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Annual accounts of the ECB for the year ended 31 December 1999

12 April 2000

In its first year of full operation the European Central Bank (ECB) made an operating profit of EUR 666 million before payment of remuneration of EUR 913 million to national central banks (NCBs) on their claims in respect of the EUR 39.5 billion of foreign reserve assets, including gold, transferred by them to the ECB at the beginning of the year. Taking this remuneration into account, the ECB's financial result for 1999, therefore, amounted to a loss of EUR 247.3 million.

The principal factor contributing to this loss was the substantial increase during the year in interest rates related to the ECB's large holdings of US government securities, and also to euro-denominated securities. Therefore, although the widened favourable differential between euro and US dollar interest rates resulted in significant positive net interest income, the accompanying falls in securities prices resulted in end-of-year valuation write-downs amounting to some EUR 605 million. To these were added net realised losses of EUR 265 million on sales of securities effected in a falling market in the normal course of portfolio management operations.

The income of the ECB is derived primarily from investment earnings on its holdings of foreign reserve assets and on its paid-up capital of EUR 3.9 billion. (The bulk of the latter - some EUR 3.5 billion - was invested by the ECB in securities issued by EU governments.) Substantial amounts of interest income were also received and paid on the NCBs' intra-Eurosytem balances with the ECB arising from the operations of the TARGET system: the net income on these operations was immaterial to the financial result.

The ECB's administrative expenses on salaries and related costs, premises, goods and services amounted to EUR 122 million, compared with EUR 60 million in the last seven months of 1998. Depreciation charges on fixed assets amounted to EUR 10 million. At the end of 1999 the ECB employed 732 staff (including 55 at managerial levels) compared with 534 the previous year.

The ECB recorded exchange rate valuation gains totalling EUR 6.9 billion on its holdings of foreign currency assets and gold. In accordance with the accounting principles of the Eurosystem, while unrealised valuation losses are charged against profit, unrealised gains are not recognised as profit, but are transferred directly to revaluation accounts. These gains may not be used to offset the revaluation losses arising from falls in securities prices.

At its meeting on 16 March 2000, and in accordance with its previous decisions on the coverage of future losses incurred by the ECB, the Governing Council of the ECB decided that the ECB's losses should be funded as follows:

Transfer from the general reserve fund: EUR 5.5 million

Release of retained profit carried forward from 1998: EUR 22 million

Retention of pooled monetary income accruing to NCBs: EUR 35.2 million

Direct charge on the seigniorage income of NCBs: EUR 184.6 million

Notes for editors

  1. Accounting policies of the ECB: Common accounting policies have been established by the Governing Council of the ECB for the Eurosystem, including the ECB, in accordance with Article 26.4 of the Statute of the ESCB. Although these policies are generally based on internationally accepted accounting practice, they were designed with special regard for the unique circumstances of central banks, and they pay particular attention to the issue of prudence given the large exposures that the NCBs bear in respect of foreign exchange. This prudent approach applies, particularly, to the differing treatment of unrealised gains and unrealised losses for the purposes of recognising income, and to the prohibition of netting unrealised losses on one asset against unrealised gains on another. While all NCBs are bound by these policies for the purpose of reporting their operations as part of the Eurosystem for inclusion in the consolidated weekly financial statements of the latter, they are not compelled to adhere to them in the preparation of their own annual accounts, unless required to do so by local legislation. In practice, however, it is anticipated that all NCBs will voluntarily apply broadly the same policies as the ECB in the preparation of their own annual financial statements.

  2. Remuneration of foreign reserve assets transferred to the ECB: The Governing Council may decide the denomination and remuneration of the resultant claims of NCBs on the ECB. Pursuant to Article 30.3 of the Statute of the ESCB, the Governing Council decided that these claims should be denominated in euro using the valuations at the time of the transfer, and should be remunerated on a daily basis at the latest main refinancing rate of the Eurosystem (the two-week euro repo rate), adjusted to take into account the zero rate of return on the gold component. The current arrangements are open to periodic review. For the years 1999, 2000 and 2001, pending the issuance of euro banknotes and their inclusion in the liability base for the purposes of calculating monetary income (see note 3), the Governing Council has approved a transitional regime to cover the ECB's losses which could arise from its very large exposure to adverse movements in foreign exchange rates. In the event of such a loss which could not be covered by the mechanisms foreseen in Article 33.2 of the Statute of the ESCB (viz. use of the general reserve fund and application of the pooled monetary income of the NCBs, which will be relatively low during the transitional period), the ECB is entitled to waive up to a total of 20% of the original claims over this three-year period. This waiver did not need to be invoked for 1999.

  3. Monetary income: For the years 1999 to 2001, monetary income of the NCBs consists of imputed income on their "liability base", calculated on the basis of a reference rate set equal to the Eurosystem's main refinancing rate. The liability base currently consists almost exclusively of deposit liabilities to credit institutions. Interest paid by NCBs on items within the liability base is deducted and the net income is pooled. At present, minimum reserve requirement deposits, which constitute the bulk of the liability base, are also remunerated by NCBs at the Eurosystem's main refinancing rate. Unless required to cover a loss of the ECB, and following a decision of the Governing Council to that effect, pooled monetary income is then redistributed to NCBs in accordance with their respective shares in the ECB's capital key. In 1999 the entire amount of monetary income pooled by the NCBs was retained to cover the ECB's losses.

  4. The direct charge on the seigniorage income (note issue income) of NCBs: Given the exclusion of national banknotes from the liability base used to compute the monetary income of the NCBs, which could be used to fund any losses of the ECB, the Governing Council decided that any losses of the ECB up to the end of 2001 which could not be covered by means of the mechanisms mentioned in Article 33.2 of the Statute of the ESCB and/or the waiver described above would be covered by a direct charge on the seigniorage income of NCBs in proportion to their contribution to the ECB's capital. The maximum charge payable should not result in any NCB having to pay more than the total of the income which it earned in the year in question. The seigniorage income of each NCB is deemed to be the amount that would be earned if its note issue liabilities formed part of its liability base and, therefore, earned interest at the Eurosystem's main refinancing rate. (For 1999, the application of this formula would have made available a maximum total direct charge of some EUR 4 billion out of a total imputed seigniorage income of some EUR 9 billion for the Eurosystem as a whole.)


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