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Le lancement de la Banque centrale à Luxembourg - Yves Mersch

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à l'occasion de la Journée bancaire de l'ABBL au Cercle Municipal Luxembourg

Luxembourg, le 20 avril 1999

Seule la parole prononcée fait foi.

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La traditionnelle Journée bancaire de l'ABBL fournit chaque année l'occasion de faire le point sur la place financière du Luxembourg en l'examinant sous différents angles de vue selon les orateurs choisis.

Je suis très heureux d'avoir l'occasion cette année d'ajouter aux différents angles celui d'une nouvelle institution, créée non pas pour imposer un poids administratif supplémentaire à la place financière, mais pour faire entendre la voix du Luxembourg au niveau européen et vice-versa, à servir de relais auprès de la place financière pour les décisions prises dorénavant en matière monétaire de façon centralisée au niveau européen.

La BCL étant, par ailleurs, le successeur légal de feu l'Institut Monétaire Luxembourgeois, je suis honoré de pouvoir adresser la parole en quelque sorte à la paroisse locale. Renouant avec une initiative prise l'année passée par le Docteur Storck, j'utiliserais à mon tour la langue de travail du Système européen de banques centrales pour partager pendant quelques instants les impressions d'une année passée à mettre en place la nouvelle Banque centrale du Luxembourg.

1.   Introduction

Let me state at the incept that the work of establishing this new institution is not yet completed in view of the considerable delays that had taken place at the outset. In this respect, I clearly want to distinguish the two phases of such an establishment, the first phase being the operational set-up of the institution in order to be ready for the transition to the euro. The second phase will be the consolidation at an administrative level of the operational success, a work that is still under completion.

1.1.   Design

A first task was however, to find an agreement on the design of the new institution. Just as money has three well-known economic functions - means of payment, unit of account and store of value - so there are three public functions related to each of them. Operating and supervising the payment system refers to money as a means of payment; ensuring price stability relates to money as a unit of account and a store of value; and pursuing the stability of banks relates to money as a means of payment and a store of value. In each of the three functions, commercial banks have played, and still largely play, a crucial role.

  1. At first stage it looked as if the new Central Bank could limit itself to exercise four functions. One was the existing surveillance of market participants and prudential regulation, a function which occupied 80 % of the former Monetary Institute and which required above all a strengthening of the existing administrative resources.
  2. Part of the second function also existed to a small extent in the former Monetary Institute: the theoretical approach to monetary policy. Civil servants followed the working groups for the organisational and institutional set-up of the European central bank and tried to prepare for the equivalent translation into general conditions and procedures at a national level.
  3. What, however, was absent a year ago, was even the embryo of a front office, a back-office and a middle-office, i.e. the total absence of any operational services which were to be the interface with the financial centre.
  4. A third function had been prepared by two persons, that was the establishment of a new national payment system, which was to be the Luxembourg piece of a European wide network called TARGET. In this area a considerable amount of work had been outsourced. The same was true for the information services which were barely enough to be a serious counterpart to the numerous contractors working from the outside.
  5. A fourth function of a Central Bank, finally, is the issuance of banknotes. In this regard the branch of the Belgium National Bank in Luxembourg, was to be taken over by the Luxembourg Central Bank. A couple of Luxembourgers were trained in order to be able to accompany this take-over. But, the people working with the Belgium National Bank had no contact with their future colleagues from within the Monetary Institute.

1.2.   Deficiencies

If the operational side for monetary policy as well as for payment and settlement had not started to be recruited, deficiencies in administrative resources were nevertheless also evident. The surging importance of information technology not only in respect of the needs of the network of the European System of Central Banks, but in respect to the activities of banking industry at large, could not be accommodated with ever increased amounts of outsourcing without endangering the decision making at the level of the bank. The I.T. department represents for BCL some 20 % of it's staff, a level identical with the one of the ECB.

A second deficiency was the accounting system in place appropriate for the IML and its administrative tasks. It could easily have been managed by any baker shop in town but was not appropriate for running a bank. One and a half staff position was attributed to this function, which in the ECB is the last to operate both in the evening or even the night after the closure of payment systems and the first to open system at 6.30 in the morning in order to transmit before 8 o'clock the balance sheet to Frankfurt. The necessity of operating working shifts in accounting, payments or security has a heavy burden on the amount of staff needed for a small number of job postings. The work of assisting staff like I.T. services, building operations, etc is of course affected in parallel. Mending interventions or testing have to be largely done on weekends. This is no more a public administration.

Yet human resource department was limited to calculating salaries and follow administrative rulings. Working regulations, statute, evaluation, training, compensation will have to take account of the new environment and request a true human resource policy.

Organisation and internal control also did not exist. Internal audit was limited to a half-time job, the other half-time being devoted to control the refurbishing of the buildings that the IML had acquired. Statistical services were mainly geared towards prudential statistics and communications simply did not exist.

2.   Challenges

With seven months left to become operational, it was evident that the challenges were adding to each other and had to be prioritised.

2.1.   Human Resources

The most important was to come to grips with human resources. The personal consisted of less than 100 people, two thirds of which were in surveillance. The first decision was to allow the adjustment of the needed resources for the surveillance function to be doubled to 120. The remaining thirty people for the monetary policy, statistics, banknotes, I.T., payments, accounting, administrative support etc. had to be supplemented by hiring 100 additional staff of which one third was to come from the National Bank of Belgium, one third through the traditional avenues of administrative recruitment, an another third was to be recruited from banks. All these recruitments had to be fitted more or less within a statute where the different professional know-hows could not easily be accommodated within the existing framework of the public service. It was obvious that this was to be a task receiving priority after the operational set-up.

Just as special Central Bank focused-training or compensation of extended working hours of the European network. Our basic law of December 23, 1998 also confers upon BCL the first example of a completely capitalised pension fund in the public service without giving any further clue. All of these areas are now under consideration. The result of which will most probably be a statutary regime, .sui generis, like in other European central banks.

In fact it took several weeks to design the exact posts that were to be filled. It took months to proceed with the required examinations, to go through individual interviews and to await before people could join the new teams. In certain areas the newcomers only joined the Luxembourg Central Bank in the last days or couple of weeks before D-day January 1. As of today, we are still short of the envisaged limit partly due to the self restraint, to our policy to refuse taking over full teams from one single bank and even to limit the absolute number of our recruitments from one single bank. We also had to deal with the demographic equilibrium and strike a balance in nationalities in view of the integration of 35 people working for the Belgian Central Bank.

2.2.   Infrastructure

A second challenge was to establish a location from which the Central Bank could operate. The Monetary Institute had acquired two buildings, one of which was refurbished within 5 months time to allow for the operational interlinking requirements of the European System of Central Banks.

If, at the beginning, the idea was to host all different functions at one side, it quickly became evident that the surveillance function and the central banking area would not be able to be accommodated in the two buildings. It had also been left unconsidered that a Central Bank needs to follow particularly stringent standards in terms of security. A Central Bank also needs a strong information system, training areas, meeting places, backup sites, continuity plans, contingency measures. These had to be developed in a conceptual way before it could be translated into buildings, the first priority having been to have the operational services ready for January 1, 1999.

Since it was time-consuming to achieve the procedural marathon for obtaining the necessary authorisations, it was admitted that the number of services that should migrate to the new site should be limited to the operational and administrative teams, leaving the most sensitive functions, namely banknotes and information services in the old locations until the new building would have been brought up.

It proves that even for the timely introduction of euro banknotes and coins into our economy, to catch up delays will make it an extremely tight schedule for having the appropriate premises ready.

I want here to pay nevertheless tribute to all those involved in the infrastructural logistics of the Luxembourg Central Bank. Through relentless dedication, the first deadline of January 1 could be met, people moving in during November to catch up with euro-wide tasks in a definite environment. I am convinced that the same team will also match the challenge of the second deadline of the timely introduction of the euro notes and coins.

Extreme motivation by staff allowed to catch up delays partly only in the last two weeks of December. Between the lines of the first Monthly Bulletin of the ECB, one can read the surprise that we delivered in time in areas like statistics where serious shortfalls were still obvious in early December.

2.3.   Separation

On top of these challenges the Luxembourg Central Bank was faced with the outlook of a separation from the surveillance function which had to be prepared taking away precious men/hours, and triggered a considerable cost.

Our advice had been to delay the functional separation from the geographical one until the Central bank had been firmly established.

Central banks are normally involved in the process of drawing up legislation relating to, for example regulatory standards, safety net arrangements and supervision since this legislation contributes crucially to the attainment of financial stability.

In Luxembourg an amendment by BCL to the bill suggesting institutional arrangements for co-operation among the two institutions along the UK model was not accepted.

In a draft agreement on the separation between the Supervising Commission and the Central Bank it is foreseen to have interinstitutional co-operation at the level of existing working groups, but there is no specific contact group pertaining to the dividing line of micro and macro prudential surveillance.

All consequences of the separation have not yet been accounted for. I also recognise the reasons of separation supported by the financial services industry. But it will not be the end of the road. One can expect that the regulatory platform in Europe will evolve in the years to come. The non-harmonised part of the platform will come under pressure to converge, the multilateral co-operation among national supervisors will have to deepen substantially over time. Such co-operation, in the opinion of many observers, will also be structured to the point of providing the banking industry with a true and effective collective euro area supervisor.

For the Central Bank the interest in supervision is founded on its task of maintenance of the stability of the financial system. Let me say one word in this context about crisis management. One has to acknowledge that the TARGET system has reached today average values of payments of 1000 billion euros of which 40 % are cross border and an even stronger interbank and payment system links clearly increase a possibility of financial instability spreading from country to another.

Banking problems are so close to monetary stability, payment system integrity and liquidity management, that a close co-operation with supervision is warranted, all the more that it has been very clearly established that crisis management will not involve the European System of Central Banks, but should remain a national responsibility.

It is therefore misleading to make believe that the Luxembourg financial centre has acquired a lender of last resort with the establishment of the ESCB.

Some might object that the whole subject is irrelevant for the financial centre of Luxembourg where all private banks are either branches or subsidiaries of foreign credit institutions, their headquarters should take responsibilities for the consolidated liquidity and solvency position. How does this rule however comply with the one that emergency liquidity assistance is restricted to the national boundaries? Of course such a situation, as we all say, is a purely theoretical one. I nevertheless wonder whether it would not be contributing to the image of financial stability of the Luxembourg financial centre to consider adding another defence ring for depositors in Luxembourg beyond the existing deposit insurance scheme and beyond the garanties of an excellent supervision based on regulation of capital adequacy and large exposures, improved licensing and supervising standards, the doubling of personal in the Supervisory Commission and so on.

In my opinion, a market based approach as it exists with the liquidity consortial bank in Germany, i.e injection of private money by banks or other market participants rather than tax payer's money or Central Bank money is an option worth a reflection. Not only to save public funds and avoid imbalances in public finance or in view of the nominal amounts available in Luxembourg, but also to reduce a moral hazard problem generated by public assistance to ailing institutions. If the industry were of the opinion that such a reflection could contribute to the image of the financial centre, the Luxembourg Central Bank would not stand aside. May I remind in this respect that the recent hedgefund crisis in the United States is another good example of public intervention being used to achieve a private solution.

2.4.   Systems

Let me return now to the more immediate challenges faced by setting up the Central Bank. Beyond human resources, infrastructure, institutional territories one has to mention the acquisition, installation and running of the necessary systems. The most innovative being of course the payment system for TARGET, where BCL's team does not need to shy away from comparison. The back-office had to set up the Correspondent Central Bank Model with the registration of more than 10,000 securities. The accounting system was to be upgraded from the same day on as the introduction from the euro.

This was one of the main reasons why we could not accept to pre-run a national minimum reserve system prior to the start-up of the euro, which coincided with the start of the new accounting system. Interfaces had to be put in place within different systems, first preparations had to be set up for the year 2000 bug.

Statistics had to be geared up in view of the increasing requests not only from Frankfurt or the prudential side, but also from Eurostat, Statec, IMF, OECD mainly in the area of balance of payments. The minimum reserve system had to be tested, become operational and needed a lot of explanations. In both areas the financial centre operators had to be informed not only about the participation in all these new systems hitherto unknown but they had to be overlooked and weaknesses in their systems had to be brought to their attention.

A whole network of counterparts, reporting institutions, direct participants and sub-participants in settlement and compensation systems, eligible assets, appropriate haircuts, etc. had to be not only put in place, but understood and communicated.

These activities of liquidity management open up local access to euro-wide, safe and efficient payment networks. They contribute to the consolidation and diversification of activities on the financial centre.

2.5.   Finance

  1. Liquidity: These challenges all happened in an environment where there was much misunderstanding about the role of a Central Bank. Of course, the independence of such an institution is a thorn in the flesh of many. Anecdotal evidence to this can be read in parliamentary discussions and some publications. It was offered that a Central Bank could operate out of an apartment flat with a dozen civil servants. It was also a widespread believe the European Central Bank would do the same than the Belgium National Bank had done before, namely not only the definition of monetary policy but also the execution of monetary policy. The most dangerous misunderstanding happened nevertheless in relation to the liquidity needs as opposed to revenue needs of the new institution. The Luxembourg Central Bank has today a balance sheet between 11 and 15 billion euros putting it among the top ten banks in Luxembourg. This is only reflecting the fact that a central bank has to be seen but not in relation to the public budget, GDP, population or alike as the counterparty of its financial system. Luxembourg represents in financial terms not 0.1 % of Europe, not 0.2 %, but between 4 and 5 %! The role of a central bank is to exchange assets with the financial system The fact was that BCL had an own fund base of famished dimension. The relation to its balance sheet was at a level that the supervisory authority should have become nervous. On top nearly all of its assets are earmarked for future liabilities like capital and reserve increase at the ECB, quota increase at the IMF, emergency financing for Brazil and so on. The profits from gold sales relinquished by the Belgium Central Bank had been to a large extent affected to the budgetary reserves according to the monetary association agreement in which a Luxembourg Central Bank did not exist. This explains also why Luxembourg is the only national central bank, member of the Eurosystem that is not a member of the Bank of International Settlements. As of late it seems that the question of liquidity could nevertheless be resolved on the base of an agreement with Government. The discussions concerning such an agreement have been going on since November last year.
  2. Revenue: A central bank's usual source of income is threefold
  • compulsory and unremunerated deposits from the banking sector
  • accumulated exchange reserves
  • seigneurage.

Much to the benefit of financial activities in Europe, unremunerated minimum reserves have been ruled out at European level as for now. Too bad for the central bank's income.

Accumulated reserves from the past, in the case of Luxembourg, were handled in the framework of the Belgian Luxembourg monetary association treaty. No "bingo" for the new central bank, which did not take part in the negociations for the intergovernmental agreement.

The third source of income, seigneurage, has in the past been largely left to the main issuing authority in Luxembourg, namely the Belgium Central Bank. In return the distributed profits of this institution were divided according to the population ratio between the Belgian and the Luxembourg Governments.

With the advent of the third stage, the revenue of seigneurage should have been pooled and redistributed at European level. This stipulation of the Treaty was however postponed and Belgium and Luxembourg had to proceed to a new interpretation of their monetary association treaty. Such a new agreement between the two Governments allows for future flows from the Belgian Central Bank directly to the Luxembourg Central Bank. If these flows correspond to the amounts that the Prime Minister announced in a letter to the board of BCL, this income should ensure the functioning of BCL over the transitional period. The agreement with the Budget Minister, that I mentioned before, should complete the transitional arrangements. Unfortunately both, the Belgian - Luxembourg agreement and the convention with the Treasury, have not yet been implemented, but the latest statements point to May 1st. As is usual in Luxembourg, we tend to fall back on our feet in the last minute however much wobbling there has been before. Needless to say it also underlines the cordial relations between the Luxembourg Central Bank and the Government.

This leads me in fact to an additional challenge, the location of the Central bank in the traditional institutional landscape of Luxembourg.

3.   Institution

  1. Outside: We are, indeed, very honoured to have the Sovereign of this country officially recognise the importance of the institution as a flag bearer of the country at European level. It will not surprise you that the organisms most exposed to the outside would have been the most supportive. And it will not surprise neither that inside institutions the most inward looking levels have tended to see in BCL an unwanted competitor. Let me nevertheless mention also extraordinary good and professional relations with the Luxembourg Statistical Office. We are ready to sign a co-operation agreement to share responsibilities for the establishment of a balance of payment. This function not foreseen in our basic law will be assumed by BCL in the interest of the financial centre in order to make maximum use of existing reporting requirements and synergies as well as to avoid unnecessary administrative burdens for economic agents. We await the final green light from Government concerning full cost coverage of our Banks expenditure in this respect. A second agreement orally confirmed and submitted in written form is with the F.S.S Commission and concerns IT services support by BCL and statistical distribution of responsibilities among the two institutions. Again the endeavour is to avoid duplication and maximise synergies. Librac, CCLux, Cetrel among others will be covered in this respect. I add the draft agreement with the Treasury as well as number of outstanding questions with the Belgium National Bank, which are promised in a constructive dialogue with the new Governor of BNB. But an institution can not only be assertive to the outside world. This is part of its communication department responsibilities, and the press has been forthcoming with our emerging communication efforts. These efforts have to be increased because they are part of the necessary accountability of an institution which has to give merit to its independence. But the institution has also to be consolidated to the inside.
  2.  Inside: We are extremely grateful to have outstanding personalities in our administrative council. The management team, including department heads, can only be qualified as very dedicated, hard working, highly motivated and professional, and the same can be said of the personal despite its differing origins : one quarter coming from a Central Bank background, one quarter from the Monetary Institute, one quarter from a private sector background and one quarter freshly recruited from school. They all have to be melted into a corporate culture, inside of the leanest of European central banks. The advantage of building up such an institution is of course that we did not have the problem of managing two different sets of regulations, the transition from one to another was inexistent. We did not need to look backwards and we could lean on the experience of others. We accompanied the built up of the ECB trying to keep our leaning curve as steep in the time horizon as possible. I am therefore proud to announce that from the second half of this year on we will not need any exemption under the ESBC rules any more and by the end of the year the toddler will dispense with its diapers. This should in time open up new horizons of a constructive involvement of this institution into the economic development of our region.