The transition to the year 2000 and the demand for central bank liquidity

11 August 1999

The Eurosystem, which maintains close contact with the banking and financial community in the euro area, is well prepared for the transition to the Year 2000. Indeed, its operational framework was, from the outset, designed with a view to ensuring maximum flexibility in the implementation of monetary policy. Hence, unlike some of the systems used by other central banks, the Eurosystem's operational framework already has built-in mechanisms designed to deal with any level of liquidity demand from market participants.

In particular, its standing facilities offer an automatic channel to counter any potential fluctuation in the liquidity needed by the banking system, and thus also to limit any impact of these fluctuations on short-term interest rates. In addition, the three following characteristics of the monetary policy framework are worth highlighting in this context: first, the Eurosystem has at its disposal a diverse range of instruments that may, if necessary, complement its main and longer-term refinancing operations and its standing facilities. Second, the eligibility criteria for collateral required for the refinancing operations of the Eurosystem and the correspondent central banking model (which allows the cross-border use of collateral) ensure that there is a sufficient amount of eligible assets available as collateral even under rather exceptional circumstances. Finally, the averaging mechanism applied to the one-month maintenance period of the reserve requirement system generally contributes to smoothing out temporary liquidity flows.

The European Central Bank sees no need for the public to hold excess cash for the transition to the Year 2000. Nevertheless, the Eurosystem is well prepared to meet any liquidity requirements resulting from an increase in the demand for banknotes, should the need arise.

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