Eesti Pank allocated a quarter of last year’s profit to the state budget
- The central bank has allocated one quarter of last year’s profit, or 1.1 million euros, to the state budget
- Eesti Pank’s capital has increased by around 0.5 billion euros and the long-term goal is to increase its capital to 1.4 billion euros
- Eesti Pank’s share of the assets purchased by the central banks of the euro area for monetary policy purposes is 4 billion euros
The Supervisory Board of Eesti Pank decided on Tuesday to accept the proposal of the Executive Board to transfer one quarter, or 1.1 million, of the 4.3 million euros it made in profit last year to the state budget. The Supervisory Board allocated 3.2 million euros of last year’s profit to increasing the capital of the central bank.
Since 1992 Eesti Pank has allocated a total of 149.8 million euros to the state budget.
Chair of the Supervisory Board Mart Laar said, “The long-term goal of the Supervisory Board is to create a large enough reserve that the central bank would be able to help the state if problems were to arise. The loose monetary policy of the euro area central banks of recent years and the large volume of assets that have been purchased in connection with it have increased the financial risks faced by Eesti Pank, and that risk is likely to increase in the years ahead”.
The ratio of Eesti Pank’s increased capital to the assets used for monetary policy is one of the lowest of any of the central banks of the euro area. The comparison with the other central banks of the euro area is important, as the balance of risks to capital of the central banks of the euro area and the European Central Bank as a whole is considered when joint monetary policy decisions are made.
For this reason the Supervisory Board set a long-term goal in 2012 of increasing Eesti Pank’s capital ratio to the average level of the central banks of the euro area. This means it is necessary to raise the level of capital from the current level of half a billion euros to 1.4 billion. The central banks of the euro area have purchased a total of 1.5 trillion euros of assets for monetary policy purposes and the income and risks from them are shared equally, and Eesti Pank’s share of that is 4 billion euros.
Eesti Pank received 32.7 million euros last year in income from the joint monetary policy and currency issuing of the Eurosystem, up from 30.5 million euros the year before. Eesti Pank’s operating expenses were 19.8 million euros last year, which was 2.1 million euros more than a year before.
The net income was reduced by a general risk provision of 7.5 million euros to cover risks, which was the same amount as last year. In the past five years Eesti Pank has built up a risk provision of 45 million euros in total. Risk provisions are the first line of defence against losses on top of the reserves already held at the central bank.
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 joint activities of the euro area central banks, which mainly stem from monetary policy loans and asset purchases.
The euro area central banks divide the income and costs of the single monetary policy, so that the income earned from monetary policy loans to commercial banks, or the costs from them, is divided among the national central banks to match their participation in the European Central Bank. This participation is called the capital key of the European Central Bank, and since the start of 2015 Eesti Pank’s capital key has been 0.274%.
The total volume of assets bought by the central banks of the euro area in their monetary policy transactions stood at 3.2 trillion euros on 23 February this year. Of this, 1.5 trillion euros is in monetary policy assets where the risks and income are shared among the euro area central banks using the capital key. Eesti Pank’s share of all the assets purchased by the central banks of the euro area for monetary policy purposes is 4 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 risks for the central banks are 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 that is meant is the wider sense of 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.