As Minister for Finance, I have no function in relation to Euro area monetary policy operations. The Governor of the Central Bank carries out his European Central Bank-related functions under the Treaty of Rome and the Statute of the European System of Central Banks (ESCB) and his independence in doing so is guaranteed. Section 19A(2) of the Central Bank Act 1942 provides that the Governor has sole responsibility for the performance of the functions imposed, and the exercise of powers conferred, on the Bank by or under the Rome Treaty or the ESCB Statute. I am advised by the Central Bank that, as part of its approach to monetary policy implementation, the ECB requires credit institutions in the euro area to hold compulsory deposits on accounts with the national Central Banks: these are called "minimum" or "required" reserves. For Irish banks, the reserves must be held at the Central Bank of Ireland. The amount of required reserves to be held by each institution is determined by its reserve base. The reserve base of an institution is defined in relation to prescribed elements of its balance sheet.
In order to determine an institution's reserve requirement, the reserve base is multiplied by a reserve ratio. The ECB applies a uniform positive reserve ratio to most of the items included in the reserve base. This reserve ratio was set at 2% at the start of the monetary union.
The compliance with reserve requirements is determined on the basis of the average of the daily balances on the institutions' reserve accounts over the maintenance period of around one month.
The ECB announced on 8 December that it will reduce the reserve ratio for Euro area banks to 1% as of the reserve maintenance period starting on 18 January 2012. This is part of the ECB's measures to support bank lending.
Bank solvency is a regulatory as distinct from a monetary policy matter and solvency requirements are set out in the Capital Requirements Directive (CRD) which implements the Basel II capital framework in the European Union. By requiring banks to hold minimum levels of capital to absorb unexpected losses that a bank may face, capital requirements provide for continuing bank solvency so that they can continue to provide credit and other functions into the economy. The CRD was adopted in 2006, superseding previous directives in this area, and came fully into effect from 1 January 2008.
The Central Bank of Ireland is responsible, in accordance with the legislation transposing the CRD into Irish law, for the regulation and supervision of the capital, or solvency, requirements of banks in Ireland. Irish banks are required to calculate capital requirements and maintain a minimum level of own funds in accordance with the CRD as a cushion against credit and other risks and to absorb unexpected losses that a bank may face. In addition to capital requirements imposed under the CRD, I am advised that the Central Bank, as part of its prudential oversight of banks in Ireland, imposes qualitative and quantitative requirements on banks in relation to the management of liquidity risk. These requirements are imposed by the Central Bank pursuant to its powers under the Central Bank Act 1971 and the European Communities (Licensing and Supervision of Credit Institutions) Regulations, 1992, (S.I. 395 of 1992). The latest iteration of these requirements is set out in Requirements for the management of liquidity risk, published by the Central Bank in June 2009 and available to download from its website.
Arising from the recent financial crisis, the Basel Committee on Banking Supervision adopted amendments to the Basel capital framework in December 2010 to significantly increase the quality and quantity of capital held within the banking system relative to banks' risk-weighted assets and to impose standard liquidity requirements. These changes, known as Basel III, will require amendments to the Capital Requirements Directive which will be implemented in due course in the EU.