The Supervisory Board of Eesti Pank decided on May 7, 2013 to transfer three quarters of the 34.1 million euros it made in profit last year to strengthen its capital. One quarter of last year’s profit, or 8.5 million euros, is to go to the state budget.
“The Supervisory Board of Eesti Pank confirms the long-standing strategy for profit distribution that the central bank gives the state up to 25% of its profit. The Supervisory Board decided today to give the maximum permitted under this strategy. Eesti Pank will cover part of the profit distribution from its share of the income that the central banks of the euro area earned last year from the Greek government bonds bought within the framework of the bond purchase programme” said Chairman of the Supervisory Board of Eesti Pank, Jaan Männik.
The ratio of Eesti Pank’s capital to the risk assets used for monetary policy is the lowest of any of the central banks of the euro area. Last year the Supervisory Board set a long-term goal of increasing its capital to 3.5 times its then level, meaning an increase in capital of around one billion euros to 1.3 billion euros.
The Supervisory Board decided that the relative level of Eesti Pank’s capital should increase to the average level of the central banks of the euro area, as the balance of risks to the capital of the Eurosystem as a whole is considered when joint monetary policy decisions are made.
Last year, Eesti Pank received 51.6 million euros in income from the joint monetary policy and currency issuance activities of the Eurosystem, which is made up of the national central banks of the euro area and the European Central Bank. In 2011 income from this source was 20.2 million euros. Earnings from investment activities were 8.1 million euros last year, and 14.7 million in the previous year. Eesti Pank’s operating expenses fell last year to 16.2 million euros from the 19.4 million of 2011.
Since 1992 Eesti Pank has allocated a total of 123 million euros to the state budget.
Background Risks to Eesti Pank in monetary policy The risks to Eesti Pank under the currency board came from the investments of the central bank and from the banking system. When Eesti Pank became a euro area central bank, it also took on the risks of the euro area as a whole, which are mainly related to monetary policy operations.
The Eurosystem is made up of the central banks of the euro area countries and the European Central Bank. The Eurosystem divides the income and costs of the single monetary policy, so that the income earned from monetary policy loans to euro area banks is divided among the central banks to match their participation in the Eurosystem, and the same is done with risks. Eesti Pank’s participation in the Eurosystem is 0.26 per cent.
The Eurosystem’s monetary policy operations currently fall into two groups, monetary policy loans to commercial banks, which stood at 852 billion euros at the end of April, and the Securities Markets Programme, SMP, which stood at 203 billion euros.
Hedging of monetary policy risks To hedge against the risks of the monetary policy loans, the central banks of the Eurosystem have the right of claim against banks that have taken loans. The content of the collateral is the equity of the bank that has taken the loan. The euro area central banks only give out loans if collateral is provided, meaning that if the bank cannot pay back its loan to the central banks, then the central banks can instead take the collateral. If even this is not enough, the credit risk for the central banks is reduced by the national authorities and their desire to recapitalise their insolvent banks.
The SMP is backed by the promises of governments to meet all their obligations in full, meaning that if governments fail to meet their obligations fully or partially, including their obligations to the central banks of the euro area, then the euro area central banks suffer the loss.
The capital of central banks and its importance In this case, the capital of Eesti Pank and the other central banks is taken in the wider sense to mean the part of the reserves and capital that the bank can use to cover losses.
The level of capital of the central bank is important because a central bank that has little or negative capital can cause two sorts of public concern. The first is the question of the central bank’s independence if the bank needs to ask the government for additional capital. The second is the question of how much the central bank really wants to meet its inflation targets, which will then cause increased public expectations of inflation. The result of both these concerns is a loss of trust and of public faith that the central bank will be able to keep inflation under control successfully.
Source: Bank of Estonia