Completion of the Cash Changeover in Slovakia

Banknotes

Completion of the cash changeover in Slovakia

The euro banknotes and coins were successfully introduced in Slovakia as from 1 January 2009 and became the sole legal tender after the end of the dual circulation period on 16 January 2009. An information campaign, conducted jointly by the ECB and the Národná banka Slovenska (NBS), helped in familiarising the public with the banknotes and coins and the cash changeover modalities.

The cash changeover progressed broadly according to plan without any logistical problems, despite the comparatively low volumes of euro banknotes which had been frontloaded (the ratio to the total initial supply volume was 13% in value, compared to a ratio of 20% in the 2002 cash changeover). All ATMs had been converted by 1 January and no euro banknotes or coin shortages in the banking sector were reported. Whilst the NBS did not use the simplified sub-frontloading procedure, which was introduced into the legal framework in 2008, this had no detrimental effects on the availability of euro cash in the retail sector.

On the last day of the dual circulation period, 70% of the banknotes circulating in Slovakia (in value terms) were denominated in euro following the frontloading via the ESCB. In addition there were further Euro cash amounts stemming from tourism and business which have not been measured. In absolute figures, the euro banknote circulation value was €2.3 billion, i.e. 28% of the initial supply volume of €8.3 billion, which was borrowed from the Eurosystem stocks.

Media reporting has so far been favourable, on account of the smooth changeover and the absence of significant cases of abusive price increases or significant numbers of euro banknote counterfeits. The Slovaks felt well prepared for the euro and in this period of financial turmoil the euro seemed to be considered as a “shield” for the Slovak economy.

Launch of a 3-year ECI[1] programme in Asia

In view of the success of the pilot programme, the Governing Council had decided in March 2008 to launch a three-year ECI programme based on the experience with the pilot. Following a negotiated tender procedure, three wholesale banknote banks applied for the three-year ECI programme. One will start operations in Hong Kong and another in Singapore in February 2009, and it is foreseen that the third will start ECI operations also in Hong Kong in mid-2009. These are the main logistical hubs for trading euro banknotes in East Asia, which has the highest turnover of euro banknotes of any region outside Europe. The Deutsche Bundesbank is the logistical and administrative counterpart for the ECI banks. Before the end of the three-year term, the Eurosystem will assess the ongoing viability of the ECI programme.

Development of the second series of euro banknotes (ES2)

So far, resources continued to focus on the further development of the design and security features of the banknotes and the integration of the security features into the design. The development of the origination materials, the master materials used for banknote production, also started in 2008. The outcome of the first test print work for the ES2 project plan led to the Governing Council’s consideration of options for the way forward. Preparations for a work plan for two new test-print programmes are on-going as well as the development of a fallback solution to cover the risks of the project. At this stage the testing objectives and project organisation for the activities have been and are being agreed with the parties involved. Completion of this stage of the project is expected around mid 2009, to be followed by a review and decision making process. Therefore, a pilot production phase can begin only around November 2009.

To prepare the issuance of the new series, the ECB will inform the public well in advance about the modalities of the introduction of the new banknotes.

Euro banknote counterfeiting

In the second half of 2008 a total of 354,000 counterfeit euro banknotes were withdrawn from circulation. This is an increase of around 13% on the quantity recovered in the previous six months. The following table, which indicates the half-yearly trend in the number of counterfeits recovered, shows that there has recently been a gradual increase in the number of counterfeits.

However, since the number of genuine euro banknotes in circulation is also increasing (averaging over 12 billion during the second half of 2008), the scale of counterfeiting remains small. The public can therefore have confidence in the quality of euro banknotes and their security features. At the same time, the Eurosystem, i.e. the European Central Bank (ECB) and the 16 national central banks of the euro area, advises the public to be alert and to check the authenticity of the banknotes that they receive.

Historically, the €50 has been the most counterfeited banknote, but in the second half of 2008 the most counterfeited banknote was the €20. The three mid-range denominations (€20, €50 and €100) together accounted for about 94% of all counterfeits.

The majority (98%) of counterfeits recovered in the second half of 2008 were found in euro area countries, with approximately only 1% being found in EU Member States outside the euro area and the remaining 1% in other parts of the world.

The Eurosystem continues to invest much effort in ensuring that both the public and the professional cash handling community are well informed about how to recognise a counterfeit banknote.

Unusual development of the euro banknote circulation in the fourth quarter of 2008

As a result of the media attention on the global financial turmoil, which hit European banks in September 2008, private households started withdrawing parts of their deposits from bank accounts in order to hoard euro banknotes both within and outside the euro area. At Eurosystem level, this resulted in an unexpectedly high increase of the euro banknote circulation value as from the beginning of the fourth quarter 2008. In the first half of October 2008 the increase in the number of euro banknotes in circulation amounted to approximately 35 to 40 billion EUR in value terms.

Throughout the last quarter of 2008 demand was particularly high for the €100 and €500 denominations, to a large extent driven by demand from outside the euro area. By the end of the year the average value of banknotes in circulation had increased to €58.15 (compared with €55.85 at the end of the previous year).

Statistics indicate that net shipments of euro banknotes by euro area credit institutions to destinations outside the euro area reached a total value of around €96 billion by the end of December 2008, which represents a share of 13% of the total value of euro banknotes in circulation. These shipments are due to an increase in demand from foreign residents.

The Eurosystem has in place significant banknote stocks, which have been established to address any demand. Cash supply had always been ensured by the flexible stock management scheme. Cross-border shipments of euro banknotes continue to form a standard part of this scheme.

The following ECB press releases related to banknotes were issued recently:

• 01/01/09“Slovakia joins the euro area”
• 02/01/09“Euro banknotes and coins successfully introduced in Slovakia”
• 12/01/09 “Biannual information on euro banknote counterfeiting”
• 16/01/09“Dual circulation of Slovak koruna and euro comes to an end in Slovakia”

Financial supervision

Establishment of a High Level Group

The financial crisis has revealed that the current national-based organisation of EU supervision lacks a framework for delivering supervisory convergence and limits the scope for effective macro-prudential oversight based on a comprehensive view of developments in financial markets and institutions.

In October 2008 the European Commission established a High Level Group under the chairmanship of Mr. De Larosière with the mandate to submit proposals to strengthen European supervisory arrangements covering all financial sectors by looking also at the allocation of tasks between the national and European level.

In particular, the Group should consider:

• How the supervision of European financial institutions and markets should be best organised to ensure the prudential soundness of institutions, the orderly functioning of markets and thereby the protection of depositors, policy holders and investors;
• How to strengthen European cooperation on financial stability oversight, early warning mechanisms and crisis management, including the management of cross border and cross sectoral risks;
• How supervisors in the EU’s competent authorities should cooperate with other major jurisdictions to help safeguard financial stability at global level.

The Group is expected to publish its initial recommendations in February 2009. On the basis of this report, the European Commission plans to issue a Communication for the Spring European Council of 19 and 20 March 2009. The Eurosystem will contribute to the policy debate in due course.

The ECB opinion on the modification of the Capital Requirements Directive

Directives 2006/48/EC and 2006/49/EC (hereafter CRD) aim at safeguarding the financial soundness of banks and investment firms, by closely aligning regulatory capital requirements with the underlying risks that these institutions face. In October 2008, the European Commission adopted a proposal for amending certain provisions of the CRD to ensure its effectiveness and to take into account the lessons from the financial crisis. The main points of the proposal include the following:

• Large exposures at any single party will be restricted, also resulting in limitations in the inter-bank market;
• Clear EU-wide criteria will be introduced for the eligibility of hybrid capital, with the aim of improving the quality of banks’ own funds;
• In the area of risk management, revisions concern liquidity risk management and the treatment of securitised products. On the former, a number of provisions are instituted, in line with the ongoing work of the BCBS and the CEBS. On the latter, provisions aim at improving transparency, strengthening the risk management of originators and investors and better aligning incentives in the securitisation chain;
• Provisions for colleges of supervisors are put forward and the role of competent authorities is clarified in order to strengthen the supervision of cross-border banks.

The ECB received a request from the Council of the European Union for an opinion on the aforementioned proposal, under Article 105(4) of the Treaty establishing the European Community. The opinion is expected to be submitted to the Council shortly.

Selected ECB/Eurosystem publications in the area of financial supervision (October 2008- February 2009) are available on:

- ECB, Recommendations of the Governing Council of the European Central Bank on government guarantees for bank debt, 19/12/2008

- ECB, Recommendations of the Governing Council of the European Central Bank on the pricing of recapitalisations, 19/12/2008

- ECB, Financial Stability Review, 15/12/2008

- ECB, EU banking structures, 13/10/2008

Payment systems and market infrastructure

The ECB Governing Council is committed to the integration of European financial markets including market infrastructures that serve such markets. The Eurosystem is not only fostering financial market integration by supporting market initiatives but also by providing harmonised and integrated services itself. TARGET2, T2S and CCBM2 are projects which are complementary, interoperable and coordinated services that have led to significant harmonisation of the European financial markets and will continue to do so. They address the consolidation of fragmented infrastructure services in three different business domains, i.e. large value payments, securities settlements and collateral management.

One of the main challenges for the management of the TARGET2 project stemmed from the high number of stakeholders involved, and its European “multi-cultural” dimension. At the Eurosystem level, around 500 people have been involved in the TARGET2 project. The deep integration of the human resources involved has been a key factor for the success of the project. The staff of different central banks were required to work together and often asked to move to another central bank in a mutual exchange of working skills and expertise. Close operational cooperation had to be established among Eurosystem staff, especially between business and IT departments.

The involvement of the European banking and financial industry since the very early stage has also proved decisive. Given the dimension and the complexity of the project, the confidence of market participants in the “savoir faire” of Eurosystem’s staff has been crucial for its success. As a result, and after five years of project work, between November 2007 and May 2008 the TARGET2 system replaced completely the first generation TARGET system in a smooth and exemplary manner.

Today, the user communities in 21 EU countries benefit from the same real-time settlement service, offered at a single price. Moreover, the single platform has the potential for further projects in the liquidity management and back-office areas. The ultimate goal pursued by the Eurosystem is to increase overall efficiency and competition among market players, two factors which should eventually lead to a reduction of transaction costs for final users.

TARGET2 is a fundamental infrastructure to ensure the stability of financial markets and the economy in general, preventing systemic risk. On a daily basis (December 2008), more than 388.000 payments for a value of 3.3 trillion euro are settled in real-time in TARGET2. The system is performing well in these times of difficult market conditions. In particular, it assists the wider economy by ensuring the smooth processing of payments and liquidity flows.

TARGET2 may be considered as the trigger and – at the same time – the anchor to other Eurosystem projects promoting further integration and stability of the financial markets, in line with the Lisbon Agenda. Building up on the synergies created by TARGET2, the Eurosystem is currently working on two other similar projects, namely on TARGET2-Securities (T2S) and on CCBM2 (for collateral management). The implementation of the three systems in an independent but integrated way will allow efficiency to be increased, market integration to be stepped up and competition to be fostered in the EU financial markets.

The Governing Council of the ECB decided on 17 July 2008 to launch both, the CCBM2 - Collateral Central Bank Management – project as well as T2S, the pan-European securities settlement service.

In abstract terms, the overall logic and concept of CCBM2 is similar to TARGET2 and T2S. The ultimate goal is the replacement of something existing, namely a more fragmented and therefore less efficient IT infrastructure, by a single technical platform with a harmonised service.

It has to be strongly underlined that CCBM2 is about technical consolidation while the usage of the system and therefore the management of collateral including the servicing of national credit institutions and CSDs will remain fully decentralized with the national central banks.

Furthermore, the ongoing financial turbulences have clearly shown the need of banks to move their collateral flexibly according to their daily business needs; CCMB2 will bring the required efficiency and speed in this respect.

Although CCBM2 is of voluntary nature, there is broad consensus amongst Eurosystem central banks on the benefits the new system will bring. Final commitment to CCBM2 will be sought in the second quarter of 2009 on the basis of the final version of the technical specifications and the overall cost figures.

The National Bank van België / Banque National de Belgique and De Nederlandsche Bank were assigned the responsibility to build and operate the CCBM2 platform. This assignment of the so called 2CBs creates an additional role to their usual duties as a national central bank, being provider of an important financial market infrastructure.

In summary the above mentioned developments imply that all involved parties - the 2CBs, all the involved national central banks and also the ECB – most likely will have the need to increase their workforces – both in terms of quantity and quality / expertise. This assumption is valid for the duration of the project for which the go live date, from today’s perspective and subject to further detailed analysis, could be in 2011; it may also be valid for the “normal operation” after migration, due to the ongoing process of regular improvement, technical releases, periodical performed (contingency / continuity) tests, etc.

With T2S, Central Securities Depositories (CSDs) and NCBs will transfer the management of their securities and cash accounts, respectively, to a central platform to allow for delivery-versus-payment (DvP) settlement of securities in central bank money. T2S will be fully owned and operated by the Eurosystem and is scheduled to go live in the second quarter of 2013. The Governing Council assigned the development and operation of T2S to Deutsche Bundesbank, Banque de France, Banca d’Italia and Banco de Espana, called 4CB.

All but one small euro area CSD have expressed their support for T2S. In addition, Denmark and Lithuania committed to settle both, their national currency as well as the euro via T2S. Many other non-euro area CSDs have expressed their willingness to join T2S but, only for euro transactions. The ECB has invited these markets to asses their business case for including their national currency into T2S by the end of March 2009. At that time, the Eurosystem also intends to conclude a binding agreement with CSDs on the future use of T2S.

T2S is a highly visible and politically sensitive project. Many CSDs have been reluctant to join T2S but their users, i.e. banks, are strongly in favour of T2S since they expect to reap significant savings by using T2S. Due to the close involvement and the scrutiny of market participants in the project, the Eurosystem is very transparent in its conduct of the project in order to secure and maintain the buy-in of market participants. The project is progressing well but due to the tight deadlines and due to its high visibility, the project has sometimes put some strain on Eurosystem staff.

It should be remarked that staff has made huge efforts and shown extremely high commitment to meet the deadlines agreed with the market in order to safeguard the reputation of the Eurosystem and to avoid delays. In many cases, this implied overtime and sometimes also weekend work. But the Eurosystem has gained a lot of credibility with T2S due to its ability to progress with this complex project according to schedule.