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THE ROLE OF EESTI PANK AS A MEMBER OF THE EUROSYSTEMOn 1 January 2011 Estonia became a fully-fledged member[1] of the European Economic and Monetary Union (EMU) and Eesti Pank became a member of the Eurosystem. Eesti Pank remains a member of the European System of Central Banks (ESCB). The ESCB consists of the European Central Bank (ECB) and all EU Member States, regardless of whether they have adopted the euro. The Eurosystem includes the ECB and the central banks of countries that have adopted the euro. Now that Eesti Pank is in the Eurosystem, the Governor of Eesti Pank attends also the meetings of the Governing Council of the ECB[2] (in addition to the meetings of the General Council of the ECB) and participates in the euro area monetary policy decision-making. From 13 July 2010 to 1 January 2011, the Governor of Eesti Pank participated as an observer in the meetings of the ECB Governing Council. Eesti Pank has representatives in the committees and working groups of the European Central Bank that meet in the composition of the ESCB. As of 1 January Eesti Pank participates in the work of the committees and working groups of the Eurosystem as a fully-fledged member. From 13 July 2010 it participated in these committees and working groups as an observer. The tasks and responsibilities of the central banks of the Eurosystem have been determined in the Statute of the ESCB and the ECB. The Eurosystem operates by the principle of decentralisation. National central banks are responsible for almost all operational tasks of the Eurosystem:  conduct of monetary policy operations management of the monetary reserves operation and oversight of payment and settlement systems issuing of banknotes in cooperation with the ECB assisting the ECB in collecting statistics
Euro area membership has entailed major changes in monetary policy and the euro area's economic analysis, reserve management and foreign currency operations, statistics, cash, and payment and settlement systems. The functions that are not directly connected to the implementation of single monetary policy are virtually the same: monitoring and analysis of the Estonian economy, compilation of economic forecasts, management of official foreign reserves, ensuring of financial stability, international cooperation outside the European Union (e.g. with IMF and BIS).Monetary policy and economic analysis
The monetary policy of the euro area follows the principle of centralised decision-making and decentralised implementation. All monetary policy issues, enforcement of regulations and decision-making fall under the competence of the Governing Council of the ECB. The Governing Council cooperates with the central banks of the Member States to develop the monetary policy framework and set monetary policy goals. Cooperation takes place in numerous committees and task forces, where all important issues are discussed before any decisions are made. The ECB Executive Board is responsible for the implementation of the decisions of the ECB Governing Council via national central banks. The primary monetary policy measures used by the Eurosystem are the regular repo auctions to give short-term loans to commercial banks and the system of reserve requirements. The ECB and the committees draft the materials on the basis of which the ECB Governing Council sets the specific inflation target and the key monetary policy interest rates that are needed for achieving that target. The current priority of the monetary policy is to maintain the inflation rate close to but below 2% in the medium term. The most important monetary policy interest rate is the interest rate applied to the ESCB's main refinancing operations. Its value in August 2011 was 1.50%. Daily monetary policy is implemented in cooperation with the ECB and the national central banks of the Eurosystem. For instance, the reserve requirement and the amount of regular refinancing operations, the total amount of short-term loans granted to commercial banks in the Eurosystem, are determined by the ECB Governing Council, whereas monetary policy transactions are intermediated by national central banks. The required reserves of commercial banks are held with the national central banks of the euro area. Lending to commercial banks also takes place via the Eurosystem's central banks. In other words, the partner of a commercial bank in a refinancing operation (a loan contract) is generally a national central bank of the euro area, not the ECB. Achieving the primary monetary policy objective of the Eurosystem would not be possible without monitoring, analysing and forecasting economic developments. The ECB Governing Council makes the interest rate decisions on the basis of comprehensive analyses of the euro area economy and money supply. The analytical work is divided into two major areas. On the one hand, both the ECB and the national central banks of the euro area carry out general monitoring of the euro area economy by analysing total demand, the interest rate level and liquidity of financial markets, the capital and labour market situation, changes in the euro exchange rate and global economic developments. Fiscal policy is also an essential part of the analysis. Economic analyses result in short- and medium-term assessments of inflation developments. On the other hand, the results of economic analyses are cross-checked by focusing on the aggregate indicators of money supply and credit and their long-term impact on inflation. All this takes place in close cooperation between the ECB and the national central banks of the euro area. This requires extensive "homework" from the national central banks to present their standpoints and participate in the discussions in the relevant committees and working groups of both the Eurosystem and the ESCB. Reserve management and foreign currency operations The management of foreign reserves in the Eurosystem is divided into two. Every central bank of the euro area makes a contribution to the fixed capital and foreign reserves of the ECB. If needed, these reserves are used for currency market interventions, which are performed exclusively by the ECB, all central banks of the euro area or by a combination of participants. The ECB does not invest its reserves; instead, these are managed by the central banks of the Member States. To this end, the ECB's reserves are distributed among national central banks according to the so-called capital key[3]. The income on investment belongs to the ECB; the Member States participate in the distribution of the profit and increase the capital of the ECB, if needed. In addition to the reserves of the ECB, every central bank that is a member of the Eurosystem independently manages their own national foreign reserves. No common rules have been laid down to regulate the management of the reserves of the Member States. The function of these reserves in the Eurosystem is to guarantee the feasibility of an additional contribution to the ECB's reserves, if needed. However, central bank reserves have also a broader role. The central banks of the Member States, including Eesti Pank, are independent legal entities with their assets and liabilities, which is why they need sufficient capital buffers to cover extraordinary losses. Eesti Pank needs a sufficient capital buffer also to fulfil the tasks not directly related to the implementation of the Eurosystem's monetary policy. Cash The regulations pertaining to the circulation of cash are laid down by the ECB Governing Council after consulting national central banks. The daily management of cash circulation is the responsibility of the Eurosystem's central banks and euro cash is launched into circulation (via commercial banks) by national central banks, not the ECB. Therefore, the euro cash in circulation is also a liability of national central banks, not the ECB, and is recorded on their balance sheets. Payment systems A key task of the Eurosystem is to foster the smooth operation of payment and settlement systems. The central banks that belong to the Eurosystem fulfil this responsibility in three ways: as operators of the payment systems, as policy developers, and as overseers of payment and settlement systems. Eesti Pank will continue to operate the payment systems. It will be actively participating in the policy-making of
payment and settlement systems, including compilation of ESCB standards and guidelines and legislative drafting
of the ECB. Eesti Pank is and will be responsible for the oversight of payment and settlement systems,
assessing the systems' compliance with the established standards.Statistics The Eurosystem needs detailed information about the euro area economy and financial system to fulfil its key functions. The distribution of responsibilities between the ECB and the national central banks regarding the collection, processing, analysis and publication of data and related methodology is similar to those applied in the area of monetary policy. The ECB Governing Council approves the standardised statistics requirements and due dates for the submission of statistics that are needed for that work, having first consulted with national central banks. The central banks are responsible for the daily collection and processing of statistics, and compilation of statistical outputs. National central banks participate in the compilation of euro area statistics. They collect statistical data from national credit institutions, other financial institutions and companies, and state agencies regarding the following areas:
1) money, banking and financial markets;
2) balance of payments statistics and the international reserves of the Eurosystem; 3) financial accounts. In addition, Eesti Pank delivers general statistics on public finances along with statements to the European Central Bank, and takes part in the international networks of statistical databases. Eesti Pank's responsibilities in statistics grew after Estonia joined the euro area, since in the single currency system the euro area central banks are required to present more detailed statistics than the non-euro area central banks. Assets and liabilities of the central bank after the changeover Similar to other national central banks of the euro area, Eesti Pank remains an independent and autonomous central bank with its own assets and liabilities also after the adoption of the euro. Joining the Eurosystem changed somewhat the structure of assets and liabilities. Two major changes occurred on the liabilities side of the balance sheet of Eesti Pank.
1) The issue of
cash, which is reflected on the balance sheet as a central bank liability, grew. Technically, the entry of the
issue of cash on the balance sheet is an estimate of Estonia's share in the amount of cash put into
circulation in the whole region. This estimate is calculated on the basis of Estonia's capital key in the fixed
capital of the ECB and is determined by the country's GDP and population. Compared to other euro area countries,
there is actually considerably less cash in circulation in Estonia, which is why the calculated amount of cash
in the balance sheet will be much bigger. Similar to kroons, the euro bank notes circulating in
Estonia are a liability of Eesti Pank and have to be fully backed by the assets of Eesti Pank.
2) The reserve requirement of Estonian banks decreased after the adoption of the euro, from the current 15% to 2%[4]. On the side of assets, three major changes occurred after the changeover to the euro.
1) Eesti Pank's
share in the ECB increased and some of the reserves were transferred.
2) Eesti Pank's external assets shrank as a result of lowering the reserve requirement. 3) The difference between the value of euro cash actually in circulation and the calculated amount allocated to each national central bank is covered by a claim on the Eurosystem. After the changeover, the structure of Eesti Pank's assets started to change gradually. In the currency board system the issue of kroons had to be backed only by external assets, whereas euro issues may be covered by domestic and external assets (with claims against the European Union and its Member States and also other countries) in accordance with the common requirements of the Eurosystem. The reserves backing the kroon consisted of the government bonds of major industrial countries (USA and euro area), but in the euro area the reserves backing the euro may also consist of other financial assets, such as loans granted to commercial banks. [1] Until 1 January 2011 Eesti Pank participated in the EMU as a member with derogation. |