Circular BCL 1998/152 of 6 November 1998 — Introduction of a Mandatory Reserves System

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Luxembourg, 6 November 1998

Circular BCL 98/152

Introduction of a Mandatory Reserves System

To all credit institutions

Introduction

On 7 July 1998, the Governing Council of the European Central Bank (ECB) decided to apply a mandatory reserves system among the monetary policy instruments to be used in the euro area.

By reference to this decision and on the basis of Article 19.2 of the Statutes of the European System of Central Banks (ESCB), the Council of the European Union will adopt a regulation, directly binding and applicable in the countries of the euro area, on the introduction of a mandatory reserves system by the European Central Bank in the euro area from the beginning of the third stage of Economic and Monetary Union. This regulation will define the reserve base and a range within which the ESCB may set the reserve ratios for these reserves.

The mandatory reserves system must be applied uniformly in all member countries of Economic and Monetary Union and be consistent with the objectives defined in Article 2 of the Statutes of the ESCB, which implies, among other things, that its application should not lead to significant relocation of activities or disintermediation on the markets. For this purpose, the ECB will adopt a regulation on the basis of Article 19.1 of the Statutes of the ESCB.

The mandatory reserves system will have the following two monetary objectives:

by its very existence, it will condition the creation and/or intensification of structural liquidity deficits;

it will contribute to the stabilization of interest rates on money markets through the calculation of an average reserve.

1. Mandatory Reserves System in Luxembourg

In accordance with decisions taken by the ECB, the Central Bank of Luxembourg, hereinafter generally referred to as the Central Bank, will implement, from 1 January 1999, a mandatory reserves system to which all credit institutions established in Luxembourg will be subject.

The mandatory reserves system has the following characteristics.

1.1. Institutions concerned

The system applies to all credit institutions established in Luxembourg regardless of their legal form and geographical origin.

Each credit institution must open a current account with the Central Bank from which a specific account labeled "reserve account" will be funded, to deposit and maintain funds intended to satisfy the reserve requirement imposed on the credit institution in question. Each credit institution must first adhere to the General Conditions of the Central Bank to become an account holder with it.

1.2. Reserve base and reserve ratios

The reserve base of a credit institution is defined based on elements of its balance sheet. The calculation of the base as well as the reserve requirement is performed by the Central Bank of Luxembourg based on the data that the concerned institutions transmit to it within the existing framework of statistical reporting to be provided monthly.

Regarding credit institutions established in Luxembourg that have branches abroad, it is important to note that the base and the reserve requirement are calculated based solely on data relating to the balance sheet of the Luxembourg entity. Data relating to the foreign branches of the concerned institution are not included in the calculation of the reserve requirement.

The table on the following page provides the list of liability instruments taken into consideration for the calculation of the reserve base as well as the reserve ratios applying to these different instruments. Furthermore, the table lists the instruments that are to be excluded from the reserve base.

A. Liability instruments included in the reserve base with a reserve ratio of 2%

Deposits

Demand liabilities

Liabilities with notice less than or equal to 2 years

Term liabilities with an initial maturity less than or equal to 2 years

Issued securities

Debt securities with an initial maturity less than or equal to 2 years

Money market instruments

Money market instruments

B. Liability instruments included in the reserve base with a zero reserve ratio

Deposits

Demand liabilities

Liabilities with notice less than or equal to 2 years

Term liabilities with an initial maturity less than or equal to 2 years

Firm sale and repurchase operations

Issued securities

Debt securities with an initial maturity less than or equal to 2 years

C. Liability instruments Excluded from the reserve base

Commitments towards credit institutions that are subject to the mandatory ESCB reserves system

Commitments towards the ECB and the national central banks of the ESCB

It should be noted that credit institutions have the possibility to offset claims and commitments in order to reduce the volume of commitments that will serve as the basis for the calculation of the reserve base. The aforementioned offsetting may be carried out provided that the following conditions are met simultaneously:

the creditor and the debtor are the same natural or legal person 1;

the claims and debts are denominated in the same currency 2;

the claims and debts have strictly the same maturity date or, failing that, when the claim has a maturity date prior to that of the deposit with which it is offset.

All operations included in the various liability instruments comprising the reserve base must be included regardless of the monetary unit in which these operations are denominated.

Example:

A demand deposit in USD made by a US resident with a Luxembourg credit institution is to be included in the reserve base to the same extent as a demand deposit in EUR made by a Luxembourg resident who is not subject to the ESCB mandatory reserves system.

Example:

A demand deposit made by the headquarters of a Japanese bank established in Tokyo with a Luxembourg credit institution is to be included in the reserve base. On the other hand, a demand deposit made by a branch, established in the euro area and subject to the ESCB mandatory reserves system, of a Japanese bank is not to be included in the reserve base.

All operations carried out with the European Central Bank as well as with all national central banks of the euro area are to be excluded from the reserve base. Also excluded from the reserve base are all operations carried out with credit institutions that are themselves subject to the ESCB mandatory reserves system.

Example:

A deposit made by a German bank, established in Frankfurt and subject to the ESCB mandatory reserves system, will be omitted from the reserve base of the reporting institution.

Regarding "Issued debt securities" and "Money market instruments", issuing credit institutions must justify the actual amount of these instruments held by other credit institutions subject to the ESCB mandatory reserves system to be authorized to deduct them from the reserve base. To the extent that institutions cannot provide this proof, the Central Bank of Luxembourg will apply to each of these two balance sheet items a uniform deduction corresponding to a determined percentage defined by the European Central Bank.

The European Central Bank has decided to set this percentage at 10% for the period from 1 January to 30 June 1999. This threshold will be reviewed semi-annually by the ECB and the concerned credit institutions will be informed of any potential change in the threshold by circular letter from the Central Bank of Luxembourg.

The ECB establishes and publishes, on its Internet site (http://www.ecb.int), a list of credit institutions subject to the ESCB mandatory reserves system. In principle, all credit institutions appearing on the official list of "Monetary Financial Institutions", updated and published by the ECB e.a. on its Internet site, are subject to the mandatory reserves system.

1.3. Franchise

A franchise of EUR 100,000 will be deducted from the overall mandatory reserve requirement calculated for each institution.

1.4. Calculation of the reserve requirement

Regime starting from the fiscal year beginning on 1 January 2000

The calculation of the mandatory reserve amount is performed by the services of the Central Bank of Luxembourg based on the monthly statistical tables S 1.1 and S 1.2 that credit institutions must submit monthly to the Central Bank.

Transitional regime until the end of the year 1999

The statistical tables S 1.1 and S 1.2, in their current form, do not allow for the precise calculation of the reserve base and, consequently, the reserve requirement. Indeed, additional information is necessary at the level of:

debts towards credit institutions that are subject to the ESCB mandatory reserves system;

debts towards the ECB and the national central banks of the ESCB;

offsets between claims and commitments carried out according to the conditions defined in this circular.

The Central Bank will introduce before the end of 1999 3 revised monthly statistical tables S 1.1 and S 1.2 which are compliant with ESCB requirements.

Pending the revision of statistical tables S 1.1 and S 1.2, the following definition of the reserve base will be retained: the totality of liabilities in the form of deposits as well as securities with an initial duration of two years or less, regardless of the monetary unit in which they are denominated, towards banking and non-banking clients in Luxembourg and abroad.

This reserve base may however be reduced by the following elements:

debts towards credit institutions that are subject to the ESCB mandatory reserves system;

debts towards the ECB and the national central banks of the ESCB;

the amount of issued securities held by credit institutions subject to the ESCB mandatory reserves system.

The institutions subject to the system are called upon to provide the Central Bank with the necessary information to carry out the aforementioned deductions. This information must be filled in units of the capital currency on the form annexed to this circular and must reach the Central Bank no later than the 10th business day following the end of the month to which they relate.

It should be noted that, for the establishment of the annex to this circular, credit institutions have the possibility to offset claims and commitments in order to reduce the volume of commitments that will serve as the basis for the calculation of the reserve base. The aforementioned offsetting may be carried out provided that the conditions defined in point 2.2 of this circular are respected.

Regarding "Issued debt securities" and "Money market instruments", institutions must justify the actual amount of these instruments held by other credit institutions subject to the ESCB mandatory reserves system. This justification must be provided together with the form annexed to this circular; in the event that this condition is not respected, the deductions in question cannot be taken into account. When institutions cannot justify the actual amount of these instruments held by other credit institutions subject to the ESCB mandatory reserves system, it is not necessary to provide this information on the annex of this circular since this information can also be derived from the existing statistical reports S 1.1 and S 1.2. In this case, the Central Bank will apply to each of these two balance sheet items a uniform deduction corresponding to a determined percentage defined by the European Central Bank.

In the event that this information included on the form in annex does not reach the Central Bank within the required deadlines, no deduction of the reserve base can be made.

The reserve base thus obtained will be multiplied by the reserve ratio mentioned under point 2.2 of this circular in order to calculate the reserve requirement.

Subsequently, a franchise of EUR 100,000 will be deducted from the reserve requirement thus obtained.

1.5. Notification of the reserve requirement

The Central Bank will calculate for each concerned credit institution the amount of the reserve requirement and communicate it by letter to the concerned institution before the 20th calendar day of the month in which the accumulation period begins.

1.6. Reference period for accumulation

The reserve requirement of an institution is calculated based on the data from its balance sheet established on the last day of the month preceding the accumulation period. The period during which each credit institution must satisfy its obligation on average (accumulation period) begins on the 24th day of the month and ends on the 23rd day of the following month.

The first accumulation period will however be extended. It will begin on 1 January 1999 and end on 23 February 1999.

Credit institutions must respect their reserve obligations based on monthly averages. Each credit institution must therefore achieve, during the accumulation period, a daily average of its obligations that is at least equal to the amount defined in point 2.4 of this circular.

Example:

By virtue of the balance sheet established on 31 January 1999 and additional information provided based on the annex to this circular, an institution must deposit a reserve of 100 EUR during the accumulation period from 24 February to 23 March 1999.

It is not required that this institution maintain a deposit of 100 EUR in its reserve account throughout the entire accumulation period.

The institution may, either deposit an amount less than 100 EUR, or deposit an amount greater than 100 EUR depending on the activities pursued and its cash management during the accumulation period.

Nevertheless, at the end of the accumulation period, the institution must have achieved an effective average deposit of 100 EUR per calendar day. The effective average deposit is obtained by adding the amount of deposits made each day during the accumulation period, divided by the number of calendar days.

1.7. Determination and notification of the reserve requirement for the first accumulation period

The reserve base of an institution for the first accumulation period of ESCB mandatory reserves will be defined based on elements of its opening balance sheet on 1 January 1999, as communicated to the Central Bank within the framework of monthly statistical reporting 4.

As the S 1.1 and S 1.2 tables for December 1998 will not be available before 12 January 1999, the reserve requirement must, in a first step, be calculated using provisional figures. For this purpose, the Central Bank will rely on the statistical tables S 1.1 and S 1.2 established on 30 November 1998 which are to be submitted by 14 December 1998 at the latest. It is therefore important that credit institutions submit by 14 December 1998 also the form annexed to this circular in order to benefit from the deductions of the reserve base, as described in point 2.4 of this circular. The form annexed to this circular is therefore to be prepared for the first time based on November 1998 data and communicated to the Central Bank together with tables S 1.1 and S 1.2 by 14 December 1998 at the latest. The reserve requirement thus obtained will be communicated to credit institutions before 20 December 1998 so that they can take the necessary measures to constitute their mandatory reserves from 4 January 1999.

When the December 1998 data will be available, the Central Bank will calculate the definitive reserve requirement and communicate it to credit institutions before 20 January 1999. Credit institutions can then adjust the amounts allocated to their reserve account to ensure compliance with the reserve obligation.

1.8. Holding and management of reserves

Regarding aspects related to the holding and management of reserves, reference should be made to the "General Conditions of Luxembourg Central Bank Operations".

1.9. Remuneration of mandatory reserves

The amount of mandatory reserves deposited by a credit institution is remunerated at a rate corresponding to that of the main refinancing operations of the ESCB.

In practice, the remuneration will be calculated as the average, during the accumulation period, of the rate (weighted according to the number of calendar days), of the main refinancing operations of the ESCB.

The remuneration is calculated "ex post" according to the formula on the following page:

Where:

R t

=

remuneration to be paid on mandatory reserves of accumulation period t

H t

=

mandatory reserves constituted during accumulation period t

n t

=

number of calendar days in accumulation period t

i

=

i th calendar day of accumulation period t

MR i

=

marginal interest rate of the most recent main refinancing operation occurring during the period covering calendar day i

The payment of remuneration takes place on the second banking business day of the following accumulation period. It should be noted that excess reserves are not remunerated.

2. Sanctions in case of non-compliance with reserve obligations

Non-compliance with the reserve requirement occurs when, for a given institution, the daily average of its obligations recorded at the end of the accumulation period is lower than the reserve requirement defined in point 2.4.

When a credit institution does not satisfy its obligations imposed by the Council of the EU regulation concerning the application of mandatory reserves by the ECB or by regulations or decisions of the ECB related thereto or by this circular, the ECB respectively the Central Bank of Luxembourg may impose the sanctions provided by the following acts which will enter into force on 1 January 1999:

council regulation of the EU concerning the application of mandatory reserves by the ECB;

council regulation of the EU concerning the powers of the ECB regarding sanctions;

ECB regulation concerning mandatory reserves;

General Conditions of Operations of the Central Bank of Luxembourg.

Please accept, Ladies and Gentlemen, the assurance of our very distinguished sentiments.

CENTRAL BANK OF LUXEMBOURG

Arthur PHILIPPE Director

Jean-Nicolas SCHAUS Director

Yves Mersch General Director

Annex 1

Information to be provided to the Central Bank of Luxembourg for the reduction of the reserve base under the transitional regime until the end of the year 1999

The labeling of the lines and columns of this table corresponds to those used for tables S 1.1 and S 1.2 to be submitted monthly to the Central Bank of Luxembourg. The concerned credit institutions can consequently rely on the definitions of the Collection of Instructions to Banks to establish this table.

Copyright © 2000 Central Bank of Luxembourg. All rights reserved.

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