Eesti Pank's balance sheet before and after joining the euro area

 

A lot of questions have been asked from Eesti Pank in recent days regarding changes in Eesti Pank's balance sheet after Estonia's accession to the euro area. Since this is an important issue, some explanations have been presented below.

How is the euro cash released into circulation registered?

In the Eurosystem, euro cash is issued through the central banks of euro-area Member States. This means the euro cash issued is registered by the euro-area national central banks. When Estonia joins the euro area, Eesti Pank will exchange kroons for euro and recognise the euro cash in circulation on its balance sheet. A small share of all the euro cash in circulation is recognised on the balance sheet of the European Central Bank.

How and by which assets is the euro cash in circulation backed?

Like any currency, the euro cash circulating in the euro area must in any case be backed by high-quality assets. Similarly to other euro-area central banks, Eesti Pank will, after the adoption of the euro, back the euro cash recognised on its balance sheet by its own assets. Thus, the volume of the assets necessary for backing the euro cash registered by Eesti Pank is broadly as large as the volume of assets currently needed to back the kroon.

The euro-backing assets with the central banks of the euro area consist mainly of EU Member States' bonds and other very trustworthy and liquid investments. Therefore, after the adoption of the euro it will not be required that Eesti Pank's assets be invested in foreign currency. However, no marked changes will be made in the asset structure of Eesti Pank after the adoption of the euro. Most of Eesti Pank's assets are already invested in bonds issued by EU Member States.

Will the adoption of the euro affect Eesti Pank's excess reserve above the currency board?

The volume of the assets necessary for backing the euro cash registered through Eesti Pank and recognised on the balance sheet of Eesti Pank will be broadly as large as the volume of assets needed to back the kroon. Therefore, Eesti Pank's so-called excess reserve above the currency board (i.e., the current difference between Eesti Pank's assets and kroon liabilities) will not increase as a result of the adoption of the euro.

As at the end of February, the excess reserve above the currency board is slightly over 6 billion kroons. This is, in fact, also Eesti Pank's capital. Like all financial institutions, the central banks belonging to the ESCB must have enough capital to ensure the stability of the monetary and financial system. This is especially important against the background of the current financial crisis, which has already markedly increased the role of central banks. Taking into consideration Estonia's forthcoming accession to the euro area, Eesti Pank considers its current capital volume to be generally sufficient.