaluation account at the year-end are taken to the profit and loss account as “Write-downs on financial assets and positions”.

What rules apply to the creation and use of the provision for financial risks?

In view of its exposure to financial risks, the ECB can establish a provision for financial risks, which is funded from the ECB’s income. This provision is used to the extent deemed necessary by the Governing Council to offset losses that arise as a result of exposures to financial risks (see How can the ECB cover its losses?). The size of this provision is reviewed annually, taking into account a range of factors, including the level of holdings of risk-bearing assets, the projected results for the coming year and a risk assessment. The provision for financial risks, together with any amount held in the ECB’s general reserve fund, may not exceed the value of the capital paid up by the euro area NCBs.

What is the difference between provisions and reserves?

Provisions are amounts set aside in order to provide for any known or expected liability or risk, the cost of which cannot be accurately determined. They are set aside or released before arriving at the result for the year. The ECB has administrative provisions and a provision for financial risks (see What rules apply to the creation and use of the provision for financial risks?), both of which are included under the balance sheet item “Provisions”. The provision for financial risks is considered an “above-the-line” buffer (see How can the ECB cover its losses?).

Reserves by contrast are amounts set aside out of profit for the year which are not intended to meet any specific liability, contingency or expected diminution in the value of assets known to exist at the balance sheet date. The ECB may build up a general reserve fund which would be recorded under the balance sheet item “Capital and reserves” (the general reserve fund currently stands at zero, see Where do the ECB’s profits go?). Unlike the provision for financial risks, the general reserve fund is a “below-the-line” buffer and may be used to offset any loss for the year not covered by “above-the-line” buffers (see How can the ECB cover its losses?).

What happens if the ECB faces (repeated) losses?

The ECB’s mandate is to maintain price stability, not to generate profits or to avoid losses. Thus decisions taken in this context are solely based on considerations aiming to ensure an effective monetary policy, even if pursuing the right policies could temporarily result in a reduction in the reported results. In this context, profits and losses are side effects of the effort to fulfil the ECB’s primary mandate. In any case, the ECB can effectively operate and fulfil its primary mandate to maintain price stability regardless of any losses.

In the event of losses, the ECB would first rely on the resources set aside in previous years. If the ECB’s provision for financial risks is not sufficient to cover the losses incurred during the period, the ECB, subject to a Governing Council decision, can offset the loss against the general reserve fund, which is built up from undistributed profits of previous years (the general reserve fund currently stands at zero) or have recourse to the NCBs’ monetary income to cover the outstanding loss for the year. Any further amount is carried forward on the ECB’s balance sheet, to be offset against future profits (see How can the ECB cover its losses?).

What is the relation between the ECB’s subscribed capital and its paid-up capital?

The capital of the ECB comes from the NCBs of all EU Member States (for further details on the ECB’s subscribed and paid-up capital, see Capital subscription). The NCBs’ shares in this capital are calculated using a capital key which reflects the respective country’s share in the total population and gross domestic product of the European Union.

While euro area NCBs are required to pay up in full their share of the ECB’s subscribed capital, non-euro area NCBs pay only 3.75% of their share of the subscribed capital as a contribution to the operational costs of the ECB. Thus the ECB’s paid-up capital is less than the subscribed capital.

The paid-up capital of the ECB would be equal to its subscribed capital if all EU countries joined the euro area and their NCBs paid their full capital subscription to the ECB.

Further reference:

The Eurosystem capital key is derived from the capital keys of the euro area NCBs. It is used, for example, to guide purchases in some of the ECB’s asset purchase programmes.

How does the ECB invest its paid-up capital?

The ECB’s paid-up capital is invested in euro-denominated assets in the own funds portfolio (for further details on the ECB’s own funds portfolio, see Foreign reserves and own funds), which is reported under the balance sheet item “Other financial assets”. The own funds portfolio provides the ECB with income to help fund those operating expenses that are not related to the delivery of its supervisory tasks (see How does the ECB finance its operating expenses?).

Further reference:

Vergote, O., Studener, W., Efthymiadis, I. and Merriman, N., “Main drivers of the ECB financial accounts and ECB financial strength over the first 11 years”, Occasional Paper Series, No 111, ECB, May 2010. ”

Section 3 – Questions on the ECB as part of the Eurosystem

What is the “monetary income” of the Eurosystem?

Eurosystem monetary policy is implemented in a decentralised manner by the euro area central banks on behalf of the monetary union. Thus Eurosystem monetary policy operations and the resulting income and expenses are recorded in the separate financial statements of the euro area NCBs and the ECB (see What is the key difference between the impact of the implementation of monetary policy on the ECB’s and NCBs’ balance sheets). In line with Article 32 of the Statute of the ESCB, the net income generated by the euro area NCBs in the performance of the monetary policy function is defined as the monetary income of the Eurosystem. It is not retained by the particular NCB in which it arose but is pooled and then redistributed at the end of each financial year.

The monetary income allocation among euro area NCBs consists of several steps. In the first step, the amount of each euro area NCB’s monetary income is determined. This is done by looking at the assets held against banknotes in circulation and deposit liabilities to credit institutions. Both the asset and liability positions to be considered and the methodology for calculating the related income are set out in Decision (EU) 2016/2248. For example, the income the NCBs generate from lending to commercial institutions (i.e. from the main refinancing operations or longer-term refinancing operations) is considered to be monetary income.

In the second step of the monetary income allocation, the sum of euro area NCBs’ monetary income is shared among them in proportion to their shares in the ECB’s capital.

Finally, the difference between the amounts in the second and first steps is calculated. Each euro area NCB receives or pays in the difference between its monetary income share according to its share in the ECB’s capital and the actual monetary income it has earned (and pooled). For instance, if the monetary income that an NCB records in its own financial statements is less than its share, it will receive a monetary income allocation payment. This final amount received or paid at the end of reallocation process is reported by euro area NCBs under the profit and loss item “Net result of pooling of monetary income”.

The reallocation is carried out centrally by the ECB. However, the ECB is not part of the monetary income allocation (see What is the ECB’s role in the monetary income allocation?) and its result is therefore not affected by this process.

What is the ECB’s role in the monetary income allocation?

The allocation of the monetary income of euro area NCBs is laid out in Article 32 of the Statute of the ESCB, which defines monetary income as the income accruing to NCBs in the performance of their monetary policy function. While the ECB is not part of the monetary income allocation, it has been assigned the task of calculating and distributing the monetary income for the Eurosystem. The ECB informs the NCBs of the cumulative amounts on a quarterly basis, while the allocation of the sum of each NCB’s monetary income in proportion to their shares in the ECB’s capital takes place at the end of each financial year (see What is the ‘monetary income’ of the Eurosystem?).

The ECB is not part of the monetary income allocation of the Eurosystem, but its distributable profit for the year (which comes from all ECB operations, including monetary policy operations) is allocated to the euro area NCBs (see Where do the ECB’s profits go?).

What is behind the ECB’s TARGET balance?

The Trans-European Automated Real-time Gross Settlement Express Transfer system (TARGET) is a payment system operated by the Eurosystem to settle payments in euro within the European Union in real time in central bank money. These transactions are initiated either by central banks or by private entities (credit institutions, including on behalf of their clients, and other participating financial market infrastructures). TARGET settles payments related to the Eurosystem’s monetary policy operations, interbank payments, customer payments exchanged between banks, and transactions related to other payment and securities settlement systems. All settlements are automatically aggregated and adjusted to form part of a single position of each NCB vis-à-vis the ECB. The movements in TARGET accounts are reflected in the accounting records of the NCBs and the ECB on a daily basis.

As a result, the participating euro area NCBs have either a claim or a liability vis-à-vis the ECB. The related single net TARGET asset or liability position is presented on the ECB’s balance sheet under either “Other claims within the Eurosystem (net)” or “Other liabilities within the Eurosystem (net)”. Non-euro area NCBs participating in TARGET can only have a claim against the ECB. Their balances are included on the ECB’s balance sheet under “Liabilities to non-euro area residents denominated in euro”.

The ECB’s net TARGET asset or liability position is the result of a number of events, including the settling of purchases of monetary policy securities via TARGET. When the ECB buys securities from a commercial bank, the commercial bank receives the money in its current account held at the NCB of the country in which the commercial bank is located. This is because commercial banks cannot have current accounts directly with the ECB (see Can credit institutions have current accounts directly with the ECB?). At the same time, the NCB where the commercial bank holds its current account records a TARGET claim vis-à-vis the ECB, while the ECB obtains the security and records a TARGET liability towards the NCB.

Further reference:

For further information on TARGET, see TARGET Services.

Why does the ECB have a banknote liability?

The ECB and the euro area NCBs, which together comprise the Eurosystem, issue euro banknotes on the basis of Decision ECB/2010/29. The total value of euro banknotes in circulation is allocated to the Eurosystem central banks on the last working day of each month in accordance with the banknote allocation key defined in that Decision. The respective amounts are disclosed on the ECB’s and NCBs’ balance sheets under the liability item “Banknotes in circulation”.

The fact that central banks disclose banknotes in circulation on the liability side of their balance sheet goes back to times when central banks would exchange issued banknotes for gold or silver. At that time, banknotes could be considered as promissory notes of the issuing central bank vis-à-vis the holders of the banknotes.

Although the ECB does not physically issue banknotes itself, based on the above Decision 8% of the value of all euro banknotes in circulation is deemed to be issued by the ECB, while the NCBs put these banknotes into circulation on the ECB’s behalf. As mentioned above, this amount is disclosed by the ECB under the liability item “Banknotes in circulation”. In exchange for this liability, the ECB has claims against the NCBs equivalent to the value of these banknotes. These claims are disclosed under the item “Claims related to the allocation of euro banknotes within the Eurosystem” and are remunerated at the latest available interest rate used by the Eurosystem in its tenders for main refinancing operations. Interest income on these claims is included in the ECB’s profit and loss account under the item “Interest income arising from the allocation of euro banknotes within the Eurosystem” (see How is the ECB’s ‘seigniorage’ income defined?).

Is there any connection between the ECB’s and the euro area NCBs’ financial statements?

The ECB’s balance sheet presents the balances between the ECB and the NCBs under “Intra-Eurosystem claims” and “Intra-Eurosystem liabilities”.

Intra-Eurosystem balances result primarily from cross-border payments that are settled in TARGET and give rise to bilateral positions of euro area NCBs vis-à-vis the ECB (see What is behind the ECB’s TARGET balance?). Together with other intra-Eurosystem balances denominated in euro (for example due to the ECB’s interim profit distribution to NCBs, if any) they are presented on the balance sheet of the ECB and of each NCB as a single net asset or liability position under either “Other claims within the Eurosystem (net)” or “Other liabilities within the Eurosystem (net)”.

There are also intra-Eurosystem balances arising from the allocation of euro banknotes within the Eurosystem that are included on the ECB’s balance sheet as a single net asset item under “Claims related to the allocation of euro banknotes within the Eurosystem” (see Why does the ECB have a banknote liability?).The NCBs report a net claim or liability related to the allocation of euro banknotes within the Eurosystem under “Net claims related to the allocation of euro banknotes within the Eurosystem” or “Net liabilities related to allocation of euro banknotes within the Eurosystem”.

Further intra-Eurosystem balances arise from the transfer of foreign reserve assets to the ECB when NCBs join the Eurosystem. The NCBs disclose this amount as “Claims equivalent to the transfer of foreign reserves” on the asset side, while the ECB has a corresponding position on the liability side “Liabilities equivalent to the transfer of foreign reserves”.

Finally, the NCBs hold a share in the ECB’s capital and disclose the amount paid-up under “Participating interest in ECB” on the asset side. The ECB discloses these amounts under “Capital” on the liability side.

What is the key difference between the impact of the implementation of monetary policy on the ECB’s and NCBs’ balance sheets?

The monetary policy operational framework of the Eurosystem consists of a set of monetary policy instruments. As part of the overall set of instruments, the Eurosystem conducts open market operations, offers standing facilities and requires credit institutions to hold minimum reserves. Apart from open market outright transactions (asset purchases), some of which are conducted directly by the ECB, the specific monetary policy instruments are implemented in a decentralised manner by the NCBs and are reflected in their financial statements under the balance sheet items “Lending to euro area credit institutions related to monetary policy operations denominated in euro” and “Liabilities to euro area credit institutions related to monetary policy operations denominated in euro”. Accordingly, they have no impact on the ECB’s financial statements (see What is the format of the ECB’s financial statements?).

Further reference:

For further details, see the ECB’s webpages on the Eurosystem’s monetary policy instruments and, more specifically, on the open market operations.

Can credit institutions have current accounts directly with the ECB?

Credit institutions cannot have current accounts directly with the ECB.

Under Article 19 of the Statute of the ESCB, the ECB may require credit institutions established in Member States to hold minimum reserve on current accounts with the ECB and the NCBs in the pursuance of monetary policy objectives. However, Article 3 of Regulation (EU) 2021/378 of the European Central Bank of 22 January 2021 on the application of minimum reserve requirements (recast) (ECB/2021/1) (OJ L 73, 3.3.2021, p. 1) states that minimum reserves shall be held on reserve accounts, denominated in euro, with the relevant NCBs in each euro area Member State in which credit institutions are established.

Section 4 – General questions related to the ECB’s Annual Accounts

Where can I download the ECB’s Annual Accounts?

The ECB’s Annual Accounts can be downloaded from the Annual Accounts page on the ECB’s website.

Where can I find long-term balance sheet and profit and loss account data?

Data on the ECB’s balance sheet and profit and loss account since 1999 can be downloaded from the Annual Accounts page on the ECB’s website (see links in the “Download data” section at the bottom of the page).

For data on the annual consolidated balance sheet of the Eurosystem, see Annual consolidated balance sheet of the Eurosystem.

What does the production process of the ECB’s financial statements look like?

For information about the preparation and approval process for the ECB’s financial statements, see Production of the ECB’s financial statements.