MONETARY POLICY OPERATIONAL FRAMEWORK REFORM HAS CHANGED THE RULES FOR THE BANKS' REQUIRED RESERVES INSTRUMENTS

(comments on the Eesti Pank balance sheet as of 31 January 2001)

From 1 January 20 01, in compliance with the monetary policy operational framework reform strategy, Bank of Estonia allows the credit institutions to meet up to 25% of reserve requirement with euro denominated and high quality (at least S&P AA-/Moody's Aa3) securities.

Credit institutions have gradually started to use the new facility. In January 2001 about half of the credit institutions started to hold part of their required reserves in foreign securities. By the end of the month, the amount of credit institutions' required reserves holdings in high quality securities reached 1,4 billion Estonian kroons.

The overriding objective of the monetary policy operational framework reform, is to enhance the efficiency of the system, facilitate cross-boarder liquidity management within the framework of the currency board regime, and reduce market distortions without lowering overall liquidity buffers.

As a by-product, the credit institutions investing part of their required reserves in the international markets will bring along a moderate reduction of the base money and, possibly, of the gross reserves of the Bank of Estonia. It is important to stress that this reduction of base money and central bank reserves is of a purely technical nature and does not alter the liquidity stance of domestic financial sector. Besides that, the expected future cross-boarder flow of reserves, will be reflected in the Balance of Payments reserves and financial account, and shifts between Estonia's National Investment Position accounts.

The required reserves reform will support the creation of high credit standing foreign liquidity buffers and enlarge the capacity of the financial institutions to manage their liquidity in Eurozone money markets. The latter is essential from the financial stability, and international competitiveness point of view. In the longer term the reform will help converge the operational framework with the Eurosystem.

Comments on the balance sheet of Eesti Pank as of 31 January 2001

The total assets of Eesti Pank decreased by EEK 1.1 billion in January, i.e. by 6.5%, and stood at EEK 16.1 billion at the end of the month.

The Eesti Pank gold and foreign currency reserves (row III in the table on the reserves backing the kroon), having decreased by EEK 2.2 billion, i.e. by 14.4%, formed EEK 13.2 billion by the end of January.

The excess reserves above currency board cover (row IX in the table on the reserves backing the kroon) increased by EEK 115 million, i.e. by 5.3%, and reached EEK 2.3 billion.

In January, the demand for base money decreased by EEK 2.35 billion, i.e. by 17.8%. At the same time the volume of account money decreased by EEK 1.8 billion, i.e. by 31% and notes and coins in circulation by EEK 513 million, i.e. by 7%. By the end of January base money stood at EEK 10.8 billion. The decrease in base money was mainly due to the launch of monetary policy operational framework reform, which enabled credit institutions to meet the reserve requirement partially with high-liquidity buffers abroad. On the other hand, the decrease in the volume of account money as well as cash was also influenced by their seasonally high level at the year-end.

In January, Estonian kroons worth of EEK 1.75 billion were bought for foreign currency from Eesti Pank and Estonian kroons worth of EEK 4.131 billion were sold to Eesti Pank.

The volume of foreign debt of Eesti Pank increased by EEK 1.1 billion due to short-term repurchase agreements.

In October Eesti Pank mediated the repayment of EEK 20.9 million of the Systemic Transformation Facility (STF) granted to the Government of the Republic of Estonian by the IMF. The balance of the STF was EEK 296 million as of end of January.

The Eesti Pank capital, reserves and profit increased by total EEK 120 million, reaching EEK 2.5 billion.