4.2 Standing facilities

The ECB will operate two overnight standing facilities, which will be available to all credit institutions at national central banks of the euro area, provided that, when using the marginal lending facility, they have sufficient collateral. The rate of the marginal lending facility will constitute the upper bound of collateralised overnight money market rates.
The deposit facility will be remunerated at a rate that will constitute the lower bound of overnight money market rates.

When using the marginal lending facility, or, for that matter, when entering in liquidity-providing open market operations in the form of reverse transactions, counterparties have to post assets with their national central bank (or the ECB in the exceptional case when the ECB conducts fine tuning operations on its own account). These assets are meant to act as guarantees for credits received from the European System of
Central Banks. A list of eligible assets has been drawn up for this purpose. The list comprises a wide variety of assets and has two sub-sets.
First, the so-called tier one assets, which are selected by the ECB according to uniform criteria relating to their credit standing in the whole euro area. Second, the so-called tier two assets, which have been selected by the ECB because they are of particular importance for certain national banking systems of the euro area, in order to promote a certain degree of continuity at the start of the Stage Three of EMU. Two principles of equal treatment are applied, however. First, the credit standing of tier two assets is as high as that of tier one assets. Second, both tier one and tier two assets may be used by any credit institution in the euro area, irrespective of its location.

In addition, a set of risk control measures has been elaborated to ensure that, for any counterparty, the amount of assets provided is always sufficient. Risk control measures cover the assets' price and credit risks, taking account of the asset type, its characteristics and the maturity of the transaction. The ECB's risk control measures have been elaborated with careful attention to the best market practices in this area. They include the deduction of haircuts from the assets and the imposition of initial margins to the credit amount. Another feature of the risk control framework is the regular revaluations of the assets, which will, in most cases, take place daily and may trigger margin calls, most often to be settled through delivery of additional assets.

4.3 Minimum reserve system

The ECB will also apply a minimum reserve system to credit institutions of the euro area. Two main monetary policy objectives have been assigned to the minimum reserve system. The first objective is to stabilise money market interest rates through the averaging mechanism, whereby the fulfilment of minimum reserve requirements is based on average reserve holdings over monthly periods of time. During the maintenance period, this allows the banking system to absorb liquidity shocks. The reduced volatility of money market rates will reduce the need for frequent fine tuning operations, which will mean that markets are less distorted by central bank interventions than they would otherwise be. The second objective of the minimum reserve system is to enlarge the demand for central bank money, so as to enlarge the liquidity deficit of the banking system vis-а-vis the ESCB. This will safeguard the role of the European
System of Central Banks as a provider of liquidity to the banking system.

Reserve requirements will be calculated by applying a reserve ratio of 1.5% to 2.5% to the deposits, debt securities and money market paper issued by credit institutions, except for residual maturities above two years. Although repurchase agreements are included in the reserve base, they will be subject to a zero reserve ratio. In 1999SCHD-MAY.DOCf[pic]1 T-
-#"+ !-+ 1999PROT10.DOCfter-bank liabilities and liabilities vis-а-vis the ESCB will not be subject to reserve requirements. An allowance of the order of E 100,000 will be deducted from reserve requirements, so that credit institutions with a small reserve base will not have to hold minimum reserves.

Reserve holdings will be remunerated up to the required reserve level, at the rate of the main refinancing operation (as averaged over a month). It may be argued that a less than full remuneration of minimum reserves would increase the interest rate elasticity of central bank money demand. This notwithstanding, the ECB has decided in favour of a full remuneration of minimum reserves in view of the distortion to efficient markets that a less than full remuneration would have implied. As a result of the full remuneration of minimum reserves, the European Central Bank has also decided not to exempt any credit institution from the minimum reserve system.

4.4 Procedures

The ECB will have many counterparties and be subject to close public scrutiny. It has therefore set up procedures for informing its counterparties and the public about its monetary policy instruments in a robust and transparent manner.

The ECB will inform its counterparties and the public through a document detailing its monetary policy instruments and procedures and through the regular publication of various materials on its Internet site.

General Documentation

The ECB has produced a document describing its monetary policy instruments and procedures in detail. This is called "General Documentation on ESCB Monetary Policy Instruments and Procedures". A revised version of this document was published recently. This revised version includes all the newly specified elements of the monetary policy framework of the ECB, including for instance the minimum reserve system. This document also includes a calendar for the standard tender operations in 1999 (both main refinancing and longer term refinancing operations). Calendars of standard tender operations will be published by the ECB every year.

Publications on the ECB's Internet site

The list of assets that are eligible as guarantees for liquidity providing operations will be made public on the Internet site of the ECB.
The list will be updated on a weekly basis and users will be able to subscribe to an e-mailing facility for receiving certain designated parts of the list on a regular basis. Users will also be able to query the list, which will contain a large number of assets.

The list of institutions subject to minimum reserves, that is, credit institutions established in the euro area, will also be available on the
Internet site of the ECB, together with the list of all monetary and financial institutions in the European Union.

5. Concluding remarks

We are less than three months away from the moment when monetary policy sovereignty is transferred from the NCBs to the ESCB. The bulk of the preparatory work has already been completed, but major decisions - above all, the choice of a monetary policy strategy - still have to be made. The public can be certain that we will always inform them, regularly and comprehensively, about our considerations and deliberations. We will make all our decisions transparent. I have no doubt that we will be well prepared for the moment at which we take over responsibility for monetary policy in the euro area.

The euro as an international currency

Speech delivered by Eugenio Domingo Solans,

Member of the Governing Council and the Executive Board of the

European Central Bank, at The Athens Summit '99, in Athens on 18 September 1999

Thank you for inviting me to the Athens Summit '99 and for giving me the opportunity to speak to you at this important event.

I should like to share with you my views, and the ECB's views, on the importance of the euro as an international currency. I understand that this issue may be of interest to experts from Greece, a "pre-in" country which intends to join the euro area, and to many participants from countries outside the euro area and the European Union, some of which currently have exchange rate regimes related to the euro.

Nowadays the euro is the second most widely used currency in the world economy, behind the US dollar and ahead of the Japanese yen. As we all know, any currency fulfils three basic functions: it is a store of value, a medium of exchange and a unit of account. As a store of value the use of the euro as an investment and financing currency is rapidly increasing, as investors understand the advisability of diversifying their portfolio currencies among those which are more stable and more internationally used. The euro is developing at a slower pace as a medium of exchange or payment currency in the international exchange of goods and services. This fact can easily be explained by the combined and reinforcing effects of network externalities and economies of scale in the use of a predominant international currency as a medium of exchange, as is the case with the US dollar. The use of the euro as a unit of account is linked to its use as a store of value and a medium of exchange. The value stored in euro or the payments made in euro will tend to be counted in euro.

There are good reasons to expect an increase in international public use of the euro as a reserve, intervention and pegging currency, inasmuch as the public authorities understand that it is worthwhile to allocate their foreign reserves among the main international currencies and to give the euro a relevant share in accordance with its internal and external stability and the economic and financial importance of the euro area.

In connection with the use of the euro as a pegging currency, approximately 30 countries outside the euro area currently have exchange rate regimes involving the euro to a greater or lesser extent. These exchange rate regimes are currency boards (Bosnia-
Herzegovina, Bulgaria, Estonia); currencies pegged to the euro
(Cyprus, the Former Yugoslav Republic of Macedonia and 14 African countries in which the CFA franc is the legal tender); currencies pegged to a basket of currencies including the euro, in some cases with a fluctuation band (Hungary, Iceland, Poland, Turkey, etc.); systems of managed floating in which the euro is used informally as the reference currency (Czech Republic, Slovak Republic and Slovenia); and, last but not least, European Union currencies pegged to the euro through a co-operative arrangement, namely ERM II. As you well know,
Denmark and Greece joined ERM II on 1 January 1999 with a ±2.25% fluctuation band for the Danish krone and a ±15% fluctuation band for the Greek drachma. Although the euro remains in second position after the US dollar in terms of its official use, the role of the euro will increase in the future, without a doubt, especially after the year
2002 when the euro banknotes and coins will begin to circulate.

Taking the current situation as a starting point, the
Eurosystem's position concerning the future international role of the euro is crystal clear: we shall not adopt a belligerent stance in order to force the use of the euro upon the world economy. We are convinced that the use of the euro as an international currency will come about anyway. It will happen spontaneously, slowly but inexorably, without any impulses other than those based on free will and the decisions of market participants, without any logic other than that of the market. In other words, the internationalisation of the euro is not a policy objective of the Eurosystem; it will neither be fostered nor hindered by us. The development of the euro as an international currency will be a market-driven process, a free process.

The euro fulfils the necessary conditions to be a leading international currency with the US dollar and not against it. There is enough room for both currencies in the world economy. The necessary conditions for a currency to become an international currency are based on two broad factors: low risk and large size. The low risk factor is related to the confidence inspired by the currency and its central bank, which in turn mainly depends on the internal and external stability of the currency. The low risk factor tends to lead to diversification among international currencies, since diversification is a means to reduce the overall risk; it acts, so to speak, as a centrifugal force. By contrast, the large size factor relates to the relative demographic economic and financial importance of the area which supports the currency; in other words, the "habitat" of the currency. The large size factor, which concerns the demographic, economic and financial dimension, generally tends to lead to centralisation around one or a few key international currencies. It can be seen as a centripetal force, as a virtuous circle, which will tend to lead to an increasing use of the euro as an international currency. Let us consider these two factors in more detail.

The first factor concerns low risk, credibility and stability.
The stability of the euro is a priority for the ECB. Compared with the idea of stability, the strength of the euro is of lesser importance.
This does not mean that the exchange rate of the euro does not constitute an element to be considered in the second pillar of the monetary policy strategy of the ECB, which consists of a broadly based assessment of the outlook for price developments and risks to stability obtained from a wide range of economic indicators, the euro exchange rate being one of them. However, the basic factor that will determine the importance of the euro as a widely used currency in the world economy, in addition to the demographic, economic and financial dimensions of the euro area, is, without a doubt, the stability of the new currency, understood as a means to maintain the purchasing power of savings.

Stability is the basic requirement for a good currency. It is what we at the ECB want for the euro. We want a stable euro and we are convinced that, in the long term, the euro will derive strength from its stability.

The stability of the euro is the basis for the confidence in and the credibility of the ECB, without which a large international role for the euro would be unthinkable. Stability is the proof of the effectiveness of the institution. Yet in order to be credible it is not sufficient for the ECB to maintain stability. Other parameters of its action must be considered: accountability, transparency and communication, a Europe-wide perspective, etc.

These parameters or conditions for the credibility of the euro are certainly demanding. However, the achievement of these conditions is the aim of all those of us who have responsibilities with regard to the functioning of the Eurosystem.

The second factor, which we have called the large size factor or the habitat of the euro, is important because without a certain critical mass, a currency cannot have international relevance, however high its degree of stability.

The figures relating to the population and the GDP of the euro area illustrate this. With 292 million inhabitants, its population exceeds that of the United States (270 million) and that of Japan (127 million). The GDP of the euro area is, on the other hand, equal to 76% of the GDP of the United States (EUR 5,774 billion compared with EUR
7,592 billion), though it is higher than that of Japan (EUR 3,327 billion). The source of this information, which refers to 1998, is
Eurostat.

However, even more important than the current figures is the potential for the future development of the euro area, in terms of population and GDP, if and when the so-called "pre-ins" (Denmark,
Greece, Sweden and the United Kingdom) join the Eurosystem.

The entry of these countries would result in a monetary area of
376 million inhabitants, 39% larger than the United States and almost triple the size of Japan, with a GDP of EUR 7,495 billion, only slightly less than that of the United States and 125% higher than that of Japan.

All these facts and figures which demonstrate the demographic and economic importance of the European Union would be further strengthened by enlargement to eastern Europe. Our continent has a historical, cultural and geographical identity - from the Iberian peninsula to the Urals, with certain additional external territories - which, in the future, may also come to form an economic unit. However that is, for the moment, a distant prospect.

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