04 Mar 1999

Excess Foreign Exchange Reserves and Overcapitalisation in the Eurosystem

Daniel Gros / Franziska Schobert

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The national central banks of the euro area have very diverse balance sheets, but they share one aspect in common: Few of them conform to the textbook model of a central bank whose only task is to conduct monetary policy and whose monetary base constitutes its main liability. The balance sheet of the European System of Central Banks is therefore 50% longer than is necessary and then it should be according to the textbook norms. Central banks in Europe have a habit of making their balance sheets as opaque as possible so that it is difficult to determine exactly where the excess items come from. It is clear, nevertheless, that national central banks of the euro countries should clean their balance sheets of about 200 billion euro.

Wc estimate that about one-half of the reduction in the excess balance sheet items could be achieved by a sale of excess foreign exchange reserves that could be used to reduce public debt. The counterpart would be mainly a reduction in excess revaluation reserves. The remaining half represents “dead wood”, i.e. assets and liabilities, vis-a-vis both the private and public sector, that should also be eliminated as they have nothing to do with the management of monetary policy.