Written Answers. - Central Bank Reserves.
Albert Reynolds
Question:
83
Mr. A. Reynolds
asked the
Minister for Finance
the purpose to which he will expend, or the way in which he envisages disposing of, the substantial reserves shown on the balance sheet of the Central Bank in view of the fact they are no longer necessary to maintain; and if he will make a statement on the current extent of those reserves.
[3155/99]
In responding to the Deputy's question, I would first like to clarify the position generally. All central banks hold foreign currency external assets. Such external assets are held for two principal purposes – to assist in protecting the currency and to ensure that the country does not lack the foreign currency needed to pay for essential imports.
With the establishment of the European Central Bank (ECB) and the adoption of the single currency, it will be the euro area as a whole rather than individual participating member states such as Ireland, which will need such external assets. Consequently, the ECB is empowered under its statute to call up, from participating national central banks, up to EUR 50,000 million in foreign reserve assets – that is, assets in currencies other than the euro. Each national central bank's contribution is in proportion to its shareholding in the ECB, which in turn is in proportion to each member state's shares of the euro area's GDP and population.
On 4 January 1999, the Central Bank of Ireland transferred EUP, 425 million (£334.7 million) to the foreign reserve assets of the ECB, which is Ireland's share of the ECB's pooled external assets, In return for a claim on the ECB. This contribution represents about 1 per cent of total ECB foreign reserve assets. These assets will continue to be managed by the Central Bank of Ireland on behalf of the ECB.
The amount transferred represented about 6 per cent of the Central Bank's total foreign exchange assets at end November 1998. As of that date, the latest for which published figures are available, the official external assets held by the Central Bank of Ireland totalled £5,661 million.
The Central Bank also subscribed EUR 41,92 million, or £33 million, to the share capital of the ECB in accordance with the statute of the European System of Central Banks (ESCB).
It should be noted that Ireland's share of the ECB's external assets and the capital shareholding will earn income for the Central Bank and thus indirectly for the Exchequer, as the participating national central banks will share the profits of the ECB among themselves.
This will leave a substantial amount of assets, both euro and non-euro, with the Central Bank of Ireland which are, in the main, matched by counterpart liabilities, which include deposits from financial institutions, etc. and legal tender notes.
Over the years the bank has in the normal way accumulated accounting reserves as a result of its operations. The value of these accounting reserves may fluctuate, depending on changes in the value of the assets held by the bank. As of the end of November 1998, the latest date for which published figures are available, these reserves stood at £1,191. Surplus income generated, inter alia, by these reserves are remitted annually to the Exchequer as non-tax revenue. In 1999 this is estimated at some £135 million.
The bank will continue to need external assets of its own, as well as those provided to the ECB, in order to play its part as a member of the European System of Central Banks. The remaining assets will continue as heretofore to be managed by the bank in accordance with risk parameters and benchmarks set by the board of the bank. The aggregate of the national central banks' non-euro assets plus the pooled reserves transferred to the ECB will comprise the foreign exchange reserves of the ESCB.
At this stage, it is too early to say what will happen to the balance sheet of the Central Bank in the early stages of the single currency. What we can say with certainty is that both the overall level of assets and the accumulated accounting reserves of a central bank contribute to its credibility. For example, adverse exchange rate movements could, in the absence of a sufficient level of accounting reserves to absorb such movements, have negative consequences for the net asset position of the Central Bank. It is not my intention to act in a fashion which could undermine either the credibility or independence of the Central Bank, and indirectly the ESCB, or the credibility of the Irish Government.
My Department has sought the advice of the Office of the Attorney General as to the legal position of the accounting reserves of the Central Bank. In summary, the advice is that any transfer of the accounting reserves should take place only with the agreement of the Central Bank and, as appropriate, the European Central Bank. The bank and the ECB are the appropriate bodies to determine the level of reserves which are required for the purposes of the monetary policy of the euro area and in order to achieve price stability.
The contribution which any perceived surplus assets of the Central Bank would make to the Exchequer should not be exaggerated. Assets of the bank earn a return for the bank and the Exchequer receives the surplus income of the bank, thus indirectly benefiting from the bank's reserves. If the assets, corresponding to the accounting reserves, were used by the Exchequer for other purposes, we would be losing the benefit of that income. To the extent that the bank's accounting reserves would be used to reduce the national debt, the net annual benefit to the Exchequer would be the difference between the cost of servicing the repaid debt and the return on the assets in the accounting reserves, i.e. effectively the margin between the interest rates for borrowing and lending.
