Monetary incomesharing

3.8.2 Monetary incomesharing

Under Article 32 of the Statute of the ESCB, the “monetary income” – i.e. the income that accrues to the NCBs in the performance of the Eurosystem’s monetary policy function – is distributed to the NCBs in line with their respective shares in the capital of the ECB.

Intra-Eurosystem income sharing is limited to monetary income; all other income earned by NCBs (such as earnings on their own financial resources) remains with the NCB which earned it. In conceptual terms, monetary income is earned on those assets of the NCBs that are the counterpart of their liabilities in respect of both the banknotes they issue and deposits of credit institutions. Since deposits of credit institutions held with the NCBs are remunerated at or close to market rates and thus do not generate a significant amount of income for the Eurosystem, monetary income consists mainly of seigniorage income. This is the income arising as the result of the exclusive right of the ECB and the NCBs to issue non- interest-bearing banknotes with legal tender status.

It is necessary to share the monetary income because, in a single currency area, NCBs’ monetary liabilities can shift freely and autonomously from one NCB to another. This applies especially to the NCBs’ euro banknotes liabilities which are the main source of monetary income. As mentioned in Section 3.4, euro banknotes are legal tender throughout the euro area and are not repatriated. Furthermore, in the integrated euro money market, credit institutions are free to cover their needs in central bank money either by borrowing from their domestic NCB or other domestic money market counterparties or by raising funds from cross-border money market counterparties. This freedom of choice has an impact on the type of assets which an individual NCB acquires against the issue of base money and accordingly on the level of its actual monetary income. Thus, the creation of central bank money can only be controlled at the Eurosystem level; no individual NCB has control over the size and nature of its monetary assets and liabilities.

Monetary income sharing is important in two respects: it ensures a fair allocation of the Eurosystem’s income among its members, and safeguards the system’s functional integrity. It is intended to ensure that monetary income accrues to the NCB of the country that generated it, and not of the country that initially received it. The capital key of the ECB, which is based on a combination of the shares in Eurosystem GDP and population size (see Box 16), is used as a proxy for the wealth-generating contribution of a Member State to the total monetary income of the Eurosystem. Its application also ensures that the income which results from non-euro area residents holding euro banknotes is apportioned equitably among the euro area countries.

Sharing monetary income is also a means of ensuring the functional integrity of the Eurosystem. By assigning each euro area NCB a pre-determined share in the system’s monetary income, the arrangement ensures that each NCB is in a position to carry out the decentralised operations of the Eurosystem and avoids incentives for competition that would conflict with the singleness of the ECB’s policies.

The monetary income of the NCBs is calculated by earmarking specified assets to

be offset against monetary liabilities and measuring the income that arises on such assets in line with rules laid down by the Governing Council. 25 Assets for earmarking include those that are directly affected by the monetary policy operations of the Eurosystem; 26 a limited amount of gold can also be earmarked. Income arising from these assets is pooled by NCBs after the deduction of interest paid on deposits of credit institutions, of interest paid on intra-Eurosystem liabilities (which are a substitute for monetary liabilities) and, exceptionally, of specific losses that may arise as the result of monetary policy operations carried out by an NCB on behalf of the Eurosystem.

The rules outlined above will be phased in progressively over the next few years and will become fully effective in 2008. Until that date, the monetary income allocation within the Eurosystem is subject to a transitional arrangement which mitigates the impact of the full effect of the arrangements on NCBs’ relative income positions. 27

25 Decision ECB/2001/16 of 6 December 2001 on the allocation of monetary income of the national central banks of participating Member States from the financial year 2002 (OJ L 337,

20.12.2001, p. 55), as amended by Decision ECB/2003/22 of 18 December 2003 (OJ L 9, 15.1.2004, p. 39). 26 These are loans to credit institutions, and net claims on other participating NCBs, which arise as the result of cross border shifts of money via the TARGET system and the arrangements for the allocation of banknotes in circulation among Eurosystem central banks. 27 The transitional regime smoothes differences in earned monetary income that NCBs incur because their respective shares in banknotes issued in the euro area before 2002 were higher or lower than their respective shares in the ECB’s capital. The amount of monetary income to be pooled by each NCB is adjusted accordingly on the basis of compensating factors related to their average shares in the total Eurosystem banknotes in circulation between mid-1999 and mid-2001. These compensating factors will be progressively reduced to zero by 2008, when all income on banknotes will be allocated fully in accordance with the ECB’s capital key.

3.9 R E S E RV E M A N A G E M E N T S E RV I C E S TO O F F I C I A L F O R E I G N