The Making Of The Statute Of The European System Of Central Banks ~ Chapter 7: Selected ESCB Articles (Cluster II)

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Content
7.1 Introduction
7.2 Genesis of selected articles (cluster II)

Selected articles: Article 3.3 (Prudential supervision and financial stability), Article 5 (Collection of statistical information), Article 6 (International cooperation), Article 12.1, third paragraph (Decentralized execution), Article 14.3 (NCBs as integral part of ESCB), Article 14.4 (Non-System functions of NCBs), Article 16 (Banknote issuance), Art. 17-24 (Monetary functions and operations), Art. 25 (Prudential supervision), Art. 29 (Capital key), Article 30-33 and 51 (Financial articles relating to foreign reserves and the System’s income allocation). [1]

Articles 9.2 (ECB) will be dealt with under Art. 12.1c, and Art. 25 (Prudential supervision) under Art. 3.3.

7.1 Introduction
For every article covered in this chapter, we will follow the structure used in Cluster I, i.e. the description of its genesis will be preceded by (i) an introductory paragraph, describing the main economic reasons (raisons-d’être) for including the article in the Statute and the main sensitivities regarding its precise formulation, and (ii) in most cases by a description of comparable features of the Federal Reserve System, where this is considered illuminating for the understanding of the article. We then continue with the description of the history of the article, starting with the deliberations in the Delors Committee, followed by a description of the drafting process of the ESCB Statute within the Committee of Governors and its Committee of Alternates and, finally, a description of the discussions in the IGC. As regards the articles treated in this cluster, most of the discussions on these articles took place within the Committee of Governors, as the Delors Committee focussed on the overall design of Economic and Monetary Union – and not so much on the internal structure and instruments of the ESCB.[2] Though the IGC did cover all articles of the draft ESCB Statute, the IGC discussion on the Statute concentrated on the interinstitutional relations (treated in Cluster I), the formulation of the tasks of the ESCB and the transitional arrangements (i.e. the position of the NCBs of Member States with a derogation or opt-out), including the institute to be established during stage two (which would be called the European Monetary Institute).

Art. 3.3 on prudential supervision is dealt with in this cluster, because its genesis shows Member States were afraid of losing power to the System and NCBs were afraid of losing power to the centre of the System, while the Bundesbank objected to putting monetary and supervisory responsibilities in one hand. We will not describe the genesis of the articles containing the monetary functions and instruments (i.e. most articles of Chapter IV of the ESCB Statute (‘Monetary functions and operations of the ESCB’), as these articles do not contain indications for where implementation should take place, centrally or locally – the important feature of these articles being that they allow both. Of these articles we summarize their content, and we will only refer to the genesis, when this adds to understanding the article. Section 2.3 of chapter 8 will contain a table summarizing which operational tasks befall on the ECB and which on the NCBs (as decided by the Governing Council at the start of EMU in 1999, but including the later arrangements relating to the issuing of euro banknotes, which were issued only as of 2002). The financial articles 26 to 33 will be dealt with also relatively succinctly, as their meaning for the balance of power between the ECB and the NCBs is rather limited.

Genesis of selected articles (Cluster II)

Article 3.3:

Article 3.3-ESCB (non-basic task of the ESCB)
“In accordance with Article 105(5) of this Treaty, the ESCB shall contribute to the smooth conduct of policies pursued by the competent authorities relating to the prudential supervision of credit institutions and the stability of the financial system.”

Also containing the genesis of Article 25 (including enabling clause for supervisory tasks)

Article 25-ESCB (prudential supervision)

“25.1 The ECB may offer advice to and be consulted by the Council, the Commission and the competent authorities of the Member States on the scope and implementation of Community legislation relating to the prudential supervision of credit institutions and to the stability of the financial system.

25.2 In accordance with any decision of the Council under Article 105(6) of this Treaty, [3] the ECB may perform specific tasks concerning policies relating to the prudential supervision of credit institutions and other financial institutions with the exception of insurance undertakings.”

[to be read in conjunction with Article 4-ESCB (Advisory functions), Art. 14.4-ESCB (‘Other’ functions of NCBs), Art. 22-ESCB (Sound payment systems), Art. 41-ESCB (Simplified amendment procedure), Article 105.5-EC (reflects Article 3.3-ESCB), Article 105.6-EC (reflects Article 25.2-ESCB) and Article 106.5-EC (reflects Article 41-ESCB)]

Introduction
I.1 General Introduction
This article deals with prudential supervision[4] and the preservation of financial stability, which in most Member States was a responsibility of the NCB, or a shared responsibility with the national supervisory authorities. It appeared that NCBs were hesitant to endow the ECB with competences in this area, basically for one or more of the following reasons: first national supervisors have more knowledge of local circumstances and institutions (this suggested the need for continued involvement of nationally based supervisors); second, combining monetary and supervisory policy responsibility in one institution could compromise the monetary function (this argument was felt more strongly in some countries than in others); third, the transfer of national supervisory competence to an international institution could possibly concentrate too much power in one (independent) institution (instantaneously or in the future). One of the complicating factors during the design of the ESCB Statute was the diversity in national institutional arrangements relating to the supervision of credit institutions – with different degrees of involvement of NCBs. This wide diversity itself strongly suggests there is no one ‘best’ model, or at least that ‘best’ models (if they exist) are dependent on national features, like possibly the national banking structure. Nonetheless involvement in supervision enhances knowledge of the financial markets and the monetary transmission mechanism, making for better informed monetary policy decisions. The synergy also works in the other direction. Good knowledge of a bank and its linkages with other banks might be helpful when it comes to decisions such as providing liquidity support to a bank, changing its management or facilitating a rescue-take-over. A central bank is well placed to assess the risks of such decisions for the rest of the financial sector, which is especially relevant in crisis situations.

Table 7.1 provides an overview of this diversity at the time the Statute was drafted by the Committee of Governors. Subsequently we will make a few remarks on the importance of safeguarding financial stability and on the background of the position of the Bundesbank, which opposed a supervisory competence for the system. This provides appropriate background for studying the genesis of this article and the closely related article 25 of the Statute.
—–

Table 7.1  –  Allocation of responsibility for the supervision of credit institutions in the Member States of the EEC (situation in 1989) [5]

Belgium Mainly the responsibility of the Commission bancaire (7 members, of which 2 proposed by NBB), the NBB providing secretariat and defraying expenses.
Denmark – Responsibility of Banking and insurance supervisory agency.[6]
Germany Regulatory and supervisory powers vested with the Bundesaufsichtsamt für das Kreditwesen (BAKred), a separate Federal agency under the jurisdiction of the Federal Minister of Economics. This agency and the Bundesbank co-operate closely (a legal obligation) and exchange information.[7] The Bank participates in the definition of supervisory rules. The BAKred does not have regional offices; the regional Landeszentralbanken of the Bundesbank receive and analyse the monthly balance sheet reports submitted by the banks before sending them – if necessary with comments – to the BAKred. BAKred and Bundesbank are allowed to execute special on site inspections Sonderprüfungen), usually conducted by the Landeszentralbanken, but this is not a regular feature, as they rely for their on-going supervision on the reports of the auditors; in the case of the numerous local Sparkassen and co-operative banks they rely on certifications by the Associations.
Greece – Responsibility of the central bank.
Spain –  The central bank responsible for the inspection, supervision and control of banks, with due regard to the rules prescribed by the Minister of Finance.
France – The central bank has no formal supervisory mandate, but is closely involved. Regulatory power is vested in the Comité de la règlementation bancaire et financière, which is chaired by the Treasury. The Governor of the Banque de France is ex officio chairman of the Commission bancaire[8] which exercises all powers of investigation (including on site), supervision and discipline. The Bank provides its secretariat. The costs of the supervision are defrayed by the banking sector. Actual approval or withdrawal of bank licenses is the responsibility of the Comité des établissements de crédit, which is again chaired by the Governor.
Ireland – Responsibility for regulation and licensing and supervision of deposit taking institutions vested with the central bank since 1971, its supervisory responsibilities also covering a range of securities-related activities, including the Stock Exchange, financial futures and options exchanges, money brokers, collective investment schemes and certain investment intermediaries.
Italy – Central bank supervising banks and other financial institutions under the overall guidance and supervision of the Interministerial Committee for Credit and Savings, chaired by the Minister of the Treasury.
LuxembourgThe Institut Monétaire Luxembourgeois (predecessor of the present central bank) exercised prudential supervision of the financial sector.
Netherlands Responsibility resting with the central bank, based on the Act on the Supervision of the Credit System of 1979.
Portugal – Banks supervised by the central bank.
UK – Banks supervised by the central bank.

—–
At the end of the eighties central banks felt increasingly responsible for safeguarding the stability of the financial system as a whole. The stock market crash in October 1987 had shown how quickly disturbances could spread among financial markets. The speed with which disturbances could spread among markets had increased considerably during the eighties due to IT developments and increased interlinkages between different financial market segments, which in themselves could also mitigate shocks by spreading the effects over more participants (increasing the absorption capacity), but under circumstances could also trigger avalanches. These developments created new kinds of responsibilities relating to prevention of system crises and the management of such crises when they occur, for instance by injecting liquidity to prevent gridlocks in the payment systems. The explicit mentioning in the ESCB Statute of some responsibility for the stability of the financial system was new, as evidenced by the fact that at that time no central bank act contained such a task, most of them focussing in this respect on guarding the solvency of individual institutions. An exception was the Banque de France law which stipulated that “elle veille au bon fonctionnement du system bancaire.”

Some central banks stressed the importance of having under the same roof knowledge of the financial markets, payment systems and financial institutions.[9] However, the Bundesbank would oppose bringing supervisory responsibilities into the European central bank. It supported the German model, where the central bank is closely involved in supervision, but does not bear formal responsibility for supervisory policy. In the view of the Bundesbank combining monetary and prudential responsibilities can create a conflict of interest within the central bank, e.g. when raising interest rates would jeopardize the health of some banks. This would reduce the central bank’s ability to achieve price stability. Furthermore, decisions like closing of a bank were viewed as the responsibility of the government, since the central bank’s reputation could be tarnished, if one or more banks fail while it is responsible. To the extent that the government would retain ultimate responsibility for supervision, the central bank would run the risk of receiving instructions from the government, thus losing its independence. Nonetheless, because of its closeness and expertise with the banking sector, the Bundesbank always considered it had a legitimate interest in being closely involved in analysing the prudential reporting by the banks and in the design of general regulations in the field of banking supervision.[10] This thinking was reflected in the paper submitted by Pöhl in September 1988 to the Delors Committee: ‘The European central bank should be given the right to take part in the establishment of general regulations in the field of banking supervision. Moreover, owing to its expertise, deriving in particular from its business relations with credit institutions, the central bank should be closely involved in day-to-day banking supervisory activities.’ [11]

An important aspect in this context is the lender of last resort function of a central bank, which is aimed at helping solvent banks by supplying liquidity where the market temporarily is unwilling or unable to. In most countries this function is not listed explicitly in the central bank statute to prevent moral hazard among commercial banks and to prevent political pressure on the central bank for bailing out possibly insolvent banks. The border line between solvent and insolvent is sometimes thin. For an overview of the possibilities for the ECB to provide LOLR assistance, see Van den Berg and Van Oorschot (2000), [12] who conclude that the ESCB has at its disposal adequate instruments to inject at very short notice liquidity through its NCBs in the financial system (‘quick tenders’ have proven their value in the aftermath of the September 11 events in 2001)[13]. Emergency liquidity assistance (ELA) to an individual institution could either be defined as a system function (‘bilateral transactions’) or a non-system (‘Article 14.4’) function. In both cases decision-making can be quick, though in the first case the execution of ad hoc ‘bilateral transactions’ needs the approval of the Governing Council, just as the acceptance of non-listed collateral. One could very well conceive of delegation of the authority to approve non-listed collateral in individual emergency cases, to the Executive Board in order to ensure expediency. At the same time it is difficult to imagine the Governing Council being cut out completely from such decisions. In case ELA is defined as a non-system function, the Executive Board should be notified, because it has to be able – if desired – to consult the Governing Council on whether it wants to raise objections under Art. 14.4-ESCB.

I.2  Relevant features of the Federal Reserve System [14]
In the United States any group of persons that wants to establish a bank can apply for a charter either with the Office of the Comptroller of the Currency of the Department of the Treasury (OCC), in which case the bank became a national-chartered bank, i.e. chartered by the national authorities, or with the state’s banking supervisor, in that case becoming a state-chartered bank. This dual system, which already existed before the establishment of the Federal Reserve in 1913, is described by some as an expression of the traditional American opposition to concentrating too much power (in this case relating to banking) in one institution, especially not a federal one. Banks are subject to periodical examination by their chartering agency, costs of which may be assessed against the bank.[15] Chartering agencies may also impose reporting requirements.

When the Federal Reserve was established in 1913, national chartered banks had to become member of the FRS, while their supervision remained in the hands of the OCC.[16] Nationally chartered banks are also member of the Federal Deposit Insurance Corporation (FDIC), established in 1933, and in 1935 endowed with supervisory responsibilities. State banks are regulated and examined by state banking authorities and by the FDIC in case they have their deposits insured by the FDIC, while uninsured non-member state banks are examined only by the state chartering agency. State banks may apply for membership of the FRS.[17] If accepted by the Federal Reserve Board, they become a so-called state member bank and are subsequently examined, when practicable, jointly by teams drawn from the local FRB and the state supervisory agency, but in most cases by either one of them.[18]

Bank holding companies, which own or have controlling interest in one or more banks (member or non-member), are examined and regulated by the Federal Reserve. More recently, the Fed has been assigned the role of ‘umbrella supervisor’ for newly formed financial service holding companies. The Federal Reserve has also broad authority to supervise and regulate the U.S. activities of foreign banks that engage in banking and related activities in the U.S.[19]

The Board of Governors is responsible for the System’s supervisory duties, it determines the System’s supervisory policy and fulfils an oversight function with respect to the supervisory functions performed by the FRBs. The Board is authorized to conduct examinations,[20] but leaves this task almost completely to the twelve Federal Reserve Banks, their authority to conduct examinations being based directly on the FRA (e.g. in case of state member banks) or otherwise based on delegation by the Board, (e.g. in the case of bank holdings).[21] The Board will only conduct an examination, when it is not satisfied with the FRB’s work. This is the exception, in fact leaving the bulk of the supervisory work to the FRBs. This also becomes more clear when one looks at the number of people at the Board employed in the supervisory area, viz. 220 (2000-figure), of which 40 responsible for oversight supervision and the others for more general tasks, like training Reserve bank staff, risk assessments programs and examination procedures. It should be clear however that supervisory policy as such is made by the centre, and not made by the FRBs. [22] The FRS and the FDIC receive copies of the examination reports of the OCC, because national banks are members of the FRS and the FDIC.[23]

To be able to fulfil its statutory tasks the Board of Governors is entitled ‘to require from each member bank such statements and reports as it may deem necessary’, and, since 1980, to receive from depository institutions[24] all data on their assets and liabilities the Board may prescribe ‘to enable the Board to discharge its responsibility to monitor and control monetary and credit aggregates’.[25] Moreover ‘[e]xcept as otherwise required by law, any data provided [by a depository institution] to any department, agency, or instrumentality of the United States pursuant to other reporting requirements shall be made available to the Board. The Board may classify depository institutions for the purposes of this paragraph and may impose different requirements on each such class.’[26]

The FRA does not contain a direct reference to safeguarding the stability of the financial system (or the stability of financial markets). On the contrary, the Fed allowed a large number of banks to go bust in the run up to, as well as during, the Great Depression (1929-1933). Today the Fed interprets its mandate much broader. According to the Fed publication ‘Purposes and Functions of the Federal Reserve System’ (1994) the Fed’s duties fall into four general areas, one of which relates to ‘maintaining the stability of the financial system and containing systemic risk that may arise in financial markets’.[27] Prudential information is seen as instrumental for the Fed in solving potentially systemic problems: ‘In the past decade, the experience and knowledge of examiners and supervisory staff provided instrumental in the Federal Reserve’s responsiveness to the Mexican debt crisis of 1982, the collapse in 1985 of privately insured thrift institutions in Ohio and Maryland, the stock market crash of 1987,[28] and the failure of the Drexel-Burnham investment firm.’ [29] These observations were made in 1994. To this list can now be added the response to the LTCM crisis of 1998 and the terrorist attacks of 11 September 2001. The Fed could not have handled the fall-out of these crises as efficient as it had without the knowledge about the financial system and the linkages within the financial system derived from its supervisory functions.

Congress has assigned the Federal Reserve the duty of implementing specific federal consumer protection laws[30] to ensure that consumers receive comprehensive information and fair treatment.[31] In these efforts, the Federal Reserve is advised by a Consumer Advisory Council, whose members represent the interests of consumers, community groups, and creditors nationwide. Meetings of the Council, which take place three times a year, are open to the public.

II.1 History: Delors Committee
Already in the Delors Committee an effort was made to find a compromise between the different traditions of the central banks in the area of supervision. The discussion in the Delors Committee centered on the role of the ECB or the system in general. It did not discuss the pro’s and con’s of supervisory functions for national central banks. In September 1988 Pöhl had submitted a paper to the Delors Committee, covering many aspects of EMU, among which supervision, for which he promoted a model clearly akin to the German model – see the quote from this paper given in section I.1 above.

One of the first drafts versions of the Delors Report[32] gave the ESCB a macro-prudential role, i.e. a role relating to the financial markets and deriving from that role an undefined role in actual supervision:
“- in accordance with the traditional and generally accepted task of central banks to ensure the safety and balanced development of the financial system, the European system of central banks would have to oversee the functioning of financial markets in the Community. In order to play this macro-prudential role the system would have to exercise supervisory functions in the field of banking supervision and should at least take part in the process of establishing general regulations in this field.”

During the meeting of the Delors Committee on 10 January 1989, Duisenberg submitted a proposal for formulating the mandate of the ESCB. This mandate included wording on a supervisory role for the system of central banks:
“The system will be responsible for the formulation of banking supervisory policy at the Community level and co-ordination of banking supervisory policies of the national supervisory authorities.”
This text was integrated in the next version of Part II of the Report.[33] However, the apparent differences between member states in this respect resulted in a final version which would see a far more limited role for the ESCB, far weaker than the text cited above:[34]

“- the System would participate in the coordination of banking supervision policies of the supervisory authorities.” – Delors Report, par. 32

II.2 History: Committee of Governors
The first draft of the ESCB Statutes, drafted by the secretariat of the Committee of Governors under the guidance of the chairman of the Alternates Jean-Jacques Rey, contained both the idea of some task relating to the area of financial markets and of (micro) prudential supervision. The tasks appeared under the heading of ‘basic tasks’:

“2.2 The basic task of the ESCB shall be:
– to contribute to the smooth operation of the payment systems and the financial markets;
– to participate in the co-ordination of the banking supervision policies of the supervisory authorities.”
draft 11 June 1990

After a first round of discussion among the Alternates, the last but one indent was split into two indents:

“3.1 The basic tasks of the ESCB shall be: [35]
– (….)

– to promote the smooth operation of the payment systems;

– to promote the stability of the financial markets;

– [ to participate as necessary in the formulation and execution of policies relating to banking supervision].[36] ”

draft 22 June 1990

In the Alternates meeting of 29 June 1990 Crockett proposed to add to Article 2 (Objectives):
‘A further objective of the ESCB will be to preserve the integrity of the financial system.’ Tietmeyer objected: preserving the integrity was a task, not an objective of the system. Crockett’s wording was used to reformulate the last but one indent of Art. 3.1 (i.e. ‘to promote the stability of the financial markets’) into:

‘- to preserve the integrity of the financial system;

– …….. ‘

draft 3 July 1990

During their meeting of 10 July 1990, the governors agreed that any role for the System in rescuing individual banks should be avoided. On the other hand, they also recognized that measures might have to be taken in order to cope with sudden developments in the financial markets. They changed the words ‘preserve the integrity’ into:
‘[- to support the stability of the financial system;]
– ……. ‘
draft 13 July 1990

The indent was bracketed at German request, reflecting German scepticism (Pöhl kept warning against conveying the idea there would be any kind of guarantee for individual financial institutions). It was agreed that the issue should be discussed further. In the last indent the word ‘banking supervision’ was changed into ‘prudential supervision’, ‘as NCBs and other supervisory authorities were becoming increasingly involved in other areas of supervision, such as insurance and securities operations’:
‘- to participate as necessary in the formulation and execution of policies relating to prudential supervision.’
draft 13 July 1990

During their September meeting the French governor, de Larosière, said he regarded banking supervision as a principal function of a central bank and a pillar of monetary policy supervision. During the Governors’ meeting on 13 November de Larosière earmarked the bracketed indent as a fundamental role of a central bank, though at the same time he admitted that the word ‘support’ might indeed be too strong.[37] As a compromise it was decided to combine this indent with the subsequent indent relating to prudential supervision (while adding, at the request of the French governor, the word co-ordination to this indent). In the final draft the last indent of Article 3 read:
“- to participate as necessary in the formulation, co-ordination and execution of policies relating to prudential supervision and the stability of the financial system.”

draft 27 November 1990

At a more general level, it was felt to be important that the ESCB could submit opinions on matters pertaining to supervision of banks and financial markets in the Community to the appropriate regulatory bodies. This advisory function of the ESCB was to be covered in Article 4-ESCB. This article limits the advisory function of the ECB to its fields of competence. These fields are not defined in Article 4 itself, but are derived from other articles of the Statute.

Article 25

The BSSC had noted in a report to the Committee of Governors dated 5 July 1990 that the system of banking supervision follows or shadows developments in the markets, rather than leading them. Therefore, it was considered prudent to insert in the Treaty a procedure by which the ESCB could be endowed with new responsibilities in the field of supervision if deemed necessary to keep up with developments in the financial markets. Initially this was accommodated by a general enabling clause, enabling the Council of Ministers to confer other tasks to the System on a proposal from the System. The BSSC identified the following examples of activities in which the ESCB might (want to) participate: the prudential aspects of policies concerning inter-EC cross-border mergers and acquisitions, policies concerning the supervision of pan-EC financial conglomerates, systemic risks in the payment and banking systems and the provision of financial support to the banking system. The idea of a general enabling clause was to be dropped only later.[38] At that time the BSSC however still assumed the Treaty would provide for the possibility of a transfer of competence to the ECB, to the extent (and in those areas) provided for in the draft articles. (This explains the formulation of Art. 25.2, which is not so much an enabling clause itself, but assumes one.) In October 1990, following a request of the governors, the BSSC produced a proposal for a supervisory chapter of the draft Statute. The BSSC presented two articles, each containing two sub-sections, to the Committee of Alternates:[39]

“ Article 25.1

The ECB shall be entitled to offer advice and to be consulted on the interpretation and implementation of Community legislation relating to the prudential supervision of credit and other financial institutions and financial markets.

Article 25.2

The ECB may formulate, interpret and implement policies relating to the prudential supervision of credit and other financial institutions for which it is designated as competent authority.

Article 26 bis 1

The System shall be entitled to offer advice to Community bodies and national authorities on measures which it considers desirable for the purpose of maintaining the stability of the banking and financial systems.

Article 26 bis 2

The ECB may itself determine policies and take measures within its competence necessary for the purpose of maintaining the stability of the banking and financial systems.”

BSSC 11 October 1990

Some Alternates considered Article 26.1 to be superfluous, as it was already covered by Article 4, while Article 26.2 was considered to be adequately dealt with by Article 3, last indent (‘to participate as necessary in the formulation and execution of policies relating to prudential supervision.’). Therefore, before being presented to the governors, Article 25.2 and 26.1 and 26.2 were put between square brackets (at the same time Article 26.1 and 26.2 were renumbered into 25.3 and 25.4).

During the Governors’ meeting on 13 November Pöhl said he felt that the decision as to whether supervision was a central banking function should be left to the political authorities. De Larosière said there was no need for a vast supervisory organization at the ECB. However, he would find it entirely appropriate for the ECB to co-ordinate such supervisory functions. (It was then agreed to add ’co-ordination’ to Article 3, last indent.) According to Pöhl, the Bundesbank had serious misgivings about Articles 25.3 and 25.4, which would create a moral hazard situation. Duisenberg and Ciampi were willing – in a spirit of compromise – to drop these two Articles. Leigh-Pemberton however was reluctant to delete them. Ravasio (director-general DG II), representing the Commission, stated general reservations by the Commission as regards Article 25, because it tended to assign to the ECB some regulatory and legislative powers which were regarded as falling within the competence of the Commission, the Council and the Parliament.[40] In the end the governors agreed to retain the first two sub-sections and delete the last two, implying Article 25 read as follows (the predecessor of the specific enabling clause being captured in paragraph 2):

“Article 25 – Supervisory Tasks

25.1. The ECB shall be entitled to offer advice and to be consulted on the interpretation and implementation of Community legislation relating to the prudential supervision of credit and other financial institutions and financial markets.

25.2. The ECB may formulate, interpret and implement policies relating to the prudential supervision of credit and other financial institutions for which it is designated as competent authority.”

draft 27 November 1990

As regards the division of labour between the ECB and the NCBs, the article thus formulated leaves little room for interpretation. In Art. 25.1 it is clear that for ECB one should read ‘Governing Council of the ECB’, like is done in Art. 4-ESCB, and the Governing Council stands for the System as a whole. Art. 25.2 is hybrid: it encompasses decisions related to policy-making (formulating and interpreting policies), which belong to the Governing Council and it encompasses implementation, which could have been assigned to both the ECB and the NCBs. It should be remarked that the Statute does not provide for the possibility that the ECB or the Governing Council could delegate functions, attributed to the ECB, to NCBs.[41] The Governing Council can only delegate to the Executive Board (see Art. 12.1-ESCB, second paragraph). The wording probably reflected the wish to avoid any impression of trespassing on national arrangements for prudential supervision (as assigning a competence to the System (or to ‘the ECB and the NCBs’) would have implied a role for the NCBs, even where that did not exist nationally thus far). This still left open the issue of which supervisory competences to give to the ECB.

II.3      History: IGC
During the IGC the supervisory task of the System, as proposed by the Committee of Governors, was much debated, mostly at the level of deputies of the Ministers of Finance. Views were split. The main arguments used by the opponents of a ‘supervisory task’ for the ESCB were: possible conflict of interest between the prudential and the monetary objectives (Germany, France); the lack of accountability (France and UK); the risk of moral hazard (Portugal). Quite clearly, the Trésor took another position than the Banque de France, presumably because the Trésor had only reluctantly accepted the independence of the ECB and now the aim was to give the ECB no more powers than necessary. And the Trésor wanted to continue its working relationship with the Banque de France.[42] The UK (and France) wanted their supervisors to be accountable to their national parliaments: they should not be able to hide behind the back of the ECB. The UK position was influenced by the experience with the BCCI scandal. Not every argument came to the fore. For instance, it was known that some Finance Ministries were afraid that the central banks would take away tasks from (non-NCB) supervisors. For instance, when the Dutch Finance Ministry took over the presidency of the IGC, it would limit ‘prudential supervision’ to ‘prudential supervision on credit institutions’.

In its final non-paper the Luxembourg presidency put both Article 3, last indent, and Chapter V of the draft Statute (i.e. Article 25) between square brackets.[43] At the same time Art. 3, including the last indent, appeared in a slightly revised fashion[44] in the draft Treaty text of the Luxembourg presidency:

“Article 105

  1. [….]

It [the ESCB] shall take part, as required, in the definition, co-ordination and execution of policies relating to the prudential control and stability of the financial system.”

non-paper 12 June 1991

Over the summer the Committee of Governors prepared a reaction to the Luxembourg non-paper of 6 June 1991. This resulted in a letter sent to the IGC on 5 September,[45]one paragraph of which dealt with prudential supervision: “The relevant [supervisory] provisions were introduced into the Statute with three considerations in mind: firstly, the System, even though operating strictly at the macro-economic level, will have a broad oversight of developments in financial markets and institutions and, therefore, should possess a detailed working knowledge which would be of value to the exercise of supervisory functions. Secondly, the ESCB’s primary objective of price stability will be supported by the stability and soundness of the banking system in the Community as it evolves. Thirdly, measures to deal with fragility or disturbance in the banking system must take account of their effect on monetary objectives and policies.”

The Dutch presidency, which took over in July, did not like the wording of Article 105, last paragraph. Especially the words ‘as required’ gave the central banks too much room for initiative. Relevant in this regard was that the Dutch Minister of Finance, Wim Kok, had expressed himself during a meeting with a parliamentary sub-committee against concentrating all supervisory tasks in one institution, read the ECB (‘who will supervise the supervisor’?). On 25 September 1991, the Dutch presidency issued a chairman’s paper covering i.a. Article 105-108.[46] In this paper they had dropped the last paragraph of Art. 105.1, explaining this in an explanatory footnote (in the meantime Art. 105.1 had been renumbered into Art. 105.2):

“In paragraph 2 [of Article 105] the task as regards prudential supervision has been deleted, because it seems proper to leave prudential supervision in principle for the time being in national hands and not in all Member States this is the central bank. Therefore, it is not necessary to lay down explicitly in the Treaty a task for the ESCB in this field. Nevertheless, it would be useful that in the new Treaty provisions are incorporated so that the Council could designate the ECB as coordinating competent supervisory authority in future times. This is dealt with in Article 108.4.” [47]

Following several inconclusive discussions at deputies’ level, the Dutch presidency re-inserted a supervisory task in Article 105.2 of the Treaty and Article 3.1 of the Statute, but now in more opaque form and limiting prudential supervision to ‘credit institutions’ (where the Committee of Governors and the Luxembourg presidency had left open the reach of supervision):[48]

Article 3 – Tasks

3.1 As set out in Article 105 paragraph 2 of this Treaty, the basic tasks to be carried out through the ESCB shall be:

– […]

– to contribute to a smooth conduct of policies relating to the prudential supervision on credit institutions and the stability of the financial system.” [49]

presidency’s proposal, 28 October 1991

In the eyes of the drafters of the Dutch Ministry of Finance, this formulation ensured a role for the ECB, while at the same time supervision would remain primarily in national hands. The Committee of Governors decided not react on this text, because Article 3 (last indent) and, especially, Article 25.2 (see below) appeared to them to be sufficiently flexible. Indeed, though the text was more restrictive, it kept open the door for future involvement of the ECB beyond the advisory role foreseen in Article 25.1.

In the end, this text would be accepted with only two amendments. First, the word ‘policies’ was changed into ‘policies pursued by the competent authorities’ at the request of the UK. The reference to ‘competent authorities’ was meant to reflect the existing differences between the institutional arrangements in the area of supervision. Second, the indent was placed in a new sub-paragraph of Article 3, thereby ‘degrading’ this task to ‘a’ task of the System; the tasks listed in paragraph 1 of Article 3 were as of then called the ‘basic’ tasks of the System.[50]

Article 25

As regards Art. 25.1 the Dutch presidency specified which authorities have to consult the ECB (capturing also the national legislative authorities) and they continued, as proposed by the Luxembourg presidency, to replace the word ‘interpretation’ by ‘scope’. As regards the remit of prudential supervision, the Dutch presidency deleted the reference to ‘other financial institutions and financial markets’ in Art. 25.1. This reference was replaced by introducing in Art. 25.1 a concept mentioned in the (at that moment suppressed) last indent of Art. 3.1, i.e. the stability of the financial system. The presidency did not drop the reference to ‘other financial institutions’ in Art. 25.2 (the ‘enabling clause’), in order to keep the door open for unexpected developments. Compared to the Luxembourg non-paper of 12 June the Dutch presidency also added the word ‘coordinate’ in Art. 25.2.

“Article 25 – Prudential supervision

25.1 The ECB shall be entitled to offer advice to and to be consulted by the Council of Ministers, the Commission and the competent authorities of the Member States on the scope and implementation of Community legislation relating to the prudential supervision of credit institutions and relating to the stability of the financial system.

25.2 Subject to Article 108, paragraph 4 of the Treaty the ECB may coordinate, formulate and implement policies relating to the prudential supervision of credit and other financial institutions.”

chairman’s paper 25 September 1991

During the IGC deputies meeting of 13 November 1991 the German delegate Haller requested to replace ‘credit institutions’ in Art. 25.1 by ‘credit institutions and security houses’. He feared British security houses would benefit from the restriction of this article to credit institutions, because in the UK these houses were non-banks, while in Germany securities are mostly traded by banks (Universalbanken).[51] When the UK objected, Chairman Maas replied to Haller the addition was superfluous, because the subsequent part of the sentence (‘and (relating) to the stability of the financial system’) could be interpreted sufficiently broad.[52]

As mentioned above, the Dutch presidency specified the procedure for activating the enabling clause of Art. 25.2. Neither the draft Statute produced by the Committee of Governors nor the Luxembourg’s presidency’s paper had specified the procedure for designating the ESCB as ‘competent authority’ for the purpose of Art. 25.2. The Dutch presidency introduced an article to fill this legal void:

“Article 108(4)

The Council may, acting by qualified majority on a proposal of the Commission, [in co-operation with the European Parliament] and after consulting the ECB, designate the ECB as competent supervisory authority concerning the coordination, formulation and/or implementation of policies relating to the prudential supervision of credit institutions. According to the same procedure the ECB can be given supervisory authority over other financial institutions.”

chairman’s paper 25 September 1991 [53]

In the presidency’s first consolidated version of EMU texts Art. 108(4) was rephrased as follows:

Art. 108(5)

“The Council may, acting by qualified majority on a proposal from the Commission and after consulting the EMI or the ECB and [in co-operation with] the European Parliament, confer upon the ECB specific tasks concerning policies relating to the prudential supervision of credit institutions.”

presidency’s draft 28 October 1991 [54]

In two respects this text was more restrictive than the previous one, trying to appease the opponents: first, the new text spoke of conferring ‘specific tasks’ instead of designating the ECB in more general terms as competent authority, though at the same time by dropping the reference to ‘coordination’ it was achieved that a coordinating role for the ECB was not depending anymore on designation, but could be exercised right from the start of EMU. Second, the sentence referring to ‘other financial institutions’, i.e. other than credit institutions, was deleted. This text was discussed by the EMU Working Group on 6 November 1991. Views were split.[55] The only way out was to require unanimity for a decision to confer specific tasks upon the ECB – after which only the UK made a reservation. The presidency also changed ‘credit institutions’ into ‘banking institutions’.[56] During the EMU Working Group meeting on 26-28 November it was decided to replace ‘banking institutions’ by ‘credit institutions and other financial institutions with the exception of insurance companies’. With this formulation the presidency sought a middle course between the worries expressed by Haller (see immediately above), its own wish to keep open the door for future developments, and the fear of other parts of the Dutch Ministry of Finance that this was a secret plot to facilitate in the future the creation of a single big supervisor (i.e. the ECB). [57]

Art. 25.2 was revised accordingly (see the beginning of this article).

After the legal nettoyage the article was renumbered into Art. 105(6) and read as follows:

Art. 105(6)

“The Council may, acting unanimously on a proposal from the Commission and after consulting the ECB and after receiving the assent of the European Parliament, confer upon the ECB specific tasks concerning policies relating to the prudential supervision of credit institutions and other financial institutions with the exception of insurance undertakings.”

Two additional observations can be made. First, a French request for generalizing the enabling clause was rejected.[58] Second, the procedure for activating the enabling clause requires the assent of the European Parliament (instead of the co-operation or consultation procedure).[59]

In 2013, in the aftermath of the global and euro area financial crisis which had started on 2008, the Council of Ministers, by Council Regulation (EU) No 1024/2013 of October 2013, conferred upon the ECB the responsibility for prudential supervision on credit institutions of all euro area member states[60] as well as a limited mandate in the area of macroprudential policy (art. 5.1) and the responsibility for the effective an consistent functioning of the Single Supervisory Mechanism (SSM). The SSM stands for the system of financial supervision composed of the ECB and national competent authorities of participating member states. Here we see that the Council of Minister wielded a quiet broad interpretation of its authority under Art. 25.2-ESCB to confer specific tasks…’ upon the ECB. A broad interpretation need a good reason, like preventing a breakdown of the eurosystem, but it can only be a temporary solution until a better solution is found. One possible solution could be creating an SSM independent from the ECB. Such SSM could also more easily encompass supervision of non-credit institutions like insurance companies and asset managers. It is interesting to recall that in Germany the prudential supervisory powers do not rest with the central bank, but with a government agency. However, at the same time the central bank carries out a lot of the supervisory work and provides important advice the supervisory agency.[61]

Article 5:

“Article 5 (Collection of statistical information)

5.1 In order to undertake the tasks of the ESCB, the ECB, assisted by the NCBs, shall collect the necessary statistical information either from the competent national authorities or directly from economic agents. For these purposes it shall cooperate with the Community institutions or bodies and with the competent authorities of the Member States or third countries and with international organizations.

5.2 The NCBs shall carry out, to the extent possible, the tasks described in Article 5.1

5.3 The ECB shall contribute to the harmonization, where necessary, of the rules and practices governing the collection, compilation and distribution of statistics in the areas within its fields of competence.

5.4 The Council [of Ministers], in accordance with the procedure laid down in Article 42, shall define the natural and legal persons subject to reporting requirements, the confidentiality regime and the appropriate provisions for enforcement.”

(to be read in conjunction with Art. 12.1c-ESCB (Division of labour between ECB and NCBs), Art. 34.3-ESCB (Legal acts))

Introduction
1.1   General introduction

Central banks need statistical information on monetary and credit aggregates and the economy in general. They usually collect the monetary and banking information at source, that is directly from credit institutions or, in the case of balance-of-payment statistics, directly from companies. For other information on the economy, central banks usually rely on the publications of the national statistical bureaus.[62] This is an important task for central banks, also in terms of resources. As regards the division of labour within the System, Art. 5.1 mentions that the ECB shall be assisted by the NCBs, while Art. 5.2 adds that the NCBs shall carry out these tasks to the extent possible, which is stronger than the decentralization principle as formulated in Art. 12.1c (which uses the words ‘to the extent deemed possible and appropriate, the ECB shall have recourse to the NCBs’). This division of labour makes sense, not only because of the closeness of NCBs to the reporting agents, but also because of the language aspect.

Reporting puts a burden on the reporting agencies, for which they are not compensated. The ESCB is authorized to put a burden on a selected group of economic agents and to enforce compliance, but only within the confounds of secondary legislation (i.e. legislation by the Council of Ministers). Indeed, wherever the ESCB puts an obligation on third parties, Council legislation is required. Such is therefore also the case for the imposition of minimum reserves,[63] the imposition of financial sanctions on agents failing to comply with obligations under its regulations and decisions,[64] the requirement for the lawmakers to consult the ECB on any proposed Community act or draft legislative provision ‘in its fields of competence’ [65] and for the definition of persons subject to reporting requirements (the reporting population). The content and the timing of the reporting of statistical data (the ESCB needs precise and timely information to be able to fulfil its tasks) is set by the ESCB. Agents not obliging to the ECB regulations can be subjected to fines or daily penalty payments.[66]

In order to use possible synergies and reduce the costs for the reporting agencies, the article requires the System to co-operate with existing collectors of statistical information. The cost awareness of the drafters of the Statute though was not as high as in the case of the Federal Reserve. In the meantime the ECB has introduced, following requests from several NCBs, a cost-benefit analysis procedure for each introduction of new statistical demands by the system, in order to prevent the imposition of too many reporting obligations by the centre, which does not feel the collection costs borne by the NCBs nor the reporting costs borne by the reporting agents. Apparently, thinking on this evolved. When the Ecofin Council introduced an article relating to its own competence to collect (economic) statistical data in the Treaty of Amsterdam of 1997, it included the following line (Art. 213a(2)): ‘The production of Community statistics […..] shall not entail excessive burdens on economic operators’. And the 1998 Ecofin Council regulation ex Art. 5.4 of the statute defining the reporting population called on the ECB to “minimize the reporting burden involved, including by using existing statistics as far as possible”.[67]

I.2  Relevant features of the Federal Reserve

The Federal Reserve Act defines both the right of the Fed to collect information and the reporting population (i.e. depository institutions). In most cases the statistical information is reported directly to the Board of Governors – only very small non-member depository institutions which are subject to less overall reporting requirements report through specified federal agencies.[68]

We note that the FRA stresses the importance of minimizing the reporting burden, as can be seen from section 11(a)(2) of the FRA (1988): “ […..] The Board shall endeavour to avoid the imposition of unnecessary burdens on reporting institutions and the duplication of other reporting requirements. Except as otherwise required by law, any data provided to any department, agency, or instrumentality of the United States pursuant to other reporting requirements shall be made available to the Board. The Board may classify depository institutions for the purposes of this paragraph and may impose different requirements on each such class.”

II.1      History: Committee of Governors

The Delors Committee did not deal with the statistical reporting requirements. The Committee of Governors was very quick in formulating and agreeing on a text. The following, preliminary text appeared in the first draft of the Secretariat:

‘Article 5 – Task of collecting information and compiling statistics

The ESCB shall collect the information it requires either from the competent national authorities or directly from economic operators.

For the purposes, the ECB shall co-operate with the competent authorities of the Community, the Member States or non-member States and with international organisations. It shall be responsible for harmonising the conditions governing the collection, compilation and distribution of statistics in the area of its field of competence.’

draft 11 June 1990

The draft version of 22 June was already close to the final outcome:

“  5.1 In order to perform its functions, the ESCB shall collect the necessary information either from the competent national authorities or directly from economic agents. For these purposes, it shall co-operate with the competent authorities of the Community, the Member States or non-member States and with international organisations.

5.2 The NCBs shall carry out, to the extent possible, the tasks described in Art. 5.1. The central body shall be responsible for harmonising, where necessary, the conditions governing the collection, compilation and distribution of statistics in the areas within its field of competence.

5.3 The ESCB shall respect the confidentiality of information it receives in accordance with the relevant provisions of Community law.”

draft 22 June 1990

The description of ‘to the extent possible’ went further, i.e. it was clearer in its unequivocal bias in favour of involving NCBs in the execution of this task, than the more general formulation at that moment chosen for (the predecessor of) Art. 12.1c, which read in the draft version of 22 June: ‘The Council may entrust the execution of certain tasks to NCBs on the terms it shall lay down.’ (Art. 13.2 (fourth paragraph), draft 22 June 1990.) Art. 5.2 meant NCBs did not have to share their contacts with national reporting agencies with the ECB.

Following the advice of the legal experts not to give legal personality to the System, it was necessary to replace ‘ESCB’ in the first sentence of Art. 5.1. A new draft by the Secretariat of 8 October, to be looked at by the legal experts, suggested to replace in Art. 5.1 ‘ESCB’ by ‘ECB’. The Secretariat also proposed to add after ‘to the extent possible’ in Art. 5.2 the words: ‘and following instructions from the ECB’.[69] The suggested amendments apparently elicited some comments, because the version of 19 October showed Art. 5.2 in its original, unchanged form, while in Art. 5.1. ‘ECB’ was replaced by ‘ECB, assisted by the NCBs,’. The version of 19 October would stand to be the final version sent to the IGC – which is quoted below. (The version of 8 October would have shifted the power almost completely to the ECB.)

Article 5 (Collection of statistical information)

5.1 In order to undertake the tasks of the System, the ECB, assisted by the NCBs, shall collect the necessary statistical information either from the competent national authorities or directly from economic agents. For these purposes, it shall co-operate with the competent authorities of the Community, the Member States or third countries and with international organizations.

5.2 The NCBs shall carry out, to the extent possible, the tasks described in Article 5.1.

5.3 The ECB shall promote the harmonization, where necessary, of the conditions governing the collection, compilation and distribution of statistics in the areas within its field of competence. Community legislation shall define the natural and legal persons subject to reporting requirements, the confidentiality regime and the appropriate provisions for enforcement.

draft 27 November 1990

We note that changing the federal concept ‘ESCB’ into ‘ECB’ was observed with some suspicion by the NCBs, especially where this was related to the implementation of System tasks. Indeed, in these instances ‘ECB’ could be read as the central institution, i.e. to the exclusion of the NCBs, whereas in case of decision-making by the ECB ‘ECB’ could still be read as the ‘decision-making body of the ECB’, in casu its federally composed Governing Council.

The IGC would only add some editorial changes.

Article 6:

“Article 6: International cooperation

6.1 In the field of international cooperation involving the tasks entrusted to the ESCB, the ECB shall decide how the ESCB shall be represented.
6.2 The ECB and, subject to its approval, the NCBs may participate in international monetary institutions.
6.3 Articles 6.1 and 6.2 shall be without prejudice to Article 109(4) of this Treaty.”

(to be read in conjunction with Art. 1-ESCB (Establishment), Art. 12.5-ESCB (Decision-making authority regarding Art. 6 in hands of Governing Council), Art. 13.2-ESCB (President’s authority to represent the ECB externally), Art. 14.4-ESCB (Non-System tasks NCBs), Art. 23-ESCB (External operations), Art. 31.1-ESCB (NCB obligations towards international organizations), Art. 39-ESCB (Signatories), Art. 109.4-EC (External competences Community))

Introduction
I.1 General introduction
The article provides a framework for the involvement and participation of the System in any form of international cooperation involving somehow the ESCB’s field of competence. These issues should be separated from the establishment of relations and accounts with central banks and international organizations, which is allowed for without the need for approval by the Governing Council under Art. 23-ESCB. [70]

Article 6.1 determines that in case the System needs to be represented, the ECB (i.e. the Governing Council) decides on the representation (by whomever the System is represented) to ensure the System ‘speaks with one voice’ (see Commentary with Art. 6 of the draft Statute of 27 November 1990). In some cases the Governing Council will have to decide first whether a certain topic is part of the System’s tasks or not. For instance, is assisting the Brazilian central bank in managing its dollar-real exchange rate part of the playing field of the ESCB, or should NCBs be free to extend a dollar credit line to the Brazilian central bank, provided the amounts involved do not exceed certain thresholds stipulated ex Art. 31.3-ESCB? And are discussions on the international monetary architecture ESCB competences, or could NCBs continue to operate in G7 working groups related to such areas? It is possible that both NCBs and the ECB participate in an international meeting or organization, but if so they are bound to the System’s common view, when System related tasks are involved.

Cooperation sometimes involves the participation in the capital or membership of international bodies. An example is participation in the capital of the Bank for International Settlements (BIS, erected and owned by central banks in 1930).[71] Where membership requires legal personality, only the ECB and/or NCBs qualify, as the System lacks legal personality. The framework of Art. 6 determines that not only the ECB, but also NCBs may participate in such institutions. This is relevant for the NCBs, because conceivably all non-operational external relations can be handled by just the centre. This could come about anyhow in practice, for it is difficult to see how the Executive Board once present in international meetings would not start to dominate the System’s representation. On the other hand, many international fora deal with both System and non-System tasks. As long as the NCBs perform non-System tasks (e.g. in the field of payment systems (though in this field the ESCB could assume all-regulating power – see Art. 22 – or banking supervision) NCBs can be member “à titre personel”. Art. 6.2 allows NCBs to participate in international monetary institutions without interference by their governments, but at the same time acts as a System-internal approval (control) mechanism.

As regards the IMF, the Committee of Governors and the IGC assumed that euro area Member States would continue to be member of the IMF, as the IMF only allows sovereign countries (and not central banks) as members.[72] This would only change, not with the introduction of a single currency, but only with the advent of European political union. This raises the question how the System could be involved when the IMF discusses issues which are relevant to the ESCB (or perhaps even belonging to the exclusive competence of the ESCB, like international transparency guidelines for foreign reserve holdings). This has been ‘solved’ by allowing the ESCB an observership in the IMF. At the same time NCBs continue to be advisor of their own governments, relating to issues like extending IMF credits to countries with external financing problems.[73]

Art. 6.2 seems to suggest a hierarchy, with the ECB being able to decide itself on participation, and the NCBs being subject to its approval. However, in both cases the decision is up to the Governing Council. (This view is supported by Art. 12.5-ESCB. See also Art. 12.1, second paragraph, for the limited ‘own’ powers of the Executive Board.) Therefore, ‘ECB’ in Art. 6.2 has a double meaning: it refers to the decision-making ànd to the participating body.

I.2 elevant features of the Federal Reserve
In the United States the FRBs were put on a tight leash in 1935 when a new paragraph g of section 14 (Open Market Operations) of the amended FRA stipulated the following:
Relationships and Transactions with Foreign Banks and Bankers

(g) The Board of Governors of the FRS shall exercise special supervision over all relationships and transactions of any kind entered into by any Federal reserve bank with any foreign bank or banker, or with any group of foreign banks or bankers, and all such relationships and transactions shall be subject to such regulations, conditions, and limitations as the Board may prescribe. No officer or other representative of any Federal reserve bank shall conduct negotiations of any kind with the officers or representatives of any foreign bank or banker without first obtaining the permission of the Board of Governors of the FRS. The Board of Governors of the FRS shall have the right, in its discretion, to be represented in any conference or negotiations by such representative or representatives as the Board may designate. A full report of all conferences or negotiations, and all understandings and agreements arrived at or transactions agreed upon, and all other material facts appertaining to such conferences or negotiations, shall be filed with the Board in writing by a duly authorized officer of each Federal reserve bank which shall have participated in such conferences or negotiations.’

This very firm text suggests a lot of distrust existed on the side of the Board. According to Kettl (1986), this was meant as ‘a slap in the face’ of the New York Fed, which under the leadership of Benjamin Strong (until 1928), had more or less confiscated the external relations of the system.[74]

Section 14(e) (on Foreign Agents and Correspondents) was also amended by adding that the Board could not only approve, but also order a FRB to open and maintain accounts in foreign countries and that, once an FRB had opened a certain account abroad, other FRBs would be allowed, with the consent of the Board, to conduct transactions through that account. The establishment of banking accounts abroad had already been subject to the consent of the Board under the FRA of 1913, but it should be remembered that the Board itself could not open such accounts.

In practice, the New York Fed has been allowed to play an important role in the international contacts of the Fed, with the approval of the Board. For instance, the two delegates to the monthly BIS meetings are the chairman of the Board and the president of the New York Fed. The other FRBs do not play an international role, except in the area of research.[75]

Comparing the Fed and the ESCB
In 1913 the Federal Reserve had been designed with relatively independent roles for the FRBs. New York with the largest financial market had been treated by the Bank of England and the Banque de France and other central banks as their counterpart.[76] Therefore, New York quite naturally dominated the system’s external relations. When participating in international credits New York would act on behalf of all FRBs. An example of a large credit was the one to the UK in 1925 ($200 mln). Another significant transaction was undertaken in 1931, when the FRBs participated in international central bank credits to the UK, Austria, Germany and Hungary.[77] In 1933 the centre took advantage of the weakened status of the Federal Reserve in the wake of the Great Depression and took complete control of the external relations in 1933.[78] (The fact that the president of the New York Fed joins the chairman of the Fed to the BIS meetings is due to the fact that New York is the operational arm of the Fed.)

The U.S. model cannot be an example for Europe, as long as the EU Member States want to be able to decide individually on loans to, for instance, the central banks of Mexico or Brazil, or on participation in the GAB and the design and implementation of the Basle capital accords, which are topics discussed in and around the BIS meetings. In case of the IMF, the role of the NCBs as the fiscal/financial agent handling on behalf of their Member State is closely related to the fact that only countries can be member of the IMF, and not institutions. Probably Member States could appoint the ECB as their agent, but that would seem to require pooling of all reserves at the ECB.

II.1 History: Delors Committee and Committee of Governors
The Delors Committee paid some limited attention to the question of international policy coordination. Par. 38 of the Delors Report observes that ‘[….] With the establishment of the ESCB the Community would also have created an institution through which it could participate in all aspects of international monetary management.’

The Committee of Governors would pay a lot more attention to this issue. A first draft by the Secretariat of the Committee of Governors (which had not yet been discussed by the Alternates) was discussed by the governors on their meeting of 10 July 1990.

‘Article 6International cooperation
[6.1 The ESCB shall participate in actions and institutions involving international monetary or central bank co-operation.]
[6.2 The modalities of this participation shall be in accordance with decisions to be taken by the Council of the ESCB which shall specify in each case the respective roles of the NCBs and the central body.]
[6.3 When representing the ESCB, the NCBs act in accordance with the view of the Council and the Executive Board.]’
draft 3 July 1990

De Larosière made a remark on IMF membership, of which he said that one quota for the single currency area would seem logical under a single currency system. However, the matter was complicated, as it was the national governments which were members of the IMF and not the central banks. No other remarks were made and one decided to await further discussion among the Alternates.

In their meeting of 20 July the Alternates discussed an earlier note by Szász on the implication of EMU for participants’ IMF membership. This note had concluded that only if the Community were ‘to transfer itself into a genuine political union as a complement to

EMU, then it seems likely that within international organizations it would be represented at the Community level.’ The opinion expressed by de Larosière had been in line with this. The Alternates also discussed the relative roles of the System and the NCBs and concluded that in cases of international cooperation between central banks relating to the tasks entrusted to the System the System would represent the NCBs, while the System itself could also participate in international organizations. This gave rise to the following draft by the Secretariat:

‘Article 6 – International cooperation
In the field of international co-operation where it relates to the tasks entrusted to the System, the NCBs shall be represented by the System. The Council shall decide the methods of this representation. The System may participate in international monetary institutions.’
draft 24 July 1990

The matter of IMF membership would not be discussed anymore. Apparently all subscribed to the opinion that despite the complication of continued membership of the euro area countries for issues like the formula to calculate their quotas and the conduct of IMF Art. IV consultations, these countries would remain member of the IMF, implying the IMF could put a call on their reserves for IMF transactions. Such transactions, which would follow from a Member State’s obligations under the IMF Articles of Agreement, would be exempted from the ESCB guidelines for the management of the Member States’ and NCBs’ foreign reserves.[79]

During the summer the legal experts discussed the question of the legal personality of the System and its components. They opted for extending legal personality only to the central body and the NCBs. This meant the ‘System’, being a concept and not a legal entity, could not externally represent the system.[80]

During the governors’ meeting on 11 September 1990, the Irish governor Doyle pointed to an inconsistency between the July version of Art. 6 and Art. 7.3. Until then Art. 7 had read:
Article 7Decision-making bodies of the System
7.1 The decision-making bodies of the System shall be the Council and the Executive Board.
7.2 The President, or in his absence, the Vice-President shall chair these bodies.
7.3 The President or his nominee shall represent the System externally.’
draft 3 July 1990

In order to take away any inconsistency the words ‘the NCB shall be represented by the System’ in Art. 6 (July version) were changed into (in fact reversing subject and object):
‘ ……., the System would be represented by the ECB or the NCBs.’
draft 14 September 1990

At the same time the word ‘System’ in Art. 7.3 was changed into ‘Council’. (Art. 7.2 and 7.3 would later turn into a separate Art. 13 relating to the role of the President, while Art. 7.1 would be inserted in Art. 9.3 on the ECB, with the word ‘System’ replaced by ‘ECB’ – see also Art. 1-ESCB, section II.2. The reason for linking the decision-making bodies, including the Governing Council, to the ECB was to protect the status of the Governing Council by attaching it to an independent institution. Because the System would not have legal personality it would give less protection against political interfering.)

When the Secretariat produced a new draft it also replaced ‘System’ into ‘ECB and the NCBs’ in the second sentence of Art. 6, adding that the participation should be subject ‘to approval by the Council’.

‘Article 6 – International co-operation
6.1 In the field of international co-operation involving the tasks entrusted to the System, the System shall be represented by the ECB or the NCBs. The Council shall decide the methods of this representation.
6.2  Subject to approval by the Council, the ECB and the NCBs may participate in international monetary institutions.’

draft 14 September 1990

We add the Secretariat’s Commentary:
‘Comments: Given the complexity of this matter, Article 6.2 would permit the ECB or the NCBs to participate in international monetary institutions. This flexibility would allow, for instance, NCBs to remain members of the Bank for International Settlements.’

During the governors meeting on 13 November 1990 Doyle observed the two sentences of Art. 6.1 were in his view contradictory, referring to the word ‘or’ in Art. 6.1 and ‘and’ in Art. 6.2. It was decided to adapt Art. 6.1 as shown below, while adding that Art. 12 should specify that the decisions referred to in this Article should be taken by the Council of the ECB (and not by the Executive Board). The new formulation seems to give an edge to the ECB, because apparently the right of the ECB is less restricted than that of the NCBs. One should note though, as mentioned already in section I.1 above, that in Art. 6.2 ‘ECB’ refers to the organization, while ‘its’ (in ‘its approval’) can only refer to a decision-making body (in casu the Governing Council).

Article 6International cooperation
6.1 In the field of international co-operation involving the tasks entrusted to the System, the ECB shall decide whether the System shall be represented by the ECB and/or the NCBs.
6.2 The ECB and, subject to its approval, the NCBs may participate in international monetary institutions.

Article 12 – Responsibilities of the decision-making bodies
….
12.5     The Council shall take the decisions referred to in Article 6.
draft 27 November 1990

The following extensive Commentary was added:
‘Article 6 recognises the need for the System to play an active role in international monetary co-operation and to participate in international organizations. This Article provides a considerable degree of flexibility: it enables the ECB and/or NCBs to conclude agreements with central banks of third countries and to participate in international monetary institutions, thus allowing, for instance, NCBs to remain member of the BIS.

Decisions relating to the System’s international representation are to be taken by the Council (Article 12.5). This ensures that the System “speaks with one voice”.

If the ECB is to represent the Community in international monetary institutions and if it is to be enabled to conclude agreements on behalf of the Community, a provision to this effect would need to be introduced into the Treaty.’

II.2 History: IGC
During the IGC the words ‘whether the ESCB shall be represented by the ECB and/or the NCBs’ would be replaced by ‘how the ESCB shall be represented’.[81] Also, a new Article 6.3 would be added, with the aim to make clear that these articles would have to yield to Art. 109(4) of the Treaty:
‘6.3 Articles 6.1 and 6.3 shall be without prejudice to Article 109(4) of this Treaty.’

presidency text 28 October 1991

Art. 109(4) would read, in its final form:
‘109(4) Subject to paragraph 1 [relating to procedures to conclude exchange rate agreements], the Council shall, on a proposal from the Commission and after consulting the ECB, acting by a qualified majority decide on the position of the Community at international level as regards issues of particular relevance to economic and monetary union and, acting unanimously, decide its representation in compliance with the allocation of powers laid down in Articles 103 and 105.’ [82]

This makes clear that the central bank (ECB) does not have the automatic mandate to represent the Community. On the other hand, the Community, however represented, has to respect Art. 105, implying it may not trespass those areas for which the ESCB is independently competent.

Article 12.1, third paragraph (Art. 12.1c):
Article 12.1-ESCB, third paragraph (Decentralization principle):
To the extent deemed possible and appropriate and without prejudice to the provisions of this Article, the ECB shall have recourse to the national central banks to carry out operations which form part of the tasks of the ESCB.”

(to be read in conjunction with Article 1-ESCB (Legal structure ESCB); Article 5.2-ESCB (Collection of statistics); Article 9.2-ESCB (Implementation either through ECB or NCBs); Article 10.2-ESCB (Voting); Article 12.1-ESCB, first and second paragraph (Responsibilities decision-making bodies); Article 16-ESCB (Banknotes); Articles 17 to 24-ESCB (Monetary and external operations); Article 27-ESCB (Auditing); Article 3b-EC (Subsidiarity))

Introduction
I.1  General introduction

This article can be seen as the guiding principle for the allocation by the Governing Council of operational responsibilities within the System, which would consist of a new institution (the ECB) and the existing NCBs. The two possible extremes were not realistic, i.e. (1) to give the centre no operational responsibility (like the Board of Governors of the Federal Reserve), because the centre would be endowed with foreign reserves anyhow, or (2) to give the centre all operational responsibilities, i.e. to centralize operations completely, because that would negate the federal character, which was strived for from the beginning. A high degree of decentralization seemed logical, because the infrastructure was there, because it would prevent the creation of one dominant financial centre and because of the principle of subsidiarity. This principle was especially promoted by the French – for them it was a ‘constitutional idea’ that executive responsibilities should not be given to the centre, in case these could be handled equally effectively for the benefit of the ‘ensemble’ by national institutions. Also, giving an operational role to the centre could attract business to the city of its location, thus giving it an edge as financial centre.[83] Art. 12.1c itself is a procedural article, the operational tasks themselves are contained in other articles, esp. Art. 16-24. It is important to note that these articles empower both the ECB and the NCBs to execute these tasks, not making a choice (and in fact allowing for flexibility as regards future developments).

Article 12.1c played an important role, when the predecessor of the ECB, the European Monetary Institute, prepared the so-called ‘General Documentation on ESCB monetary policy instruments and procedures’, containing a description of the ESCB’s monetary policy instruments, the procedures to be followed and the relative roles played by the NCBs and the ECB.[84] Examples are the design of the standing facilities and the modalities of the open market procedures. According to the General Documentation the standing facilities are offered by NCBs, and not by the ECB; the tender operations are conducted through NCBs. Banks hold (payment) accounts at NCBs and they receive central bank liquidity only from their ‘own’ NCB. Only in exceptional circumstances will the ECB seek contact with market participants in order to initiate monetary operations. Even in these cases the transactions are executed through the books of one of the NCBs.[85] These exceptional circumstances can only be defined by the Governing Council.) In the end, the ECB’s only real operational presence is in the area of foreign reserves (managing the pooled reserves and where appropriate using them for interventions), thus not going beyond the Delors Report!

The ESCB Statute allows for specialization among NCBs. To evaluate the prospects of specialization we will also look at the developments in the Federal Reserve System. We will come back to this issue in appendix 2. Here we concentrate on the genesis of the article itself. As usual we pay some attention to the division of labour in the FRS, not in the least because the FRS was often referred to as a possible example, among others by Pöhl.

I.2 Relevant features of the Federal Reserve System

If the Federal Reserve System was used as a reference during the discussions on the design of the operational features of the future ESCB, it was to stress the roles of the regional Federal Reserve banks (FRBs). The operational capacities of the FRS rest with the Federal Reserve Banks (FRBs). This is clear from the Federal Reserve Act (FRA), which does not extend operational capabilities to the Board of Governors, but bestows them on the FRBs.

The operational powers of the FRBs are described in Section 13 (FRBs may receive lawful money and deposits and may discount eligible paper), Section 14 (FRBs may buy and sell on the open market, may open accounts abroad and may open accounts for foreign correspondents), Section 15 (FRBs may hold Treasury funds and provide fiscal agency functions), Section 16 (FRBs may issue notes,[86] have to clear checks[87] and may be required by the Board to act as a clearing house for depository institutions for the transfer of funds[88]), Section 19(c)(1) (FRBs may offer accounts for holding required reserves), Section 21 (FRBs may subject member banks to special examinations) and Section 9(7) (State banks which become member of the FRS are subsequently subject to examinations by the state chartering authority and the Board of Governors or local FRB). Many of the functions are subject to regulations such as the Federal Reserve Board (in 1935 renamed into Board of Governors) may impose. FRBs may also perform functions delegated by the Board of Governors (FRA (1988), Section 11(k)). For instance, examination and on-site inspections of bank holding companies which are supervised by the Board of Governors is delegated to the FRBs (see Art. 3.3-ESCB), the Board remaining responsible for regulation and policy.

A special characteristic of the FRS is that the open market operations (OMOs) are concentrated in one place, New York. This does not follow from the FRA, but followed from the fact that when OMOs became important some reserve districts lacked an organized market in the relevant securities, while the only significant market in US government securities was that in New York. For its domestic open market operations the New York Fed deals these days with less than 30 counterparties, so-called primary dealers which channel the liquidity further down the banking system. Most commercial banks in the rest of the country maintain correspondent relations with New York banks. [89] FRBs maintain a discount facility for local banks, but this has not been not an important channel for monetary policy.[90] Like the OMOs, foreign exchange interventions are conducted solely by New York (see appendix 1 at the end of cluster II). The services for foreign central banks and international institutions are generally provided by New York as well. The New York Fed also holds in its vaults vast amounts of gold owned by foreign official institutions.[91]

For the first two decades after the adoption of the Federal Reserve Act in 1913, the main tasks of the Board of Governors were, apart from its analytical and secretarial functions, to coordinate discount rate changes proposed by the regional banks and to modify reserve requirements. This was hardly enough to assure a minimal authority vis à vis the 12 regional Federal Reserve Banks who did most of operational tasks, in particular open market operations. Lack of first-hand contact with financial markets has, until at least the restructuring of the Fed in the 1930’s, been a handicap for the Board. This situation changed when in 1935 the Board became member of the FOMC. As of 1935 the FRA stipulated that “[n]o Federal Reserve bank shall engage or decline in open-market operations under section 14 of this Act except in accordance with the direction of and regulation adopted by the Committee [FOMC].”[92] At the same time the Board also took control of the System’s external representation.[93] The Board has only a few ‘operational’ responsibilities, viz. in the areas of collection and analysis of statistical information and supervision.[94] The Board’s supervisory responsibilities extend to the roughly 1000 state banks that are member of the FRS, all bank holding companies, the foreign activities of member banks, the U.S. activities of foreign banks, and Edge Act and agreement corporations. Even though the Board is authorized to conduct examinations, it leaves this task almost completely to the FRBs. The Board’s other responsibilities cover supervising and regulating the operations of the FRBs, exercising broad responsibility in the nation’s payments system and administering most of the nation’s laws regarding consumer credit protection.

The FRBs spend the largest part of their resources on payments processing (including processing of checks), roughly half of the 23,000 people employed by all FRBs.[95] In terms of operational expenses of the FRBs around a third is generated by commercial check collection.[96] The costs for services to the private sector (banknotes printing and issuing are excluded) are recovered from the private sector through pricing (obligation of the MCA (1980), see appendix 2).[97] Other (non-priced) operational expenses relate to FRB functions such as offering banking services to the Treasury (for which they are reimbursed)[98] and banking examinations.[99] The income of the System derives primarily from the interest on the System’s holdings of domestic and foreign assets (more than 30 billion dollar in 2001). This income is allocated according to each FRB’s share in the total capital of the System. The costs of the Board of Governors are covered by a yearly ‘assessment’ against the income of the FRBs. The FRBs pays out 6 per cent dividend over the capital paid in by its member banks. Net profits flow to the Treasury.

For an overview of the development in the relationship between the FRBs and the centre, the Federal Reserve Board, in the early years of the Fed, see appendix 1 at the end of this cluster, covering the developments in the Fed’s early years (1913-1935). The appendix also contains a box summarizing the contents of the Banking Acts of 1933 and 1935, which affected the structure of the Fed, basically strengthening the authority of the centre, i.e. the Board of Governors.

Specialization

Apart from the well-known example of the FRB of New York, which is specialised in open market operations and foreign currency interventions and which manages of the System’s domestic and foreign assets, specialization is limited. The basic principle of the division of labour within the FRS seems to be non-specialized decentralization. Every District Bank is involved in banknotes and coins, payment systems (including check collection), research, preparation of the contribution of its president to the FOMC meetings, Treasury functions and banking supervision (though the intensity varies, especially depending on the number of bank holding companies located in the district). Within this context specialization has developed in three areas: research, financial services and banking supervision, and the most important of these is research. This is described in more detail in appendix 2 at the end of this cluster. The specialization in research has an informal character and is usually related to an FRB’s geographic location or recognized expertise in a specific field. Specialization in financial services refers not so much to their provision (which is a local affair), but to the provision of leadership in the development of certain kinds of services. This form of specialization is more formalized and is made possible by the fact that the services are highly uniform. Specialization in banking supervision is limited and is linked to the fact that some districts gained more expertise in supervising certain kinds of institutions than other districts, because more of these institutions are located in their district.

Comparing the Federal Reserve and the ESCB

There are some clear similarities between the Federal Reserve System and the European System of Central Banks. In both systems policy-making is centralized, while implementation is not. An important difference however is that the central element of the FRS, the Board of Governors, does not have operational capabilities, whereas the ECB is able to perform typical central banking functions itself. In the United States there had been strong populist tendencies against creating a centralized system. This was reflected in the design of the system, which consisted in fact of a substantial number of local central banks. For a good many years the System was dominated by the very gifted governor of the New York Fed, Benjamin Strong. In the years after Strong, who resigned (and died) in 1928, there was a clear lack of leadership, which might also have contributed to the too passive attitude of the Fed during the big contraction (which a number of Federal Reserve Board members initially viewed as a purging operation after the speculative years of the late twenties).[100] The banking community had disliked a centralized system for other reasons: they feared the system would then be controlled by a Board dominated by ‘political’ (Democrat) appointees.[101] In line herewith the drafters of the FRA had seen no need to endow the Board with other features than a staff of its own. In Europe other forces were at work. At least from the French side there had been the wish to establish already in stage two an institution endowed with the capacity to intervene in the foreign exchange markets[102] – the idea to endow the ECB (or its predecessor) with reserves was in line with this.

Remarkably, it were the French who would most ardently oppose the idea of operations executed by the centre in stage three. We will be able to follow this debate in section II.2 below. In chapter 8 we will present how the ESCB tasks have actually been divided over the ECB and NCBs.

II.1 History: Delors Committee
Already in the very first stages of the debate leading to the establishment of the EMU it became clear that the leading actors were thinking of a federal system, that is a system which would keep the existing national central banks intact. Stoltenberg’s memorandum of March 15 1988 spoke of a European central bank system (last paragraph).[103] Pöhl’s contribution to the Delors Committee submitted in September 1989 mentioned the following in section II.B.4: “A federal structure of the central bank system – according to the pattern of the Federal Reserve System, for instance – would correspond best to the existing state of national sovereignty [nationaalstaatlichen Souveränität] and would additionally strengthen the independence of the central bank. (Before the final stage involving the introduction of a uniform currency, only a federally structured central bank system is conceivable in any case.[104])” The comparison with the Fed was repeated in a speech by Pöhl held in Paris on 16 January 1990 (“Basic features of a European monetary order”, reprinted in the Bundesbank Presseauszüge 1990, nr. 4), which – quite unusually – was sent by Pöhl to the ministers of finance of the EU. In this speech Pöhl said: “ [….] the ESCB could function with a comparatively small staff, say, a number similar to that of the Board of Governors of the Federal Reserve System, as executive functions could largely be transferred to the well-established systems of the NCBs which would then act on behalf of the Community [in Gemeinschaftsauftrag]. The settlement of payments, open market operations with the banks, business on behalf of government institutions and the like could well be taken care of by the NCBs – according to the guidelines and instructions of the ESCB.”

The Delors Committee would opt for a federal system. It did not explicitly deal with the question whether the centre of the system (i.e. the ECB) should perform (some) operational tasks, or whether these should be left completely to the existing national central banks, being under the instruction of the centre. Below we list a number of arguments which were developed in those days on the optimal degree of (de)centralization.

Arguments mentioned in favour of giving the ECB operational tasks of its own: [105]

  • it would increase the visibility of the ECB and thereby its profile;
  • it prevents possible conflicts of interest for an individual NCB which might occur when they have to undertake operations both on its own account and in a European role in the same market;
  • for an adequate policy preparation the ECB should be able to benefit from close contacts with the markets, therefore it should have operational tasks.

Arguments mentioned in favour of a decentralized execution:

  • intuitively appealing and no technical barriers (as regards foreign exchange interventions, these could be delegated to one of the financial centres);
  • the NCBs have most of the required experience;[106]
  • as long as there will be several financial centres, there will be a need for interventions and operations in each of these centres;
  • NCBs were expected to continue their task as fiscal agent (cashier) for their government, therefore they would be well informed about one of the most important factors influencing the liquidity situation in the local money market;[107] more in general, NCBs were expected to be better placed to understand local circumstances.[108]

A more strategic argument in favour of decentralization was that concentrating operational tasks with the ECB would aggravate the discussion on the seat of the ECB, because the seat would be seen to benefit from centralization to the expense of other financial centres.

The Delors Committee formulated its preference for a federal structure in the following way:[109]
“Considering the political structure of the Community and the advantage of making existing central banks part of a new system, the domestic and international monetary policy-making of the Community should be organized in a federal form, in what might be called a European System of Central Banks (ESCB). ….. The national central banks would be entrusted with the implementation of policies in conformity with guidelines established by the Council of the ESCB and in accordance with instructions from the central institution.”

The last indent of the sub-paragraph of par. 32 of the Delors Report on the Structure and organization of the ESCB is also worth quoting here (the first indents mentioning the federative structure and the establishment of an ESCB Council and a Board):
“- ……..
– establishment of a Board (with supporting staff), which would monitor monetary developments and oversee the implementation of the common monetary policy;
– national central banks, which would execute operations in accordance with the decisions taken by the ESCB Council.”

The first quoted indent leaves open the possibility of a non-executive centre; the second however should then have used the words ‘would execute the operations’, which would have implied all operations; now it reads as ‘some’ operations. Furthermore, the Delors Committee proposed that the central institution would have its own balance sheet. However, this was aimed at allowing the ESCB (to be established according to the Delors Report at the start of Stage Two) to hold foreign reserve assets for the purpose of creating a ‘training ground’ for the future role of the system and for conducting concerted interventions. So the idea to give the system its own balance sheet was not necessarily aimed at creating the possibility for the central institution to conduct domestic monetary policy operations.[110] In this respect par. 32 and 60 of the Delors report have to be read in conjunction. Par. 32, first paragraph, states:
“At the final stage the ESCB – acting through its Council – would be responsible for formulating and implementing monetary policy as well as managing the Community’s exchange rate policy vis-à-vis third currencies. The national central banks would be entrusted with the implementation of policies in conformity with guidelines established by the Council of the ESCB and in accordance with instructions from the central institution.”

Par. 60 (relating to the principle steps in stage three), second indent, reads:
“- ….; the execution of interventions [i.e. exchange market interventions] would be entrusted either to national central banks or to the European System of Central Banks.”

These considerations, i.e. an important role for the NCBs in carrying out monetary policy operations and possibly also foreign exchange operations and a balance sheet for the centre, constituted the background for the ensuing discussion in the Committee of Governors on the draft ESCB Statute.

Between the publication of the Delors Report in April 1989 and the start of the drafting of the ESCB Statute by the Committee of Governors early summer of 1990, Pöhl held an important speech on the outline of a European monetary framework.[111] Part of the speech was devoted to the role of NCBs in a possible European central bank system. The relevant parts of the speech are printed in annex 3 of this study. In it Pöhl first emphasized that in EMU interest rate and intervention decisions should be taken at Community level. Then he continued that “[i]n spite of these far-reaching powers, the ESCB could function with a comparatively small staff, say, a number similar to that of the Board of Governors of the Federal Reserve System, as executive functions could largely be transferred to the well-established systems of the NCBs which would then act on behalf of the Community. The settlement of payments, open market operations with banks, business on behalf of government institutions and the like could well be taken care of by the NCBs – according to the guidelines and instructions of the ESCB. In addition, the NCBs should, in my opinion, be responsible for bank and stock exchange supervision where this is not yet the case as, for example, in the Federal Republic of Germany. This means that the NCBs would play a role similar to that of the Federal Reserve Banks in the United States or the Land Central Banks in Germany.”

Clearly Pöhl was leaning towards a small centre, with operational tasks to a large extent being entrusted to the NCBs.

II.2 History: Committee of Governors [112]
The Alternates discussed the concept of a decentralized central bank system during their meeting on 29 May 1990 (this was before any draft text was written). They assumed NCBs would continue to exist. However, in such a scenario NCBs would have to act on the basis of daily instructions ‘extrèmement strictes’ – words used by the French delegate Lagayette to counter German worries that the system would be too loose. (At the beginning of the meeting the German delegate Rieke had put on the table the suggestion that NCBs would become agencies of the System. Rieke had initially even favored the creation of a single balance sheet for the system, but he seemed to accept that it mattered that the day-to-day operations would be decided centrally.) And, also according to Lagayette, commercial banks would hold their accounts with an NCB, and not with the centre. The idea of endowing the central institution with a balance sheet of its own was not disputed, not even by the Dutch, who on the contrary were keen to bring the management of all foreign reserves within the realm of the System in order to prevent foreign reserves remaining in the hands of Member States, who could then frustrate the monetary and exchange rate policy of the system. A very first internal draft version of the draft Statute of June 11, 1990 (prepared by the Secretariat of the Committee of Governors) included a reference to the role of NCBs in Article 13, which dealt with the role, place, obligations and rights of the national central banks within the System:

“13.2 (fourth paragraph) The ECB may entrust the execution of certain tasks to the national central banks, or to some of them, on the terms it shall lay down.”
11 June 1990

During the meeting of the Alternates on 18 June Lagayette remarked he favoured a system which would be as decentralized as possible, in order to ensure the continued existence of several financial centres, while Rieke had proposed to remain flexible as regards the centralization or decentralization of the execution of operations. In the Secretariat’s version of 22 June, Art. 13.2 was changed into:

“13.2 (fourth paragraph) The Council may entrust the execution of certain tasks to national central banks on the terms it shall lay down.” [113]
22 June 1990

However, views among the Alternates differed concerning the degree to which execution of operations may be decent ralized without impairing the indivisibility of monetary policy. This was reflected in the version of July 3:

“[13.3  The Executive Board [may] [shall usually] entrust the execution of its tasks to national central banks on the terms it shall lay down.]”
3 July 1990

On 10 July 1990 the Governors discussed the draft Statute. De Larosière referred to the principle of subsidiarity. He said that the execution of some tasks of the System should be entrusted to national central banks on terms the System shall lay down. The Governors should avoid creating a ‘super central bank’ that would perform every function. The British governor supported this view. Chairman Pöhl agreed and said this implied a Council and Executive Board without a large number of operational and supporting staff and with national central banks acting as an operational arm of the Council.[114]

The Secretariat tried to reflect this in a new draft of (renumbered) Article 13.4 (dated 13 July), reading:
”13.4 The tasks of the Executive Board[115] shall normally be executed by the[116] national central banks. The execution of these tasks shall be in accordance with the terms laid down by the Executive Board.”
13 July 1990

The version of July 24, after discussion by the Alternates, showed that disagreement still existed:
“13.4 The tasks of the System [may] [shall normally] be executed by the national central banks. The execution of these tasks shall be in accordance with the terms laid down by the Executive Board.” 

24 July 1990

The discussion lingered on, also because a clear view on how the system could operate was lacking. For instance, in a paper by the French central bank of 23 July it was proposed that the monetary operations should be decentralized, while the external transactions (interventions and reserve management) should be centralized.[117] Views differed concerning the extent to which segmentation would prevail in the Community financial markets, at the beginning of Stage Three, thereby justifying the greater involvement of NCBs in the local supply of liquidity. This conundrum would continue for a long time. Only during the preparations under the EMI of the monetary policy instruments for Stage Three it became possible to square the circle: a single monetary policy would be defined by the existence of uniform money market conditions throughout the whole euro area. This required that banks should be able to transfer sums of money from one country to another within the same day. To this end all national payment systems operated by the NCBs would be connected on a real time basis (see Art. 17-24 below). Under that condition it would not matter that banks could do business only with their local central bank (their central bank being the socket where they would plug in to receive liquidity provided by and at the conditions determined by the ‘system’).

The Alternates discussed this topic on September 3 1990 and again on September 9. They could not decide on the degree of decentralization of the System’s operations. Lagayette referred again to the principle of subsidiarity: decentralized implementation is desirable, even when financial markets would become strongly integrated. He was supported by Crockett, Szász and Mikkelsen (the UK, Dutch and Danish Alternates respectively). Tietmeyer, who still feared monetary policy would not be of one making, distinguished rediscount window operations, which called for a decentralized approach, and open-market operations, for which he could only envisage a ‘back-office’ model (in which the front-office function including the allotment of the accepted bids would be centralized and the NCBs would act as back-office). Italian Alternate Dini also favoured predominantly centralized execution of monetary policy for reasons of efficiency and external clarity.

Chairman Rey reported to the governors’ meeting on 11 September 1990 that the Alternates, while not agreeing on the degree of decentralization, had agreed on some overriding principles: the System should operate credibly and efficiently in a market-friendly way but leave no uncertainty as to the indivisibility of monetary policy. Moreover, given the principle of subsidiarity, the NCBs should be involved, to the extent possible, in the execution of the System’s operations.[118] This discussion had led to a reconsideration of Article 13.4; two alternative suggestions had been drafted (the first alternative representing the ‘German’ view):
(1) “The operation of the System shall be executed by the central institution or the national central banks, as appropriate for the efficient conduct of monetary policy, in accordance with the terms laid down by the Executive Board.”
or
(2) “The Council shall normally rely on the national central banks for the execution of the tasks of the System. The execution of these tasks shall be in accordance with the terms laid down by the Executive Board.”
Oral presentation J-J Rey 11 September 1990

The governors took up this issue in their meeting of 11 September 1990. De Larosière said that, according to the principle of subsidiarity, the System should rely as much as possible on national central banks for the execution of tasks. Leigh-Pemberton agreed that, wherever possible and appropriate, partly to avoid confusion and partly to reduce expenses, the existing national central banks and their operating procedures should be used. Pöhl was less intrigued by the question whether decentralization should be a possibility or the norm. He could live with decentralization ‘to the extent possible and appropriate’.[119] The governors decided that the text should read:
“13.4 The Executive Board shall, to the extent possible and appropriate, make use of the national central banks in the execution of the System’s operations.” – 14 September 1990

Until September the draft Statute had always referred to the System (and not to specifically NCBs and/or the ECB). Over the summer the NCBs’ legal experts had met. They had concluded that not the System, but the ECB (and the NCBs) should have legal personality. This implied that operational, advisory, decision-making and regulatory functions had to attributed to elements of the System. They advised to mention in case of operational functions indiscriminately both the ECB and the NCBs. According to Rey this did not alter the ‘balance of power within the System nor the relationship between the central institution and the NCBs’[120] Psychologically it did alter the balance, bringing the ECB more at level with the NCBs.

The authority of the ECB to execute functions itself was also reflected in a new Article 9 on the ECB, first appearing in a draft version of 8 October 1990 meant to be discussed further by the legal experts. The article grouped together previous and new sections of articles on the ECB. Art. 9.4 thereof read: “The function of the ECB shall be to ensure that the tasks conferred upon the System under Article 3 shall be implemented either by its own activities pursuant to this Statute or through the NCBs pursuant to Art. 13.” This article would remain basically unchanged (later renumbered into Art. 9.2 of the Treaty signed in Maastricht).[121]

A new, interesting exchange of views took place in the meeting of the governors on 13 November, when they had a final round on each article of the draft Statute and the accompanying Commentary. The draft contained the above mentioned version (the article had been renumbered into Article 14, due to a re-arrangement of some articles). Also tabled was a new alternative version, supported by the French:
“to the extent possible, the national central banks shall execute operations arising out of the System’s tasks.”
proposal Banque de France, 13 November 1990 [122]

The German chairman considered the (French) suggestion non-workable in practice. Furthermore, he considered this again a question of the ‘conceptual interpretation of the role and powers of the Council and the Executive Board’. De Larosière said to his defence that the Statute contained only a limited number of instances where the principle of subsidiarity was specifically apparent.[123] Since this principle was, in his eyes, a cornerstone of the Delors Report, he strongly supported the new alternative. In his view this was a constitutional matter. It was essential not to create an organization at the centre which would duplicate or assume the existing functions of the national central banks. De Larosière said that the principle of subsidiarity should be permanent and that it should not be left to the governing bodies of the System to determine what should or should not be delegated to the national level; the national central banks should be the executive arms of the System. This view was fully endorsed by Leigh-Pemberton. Since no agreement was reached, the Committee decided to place the alternative version (amended by the words “full” and “in the judgement of the Council of Governors”) alongside the original clause.[124] This version would be sent to the IGC.

“14.4 [To the full extent possible in the judgement of the Council, the national central banks shall execute the operations arising out of the System’s tasks.] [The Executive Board shall, to the extent possible and appropriate, make use of the national central banks in the execution of the operations arising out of the System’s tasks.]
27 November 1990

According to the ‘Commentary’ of November 27, 1990 ‘most’ governors supported the first of these bracketed options (the French’ alternative), which put stronger emphasis on decentralization. This Commentary read:
“ All Community central banks endorse the adherence to the principle of subsidiarity in the implementation of operations undertaken on behalf of the System, i.e. to make use of the national central banks to the extent possible. However, views differ as to how this principle should be embodied in the Statute. Most Community central banks agree on the formulation that to the full extent possible in the judgment of the Council [of the ECB] the national central banks shall execute operations arising out of the System’s tasks. Some [125] Community central banks prefer the formulation that the Executive Board shall make use of the national central banks, to the extent possible and appropriate, in the execution of such operations.”[126]

The topic was not discussed anymore by the governors. The updated version of the draft Statute dated 26 April, 1991 contained the same text and the same bracketed alternatives.

II.3 History: IGC
The Commission draft Treaty did not deal with the issue of decentralization, neither did the German or French drafts. On 12 March the deputies discussed the issue and reached a compromise after Rieke (the Bundesbank delegate) had indicated that in his view the differences should not be exaggerated. Köhler (German Finance Ministry) expressed the view that de-central execution should be an option, not on obligation. Conthe (Spanish Finance Ministry) said he could live with these articles as long as they referred to ‘the’ national central banks, to make clear all central banks would participate in the execution of the System’s operations. Then Wicks (HM Treasury) formulated a text which did not give rise to objection at the meeting and to which Trichet (Trésor), Köhler and Italy explicitly agreed:[127]
“14.4 To the full extent possible and appropriate and without prejudice to Article 12.2,[128] the ECB shall make use of the national central banks in the execution of the operations arising out of the System’s tasks.”
deputies IGC meeting 12 March 1990
The Luxembourg presidency decided to ‘formulate a compromise’ based on the input received during the meeting. It also decided to lift this topic into Article 108(5) of the draft Treaty text.

The text of Article 108(5) of the Luxembourg presidency (non-paper of 13 March 1991, UEM/34/91) would read:
“108(5) To the extent deemed possible and appropriate, and without prejudice to the provisions of paragraph 4,[129] the European Central Bank shall have recourse to the central banks of the Member States to carry out operations which form part of the system’s tasks.”

non-paper March 13 1991 [130]

A substantial change relative to Wicks’ proposal was the deletion of the word ‘full’ in ‘to the full extent’. The text of the draft Statute was left untouched for the moment. The issue of the organization of the ESCB was discussed among ministers on 18 March 1991. Only a few ministers touched upon the issue of the future role of the NCBs. Solchaga (Spain) remarked that money market interventions decided upon by the ECB should be divided over all national markets – in the initial years the ECB should not discriminate in favour of one market and should make use of the expertise and services of all NCBs. Such a provision could in his eyes be waived after the ESCB had gained some operational experience. According to Maude (deputy minister UK) implementation of policy should be delegated as much as possible to the NCBs. According to Wim Kok of the Netherlands decentralization of implementation was imperative. The text of Article 108(5) remained unchanged. On 10 May the deputies discussed the ESCB Statute and they decided to shift Article 14.4 which now followed the wording of Art. 108(5) to Article 12.1 of the ESCB Statute. Article 12 deals with the ‘Responsibilities of the decision-making bodies’.

From that moment on, the text would remain untouched except for a minor editorial change. The Dutch presidency decided to take the article out of the draft Treaty text and to retain it only in the Statute,[131] because of its largely System-internal nature.[132]

So the final version approved at Maastricht would read:

Article 12.1-ESCB (Responsibilities of the decision-making bodies), third paragraph:

“To the extent deemed possible and appropriate and without prejudice to the provisions of this Article, the ECB shall have recourse to the national central banks to carry out operations which form part of the tasks of the ESCB.”

(The first and second paragraph of Art. 12.1 are dealt with in chapter 10 below.)

Box 3: Subsidiarity and decentralization

The fact that the concept of subsidiarity has been used to argue in favour of a model with decentralized operations, i.e. involving as much as possible the NCBs, has been criticized from legal side. Indeed, subsidiarity relates to the question of surrendering sovereignty to higher political/bureaucratic levels and not to the execution of tasks. Therefore, Art. 12.1c does not have a legal basis, rather it is the outcome of political negotiations. However, the way the principle has been used could be seen as a welcome addition to the principle of subsidiarity, though it should be renamed for instance into the principle that the responsibility for the execution of public tasks should preferably be vested in persons/institutions as closely as possible to those concerned. In this case ‘those concerned’ are the nationals banks, payment systems and reporting agencies, while the ‘NCB’ would be one of the ‘institutions’ close to those concerned.

The principle of subsidiarity had been mentioned in the Delors Report (1989), par. 20, as an essential element in defining the appropriate balance of power within the Community:
“20.  An essential element in defining the appropriate balance of power within the Community would be adherence to the ‘principle of subsidiarity’, according to which the functions of higher levels of government should be as limited as possible and should be subsidiary to those of lower levels. Thus, the attribution of competences to the Community would have to be confined specifically to those areas in which collective decision-making was necessary. All policy functions which could be carried out [emphasis by the author] at national (and regional and local) levels without adverse repercussions on the cohesion and functioning of the economic and monetary union would remain within the competence of the member states.”

Indeed, the wording ‘carrying out functions’ could easily be misinterpreted.

During the process of drafting the ESCB Statute the Banque de France repeatedly referred to the principle of subsidiarity as an important argument for decentralizing as much as possible the implementation of monetary policy (and more in general: implementation of the System’s policies).

The Commentary accompanying the governors’ draft ESCB Statute of 27 November 1990 (Introductory report, p.5) followed this reasoning: ‘The federative structure of the System is also reflected in the execution of operations arising out of the System’s tasks, which, as mentioned above, rests firmly on the application of the principle of subsidiarity.’

Subsidiarity gained an official place in the Treaty of Maastricht in Article 3b-EC, second paragraph, which had been developed in the parallel IGC on Political Union: “In areas which do not fall within its exclusive competence, the Community shall take action, in accordance with the principle of subsidiarity, only if and in so far as the objectives of the proposed action cannot be sufficiently achieved by the Member States and can therefore, by reason of the scale or effects of the proposed action, be better achieved by the Community.” [133]

The subsidiarity principle as defined in Article 3b logically does not apply to areas that fall within the exclusive competence of the Community. Therefore it does not apply to the ESCB, because the tasks of the ESCB (monetary policy) are within the exclusive competence of a supranational body.[134] Neither does the concept as defined in Art. 3b refer to the execution of policies. (The definition used by the Delors Report is close to that of Art. 3b, but is more ambiguous, as it also refers to the execution (‘carry out’) of policy functions.)

For the Banque de France (and others with her) subsidiarity meant that tasks should preferably be performed by national institutions as opposed to ‘central’ institutions. The objective was to defend the executive prerogatives of the NCBs. This point was appropriately noted by Horst Köhler during the deputies IGC meeting of 12 March 1990, when he observed it would be better to use the concept of decentralization instead of subsidiarity.[135]

Finally we note that the Statute as such does not refer to subsidiarity.

Articles 14.3 and 14.4:

Article 14 (National central banks)

“14.3 The national central banks are an integral part of the ESCB and shall act in accordance with the guidelines and instructions of the ECB. The Governing Council shall take the necessary steps to ensure compliance with the guidelines and instructions of the ECB, and shall require that any necessary information be given to it.

14.4 National central banks may perform functions other than those specified in this Statute unless the Governing Council finds, by a majority of two thirds of the votes cast, that these interfere with the objectives and tasks of the ESCB. Such functions shall be performed on the responsibility and liability of national central banks and shall not be regarded as being part of the functions of the ESCB.”

(to be read in conjunction with: Art.1-ESCB (Constitution of ESCB), Art. 6-ESCB (International cooperation), Art. 12.1c-ESCB (Decentralization), Art. 14.1 (NCB statutes), Art. 21.2-ESCB (Allows NCBs to act as fiscal agent), Art. 22-ESCB (Payment systems oversight); Art. 27-ESCB (Auditing); Art. 28-ESCB (ECB’s capital); Art. 31.1 (NCB obligations towards international organizations))

Introduction
I.1 General introduction
The focus here is on Article 14.4, according to which NCBs may also perform non-System functions. However, we will see that Art. 14.4 gave rise to Art. 14.3, which is why we treat them together. Unlike NCBs the ECB is not allowed to perform non-System functions. This fact might strengthen the position of NCBs, as they might have wider competences than the ECB. The genesis shows that Art. 14.4 was basically a ‘defensive’ article, in the sense that NCBs sought assurance they would not have to ‘sell off’ those functions not covered by the ESCB Statute. Though the non-System functions of NCBs differ per NCB,[136] they include in most cases the collection of non-monetary statistical information and the rendering of services to the government. On the other hand, supervision of the banking system, banknote printing,[137] rating the quality of loans and companies, distribution of coins and monitoring consumer credit activities are examples of non-System tasks not performed by all euro area NCBs. The non-System functions sometimes involve large contingents of employment. Roughly half of the euro area NCB staff is employed in non-System related functions. Therefore and because the synergies involved the NCBs strongly favoured retaining their existing non-System tasks, even though part of these non-System functions might bring them in a more dependent position vis-à-vis their domestic political authorities – at least informally.

As a safeguard the Governing Council was given the right to forbid functions when they interfere with the functioning of the System. An example might be a central bank becoming active as a lender to certain industrial sectors, or starting to act as an international lender of last resort for certain regions in the world. This could lead to conflicts of interest with the monetary policy function. Another example might be a central bank becoming market maker in certain financial market segments, because such would seemingly create a second monetary policy decision-maker with discretionary powers.

Because governors were not sure how restrictive the future Governing Council would use this provision, they proposed to install a high threshold for activating this provision, by requiring a qualified majority for any such decision. The alternative, i.e. to list all their current non-System functions, was not considered. That approach (using a ‘positive’ list) would have entailed a more restrictive regime for the NCBs and might have precluded taking new tasks on board, e.g. in the supervisory area.[138]

I.2 Relevant features of the Federal Reserve
Unlike the NCBs in the ESCB, the Federal Reserve Banks do not have functions outside the Federal Reserve System (FRS). This is understandable as their only reason for being is being part of a federal central bank system. They only perform System tasks. Their main operational functions are in the area of payment systems, banking supervision and research, while the contacts with the markets and the market operations are concentrated in New York. They are an integral part of the FRS, even in stronger measure than it is the case for the NCBs in the euro system. In fact, the Board approves the appointment of the president of each FRB, it may suspend or remove from office FRB officers and directors, it approves the salaries of the directors and the officers (among which the FRB’s president), it may examine the books and affairs of each FRB, it ‘exercises general supervision’ over the FRBs,[139] the budgets of the FRBs (including the headcount) are submitted to Board of Governors for approval,[140] it may suspend – for the violation of any of the provisions of the FRA – the operations or even liquidate and FRB.[141] In general the euro area NCBs enjoy much more budgetary freedom than the FRBs. This is related to the fact that NCBs traditionally had, and still have) close relations with national authorities (shareholders; NCBs also are part of different national legislative regimes), while FRBs do not have an institutional relation with individual States and were established under one uniform national legal regime.

The table below shows the number of staff of the FRBs, with special mentioning of New York, and of the Board of Governors. We include figures for the eurosystem.

Table 7-2 ~ Staff size FRS and eurosystem 1999/2000

Number of staff [142]

FRBs  –  23458 (of which New York Fed 3654) [143]

Board of Governors – 1729

Federal Reserve System – 25187

Euro area NCBs  – 23903 [144]
(including non-System related tasks  53400)

ECB – 737 [145]

Eurosystem –  24640

II.1      History: Delors Committee and Committee of Governors

The Delors Committee had taken on board the idea, first expressed by Stoltenberg (see Art. 7) that the ESCB should be of a federal nature. For instance, in section 32 one can read: ‘Considering the political structure of the Community and the advantages of making existing central banks part of a new system, the domestic and international monetary policy-making of the Community should be organized in a federal form, in what might be called a European System of Central Banks.’ The Delors Committee proposed the governors should be part of the decision-making body of the ESCB and that the NCBs ‘would execute operations in accordance with the decisions taken by the ESCB Council.’

When the Committee of Governors asked the Alternates to start drafting the Statute, they were aware of the need to integrate their central banks into the System and of the fact that their central banks were substantially different from each other. For instance, some central banks were banking supervisors, others were not; some printed their banknotes, other did not. An effort was necessary to find a workable construction. The initial formulation by the secretariat focussed on stating that the statutes of the NCBs should be ‘compatible’ with these of the System and that:

“13.2   The NCBs should act in accordance with the policies of the ESCB to the extent necessary for the latter to exercise its powers. In this regard, the Council may require the NCBs to seek prior approval of acts which are relevant to the objectives and functioning of the ESCB.”

22 June 1990

This text, which was in fact describing a very loose system, was discussed by the Alternates on 29 June. Lagayette (Banque de France) and Crockett (Bank of England) indicated they wanted NCBs to be able to continue performing historically established tasks outside the framework of the System. Tietmeyer warned this could imply political interference through the backdoor. This discussion led to a new text by the Secretariat, for the governors’ meeting on 10 July:

Article 13National central banks

13.1 The statutes of the NCBs must be compatible with this Statute. [followed by sentence on the minimal term of office of ncb governors]

13.2 The NCBs shall act in accordance with the policies of the ESCB to the extent necessary for the latter to exercise its powers.

The Council shall take the necessary steps to ensure compliance by the NCBs with the obligations incumbent on them and in this respect it shall be given all relevant information.

13.4 NBCs may continue to perform tasks other than those described in the Statute of the ESCB provided they are not in contradiction with the objectives and functioning of the ESCB. These actvities shall not be regarded as being part of the ESCB. The NCBs may undertake new tasks subject to the prior approval of the Council of the ESCB.

3 July 1990

Subsequently Tietmeyer formulated an alternative text for 13.1, introducing the concept of the NCBs being ‘an integral part’ of the new system and rearranging the text to make clear that the requirement of compatible statutes meant more than avoiding inconsistencies between them. This text (see below) was discussed during the governors’ meeting on 10 July.

13.1     The statutes of the NCBs must be [made compatible with] [adapted to] this Statute so as to ensure that they are an integral part of the ESCB. The NCBs shall act in accordance with the policy guidelines and instructions of the Council or Executive Board.

The Council shall take the necessary steps to ensure compliance with its policy guidelines and instructions, and shall require that any necessary information be given to it.

Tietmeyer 10 July 1990

Pöhl supported Tietmeyer’s text, emphasizing the importance of using the concept of compatibility. Tietmeyer’s text would be accepted (and one would opt for the words ‘compatible with’ over the words ‘adapt to’ in order to strengthen the text).

On 24 July the Secretariat’s text would read as follows:

13.3     Subject to Article 13.5, the NCBs are an integral part of the System and shall act in accordance with the policy guidelines and instructions of the Council or the Executive Board.

The Council shall take the necessary steps to ensure compliance with its policy guidelines and instructions, and shall require that any necessary information be given to it.’

13.5     NCBs may continue to perform functions other than those described in the Statute of the System unless the Council finds, by an [appropriate] majority that these interfere with the objectives and tasks of the System. Such functions shall not be regarded as being part of the System. The NCBs may assume new functions subject to the prior approval of the Council of the System.

draft 24 July 1990 [146]

This version of Art. 13.5 (the predecessor of Art. 14.4) was close to the final text of the governors. Following advice of the legal experts of the central banks, a reference to liability was included (see below). During their meeting on 13 November 1990 the governors decided – with a view to simplifying and clarifying the text – to delete the words ‘continue’ and to delete the last sentence of Art. 13.5, while the word ‘prescribed’ was changed into ‘specified’. In Art. 13.3 (later Art. 14.3) ‘Council or Executive Board’ would be replaced by ‘ECB’.[147] The governors confirmed that the ‘appropriate’ majority would have to be a qualified (ergo not a simple) majority, thus protecting the position of the NCBs.

This led to the following final text:

‘14.3 Subject to Article 14.5, the NCBs are an integral part of the System and shall act in accordance with the guidelines and instructions of the ECB.

The Council shall take the necessary steps to ensure compliance with the guidelines and instructions of the ECB, and shall require that any necessary information be given to it.

14.5 NCBs may perform on their responsibility and liability functions other than those specified in this Statute unless the Council finds, by a qualified majority of two-thirds of the votes cast, that these interfere with the objectives and tasks of the System. Such functions shall not be regarded as being part of the System.’

draft 27 November 1990

II.3 History: IGC

During the IGC Art. 14.3 remained as it was, though the Dutch presidency dropped the subjugation to Art. 14.5 by dropping the words ‘subject to Art. 14.5.[148] Art. 14.5 would become Art. 14.4, with the words ‘responsibility and liability’ being moved from the first sentence to the second. Apparently all participants agreed that NCBs would be more than mere agencies of the centre, this allowed not only for a continued existence, but also for a continued presence in the domestic economic field as an independent expert institution.

14.4 NCBs may perform functions other than those specified in this statute unless the Governing Council finds, by a majority of two-thirds of the votes cast, that these interfere with the objectives and tasks of the ESCB. Such functions shall be performed on the responsibility and liability of NCBs and shall not be regarded as being part of the ESCB.

December 1991

However, during the legal nettoyage it was pointed out that the last sentence of Art. 14.4 was grammatically incorrect. To solve this the last six words were replaced ‘as being part of the functions of the ESCB’. This would seem to bring Art. 14.4 more in line with Art. 14.3 (‘integral part’).

Article 16:

Article 16: Banknotes

“In accordance with Article 105a(1) of this Treaty, the Governing Council shall have the exclusive right to authorize the issue of banknotes within the Community.

The ECB and the national central banks may issue such notes.

The banknotes issued by the ECB and the national central banks shall be the only such notes to have the status of legal tender within the Community.

The ECB shall respect as far as possible existing practices regarding the issue and design of banknotes.”

(to be read in conjunction with Article 1-ESCB (Legal structure of the System); Article 52-ESCB (Exchange of national banknotes); Article 4A-EC (Establishment of ESCB); Article 105a(1)-EC (replica of this article) and Article 105a(2)-EC (Coins))

Introduction
I.1 General introduction

In the area of note issuance by central banks, many different traditions existed and continue to exist, also within the European Community. In most countries the central bank is the sole bank issuing fiduciary currency. An exception is the UK where some regional commercial banks still issue banknotes, though these notes are not legal tender, while in Belgium Parliament, prior to the introduction of the euro, had the power to confer the right of issue upon other banks. Also in the Netherlands, government authorization was necessary for calling in any series of banknotes issued by the central bank. In France the creation or issue of notes needed approval of the two governmentally appointed censors (usually the highest officials of the Ministry of Finance).[149] Despite these different traditions, the article regulating banknote issuance in EMU is of relatively simple design: it bestows all legal capacities in this area on the Governing Council of the ECB. It does neither set limits, nor does it oblige the central bank to hold a minimum ratio of specified assets (e.g. gold) against issued banknotes. The article bestows legal tender on the System’s banknotes, without the need for further legislation.[150]

The article needs close reading for a full understanding. More specifically, the first sentence establishes that the Governing Council has the monopoly to authorize the issuance of banknotes within the Community.[151] The second and third sentences state that both the ECB and the NCBs may issue banknotes and that these banknotes will be the only ones with legal tender status within the Community. The formulation implies that the Governing Council may authorize other institutions, e.g. commercial banks, to issue banknotes. However, these would not have legal tender status.[152] This formulation was chosen to allow the Governing Council to authorize the continuation of the British tradition, according to which three banks in Scotland and four in Northern Ireland issue their own banknotes.[153] UK law obliges these banks to cover their banknotes, except for a de minimis part, by gold, silver or banknotes of and held at the Bank of England. In this way their banknotes can be considered as just another appearance of pound sterling notes. However, they are not legal tender.[154] Once the UK joins monetary union, the Governing Council of the ECB will have to decide whether it allows this tradition to continue. The last sentence can be read in different ways: it is an admonition to the ECB to accept continued issuing of banknotes by some commercial banks, but it also allows the ECB to reject this, because the words ‘as far as possible’ can be interpreted in several ways. If the Governing Council were to consider that the issuing of these banknotes were to undermine the ECB’s monetary policy or the euro’s credibility, it could put an end to this private issuing. The last sentence also allows for the possibility of banknotes with a uniform and a national side. This reference to the design was again added at British request. The UK delegation to the IGC insisted that British Parliament would only surrender its currency, if allowed to keep the Queen’s head on one side of the banknote (the other side being a uniform European side). Also here the decision is in the hands of the Governing Council. Right after the establishment of the ECB in July 1998, the Governing Council decided to go for a uniform design without national features,[155] in order not to confuse the public and to present the risk that people could start refusing banknotes of countries with relatively frequent falsifications – if not for other reasons, like possibly large fiscal or political problems in these countries. Such actions would hamper the economy and could be a threat to EMU.

The word ‘issue’ in the second sentence refers to the legal step of bringing them into circulation as a means of payment and carrying them as liabilities on the balance sheet (we will refer to this as being the ‘legal issuer’) [156] and to the operational handling and distribution of banknotes. Banknotes are typically delivered to banks, that want to satisfy the demand for banknotes by their clients, against debiting the (minimum reserve) account of these banks at the central bank (these accounts are built up when banks borrow central bank money from the central bank or when the central bank buys domestic assets or foreign exchange from the banks). The central bank that carries the banknotes on its balance sheet will also collect the seigniorage involved.[157] The drafters of the Statute had to decide who would carry these banknotes on its balance sheet: the NCBs and/or the ECB. They decided that both should be able to do so. It follows from the first sentence that this is up to the Governing Council to decide on this.

In theory it is possible to make the ECB the sole legal issuer, while the NCBs handle the physical circulation. Taking away the distribution function from the NCBs, would be more difficult to imagine in view of Article 12.1, third paragraph, which puts strong emphasis on using the NCBs ‘to carry out operations which form part of the tasks of the ESCB.’ A decision to designate the ECB as the only issuer of euro banknotes would have important psychological consequences (as such a decision would take away one of the oldest functions of NCBs) and unexpected practical complications, which would need due consideration. For instance, in Belgium the right of the NCB to retain seigniorage is linked to the central bank being issuer of banknotes. A decision, on the other hand, to designate the NCBs as the sole issuers of euro banknotes would reflect the situation in the United States, where banknotes are issued by the Federal Reserve Banks (see section I.2 below).

In practice, the Governing Council has decided for a combination, i.e. the issuing of banknotes is for 92 per cent allocated to the NCBs according to their paid-up share in the ECB’s capital and for 8 per cent of the total to the ECB, with the distribution and handling remaining entirely in the hands of the NCBs.[158] The outcome was a compromise, as a number of NCBs considered it unnecessary to make the ECB legal issuer, while the Executive Board of the ECB even envisaged that the ECB could be the sole issuer. The Board argued that the euro banknotes only showed the name of the ECB (and not of the NCBs) and the signature of the president of the ECB. It also disputed whether the NCBs’ euro banknotes were fungible, as was assumed by the NCBs. Indeed, banknotes can be distinguished as to their origin of issuance, because they contain a country code in the serial number on the banknote. However, NCBs do not repatriate notes to the country of origin. Making the System legal issuer was no way out, because the System does not have legal personality and thus no balance sheet. The compromise found comes close to making the System legal issuer.

Of course, fungibility exists de facto and is supported by the fact that each NCB’s balance sheet shows an ‘allocated’ number of euro banknotes in circulation (i.e. based on its share in the ECB’s capital, and not on the number of banknotes actually issued). Fungibility could legally be expressed by stating that euro banknotes constitute a joint and several liability of the components of the system. (Such a text could also imply the need for stronger control over each others balance sheets.)[159] Because banknotes are not repatriated, the banknotes in circulation will over the years tend to get mixed more and more (probably up to a certain steady-state mix).

Finally it could be remarked that Article 16 does not refer to the name of the currency. The term ‘ecu’ is mentioned in Art. 3a-EC and several other places, most people taking it for granted that the name would be ‘ecu’. However, in 1995 German Finance Minister Waigel, backed by Kohl, would insist on another name than ‘ecu’, inter alia because the ecu had been nicknamed esperanto money by German journals and was associated with a currency basket, whose value had depreciated over the years vis-à-vis the Dmark since the start of the EMS. Germany argued that the name ‘ecu’ was a mere acronym for ‘European Currency Unit’, for which a name still had to be found.[160] This led to the adoption of the name ‘euro’ by the Heads of State in 1995.[161] The name ‘euro’ had been favoured by Germany.[162]

In the operational area therefore, NCBs (and not the ECB) distribute the banknotes. Printing is a related issue. Some NCBs print banknotes in-house, while other NCBs order their banknotes from private sector printing companies, making for the case that printing is not an exclusive System function. In all these cases (distribution, printing volume, but also design and security features) the Governing Council issues detailed guidelines with minimum sets of rules. The Governing Council took a difficult decision as to who would carry the euro banknotes on its balance sheet. The System, not having legal personality, did not qualify. The decision to allocate part of the ‘issued banknotes’ to the ECB was considered important by the Executive Board for symbolical reasons. The solution found also gives the ECB a first-hand claim on the accompanying part of the System’s seigniorage. This seigniorage income of the ECB is distributed separately to the NCBs in the form of an interim distribution of profit. Independent of the method of profit distribution, the ECB’s budget always needs to be approved by the Governing Council.

I.2  Relevant features of the Federal Reserve System

In 1836 the charter of the Second Bank of the United States was not renewed. This was followed by the so-called Free Banking Era from 1837 to 1863,[163] during which state-chartered banks could issue banknotes, which varied in quality from relatively good to very low and therefore often traded at discounts. The National Banking Act of 1863 provided for the creation of nationally-chartered (note-issuing) banks and effectively taxed the issuing of banknotes by state-chartered banks out of existence.[164] The legislation provided for stringent capital requirements and mandated that the circulating banknotes be backed by holdings of specific United States government securities. If a bank failed, its notes could be redeemed at the Treasury. Nonetheless, banking problems persisted, as abundance and lack of liquidity were regular phenomena (due to the so-called inelasticity of the currency). The establishment of a system of local Federal reserve banks was aimed at breaking this pattern.[165]

The 1913 Federal Reserve draft bill brought to Congress provided for banknotes to be issued only by the FRBs. The FRBs were (and are) privately-owned, their shares being held by local member banks.[166] However, important Democrats believed the currency should be issued by the government. As a way out President Wilson insisted upon exclusive government control of the Federal Reserve Board (only governmental appointees) and by making the Federal Reserve notes an obligation of the United States. Both elements became part of the law.[167] The Federal Reserve notes had to be fully collateralized by commercial paper,[168] while at the same time the FRBs had to keep a gold reserve of not less than 40 percent of its Federal reserve notes in circulation. (This rather curious double requirement was changed in 1917, when the security against Federal Reserve notes was changed to at least 40 per cent in gold and the remainder in commercial paper, instead of another 100 per cent. In the early thirties a constant decline in commercial paper was considered a potential threat to the continued expansion of the currency, and in February 1932 Congress passed the Glass-Steagall Act of 1932, which among others authorized the FRBs to use not only commercial paper, but also government obligations as collateral for note issues. Nowadays collateral exists primarily of government obligations.

The above is reflected in Section 16 of the FRA, which authorizes the issuance of Federal reserve notes: ‘Federal reserve notes, to be issued at the discretion of the Federal Reserve Board for the purpose of making advances to Federal reserve banks through the Federal reserve agents[169] […] and for no other purpose, are hereby authorized. The said notes shall be obligations of the United States and shall be receivable by all national and member banks and Federal reserve banks and for all taxes, customs, and all other public dues. They shall be redeemed in gold on demand at the Treasury Department of the United States, in the city of Washington, D.C., or in gold or lawful money at any Federal reserve bank.’ [170]

Until 1933 people could still require that debts incurred must be paid in gold, not paper currency. This changed in 1933, when through a Public Resolution of Congress it was ordained that Federal reserve notes had to be accepted in payment ‘as coin or currency of the United States’ instead of gold in contracts that called for payment in gold. The same was applied to gold clauses in securities in 1935. Federal reserve notes formally received legal tender status only under the Coinage Act of 1965.[171] It is only since then that the notes show the following print: ‘this note is legal tender for all debt, public and private’.

Federal Reserve notes show up as a liability in the books of the FRB that issued these notes. Each note shows the seal of the Federal Reserve Bank through which the note was issued and a letter-number combination which is unique for each of the twelve FRBs.[172] The notes also show the seal of the Treasury, and carry on both sides the words THE UNITED STATES OF AMERICA. Banknotes are circulating freely through the system. When taken in by an FRB, they are not shipped back to the FRB of issuance. They remain an outstanding liability of the issuing bank (though in the balance sheet presentations cash held in their vaults is deducted from the circulation figures). The Reserve Banks package the fit notes for recirculation and destroy the unfit ones in their processing offices. The original requirement of sorting by bank of issue and returning the banknotes to the FRB of issue was eliminated by act of Congress July 19, 1954. In the words of former Federal Reserve Bank vice president Moore[173]: ‘After all, they were all Federal Reserve notes, and the Reserve banks were in sufficient financial condition that the question of note liability was not critical to any one bank. At least in practice they were all liabilities of all of the Fed banks.’ Therefore, these notes are de facto fungible.[174] A formula based on the Reserve Bank distribution of outstanding notes is used to update the balance sheet so that the notes destroyed are accounted for in the same proportion as issued notes.[175]

Comparing the Fed and the ESCB

Though the eurosystem is in many respects comparable to the FRS, one striking difference is that in the FRS the System’s assets (or at least a large part of them) are apportioned over the balance sheets of the FRBs, but not the banknotes; in the eurosystem it is the other way round: the banknotes are apportioned and not the assets. The fact that the eurosystem assets are not apportioned is due to the decentralized execution of monetary policy, while the apportioning of banknotes was triggered by the wish to allocate part of the issued banknotes to the ECB (a factor not into play in the US, where in contrast the Board of Governors does not hold (and cannot hold) monetary assets or liabilities, that can only be done by the FRBs). On the operational side the differences in the area of banknotes are minimal though: both the FRBs and the NCBs circulate banknotes, fulfilling the demands of the banks and the public. Printing in the US is in government hands and partly in public sector and partly private sector hands in the eurosystem. In both the FRS and the eurosystem fungibility of banknotes issued by the different local central banks follows from practical arrangements.

II.1 History: Delors Committee

The Delors Committee did not discuss the issue of banknotes, probably because it was considered to be self-evident that issuing banknotes would be one of the tasks of the central bank system. However, there was some discussion on the timing of the appearance of the new currency. First, the Delors Committee had discussed and rejected the idea of a parallel currency. A parallel currency co-exists with other national currencies. However, such a road was considered to be full of pitfalls. See the contribution of Duisenberg in the Appendix with the Delors Report. To make this absolutely clear the Committee started using the word single currency. The term ‘common currency’ was considered too ambiguous, because a common currency can also be used to refer to a parallel currency. The Treaty would also use the word ‘single currency’ – see for example Article 3a(2) and Article 109L(4).

Second, the Delors Committee defined the irrevocable locking of the parities as the real start of monetary union. A draft version of January 1989 of the Delors Report[176] stated the introduction of a single currency would be possible ‘only some time after exchange rates had been locked and when market forces had fostered a spreading use of the ECU in commercial and financial transactions’. A later draft[177] stated that ‘the replacement of national currencies by a single currency would take a certain time.’

Leigh-Pemberton then proposed to insert the notion of replacing the national currencies ‘as soon as possible’, the main reason being it would lend greater international credibility to the new currency (by clearly showing the irrevocability of the process), while at the same it would reduce transaction costs. The proposal of the UK governor was readily accepted, because it made even more clear that the purpose was not to create a parallel currency, but to start a new, single currency. Section 23 of the final Delors Report was redrafted to read that ‘the replacement of national currencies by a single currency should therefore take place as soon as possible after the locking of parities’.

However, section 58 in the final Report remained unchanged, stating that ‘In the course of the final stage the national currencies would eventually be replaced by a single Community currency.’ This left the timing of the revocation of national currencies once the euro was introduced somewhat in the open.

II.2 History: Committee of Governors

A first reference to banknotes appeared in the second version of the draft ESCB Statute dated 22 June 1990, which at that stage was only being discussed at the level of the Alternates of the

Committee of Governors. Banknotes were referred to in Article 3.1, first indent and in Article 15:

“Article 3 (Basic Tasks)

3.1. The basic tasks of the ESCB shall be:

– to issue notes [and coins] which shall circulate as means of payment within the Community;

….. ”“Article 15 (Notes [and coins] )15.1. As provided by the Treaty, the ESCB shall have the exclusive right within the union to issue notes [and coins] in the Community.15.2. Except for a transitional period during which notes [and coins] denominated in national currency can circulate alongside the Community currency, the latter shall be the only legal tender.”draft 22 June 1990The issuance of coins was put between brackets, because this competence traditionally belongs to the government, but at least some central banks felt the need to control the volume of coin circulation. Apart from this, the UK side had expressed the wish to retain the right for some commercial banks in the UK to issue bank notes.

During the governors’ meeting of 10 July 1990, de Larosière sought confirmation that Article 3.1[178] would allow for the possibility that banknotes could be issued by national central banks for some time at the beginning of Stage Three, before a single currency was available. In his view progress towards the issue of single currency banknotes would take time. Chairman Pöhl said he could conceive of such a system, but added the amount of cash in circulation would have to be under the control of the central institution. Other governors pointed out that the amount of notes in circulation would always be demand determined (and not supply determined) and would not necessarily be the same throughout the Member States. According to Leigh-Pemberton the purpose of the provision was only to ‘enable’ the System to issue banknotes, whereas the extent to which the System could do so would be governed by the primary objective of price stability. Irish governor Doyle suggested note issuance could best be discussed only under Art. 15 (then the first article of chapter IV of the Statute on Monetary Functions and Operations), after which the governors decided to drop the reference to note issuance from Article 3.1. (The second indent was dropped altogether.)

The version of 13 July 1990 of the draft ESCB Statute would read:

“Article 15 – Notes

15.1. As provided by the Treaty, the System shall have the exclusive right to issue notes in the Community.

15.2. Except for a transitional period during which notes denominated in national currency circulate alongside the Community currency, the latter shall be the only legal tender.”

draft 13 July 1990

The reference to coins was dropped, but would reappear in the version of 5 September 1990. In August 1990 the legal experts of the NCBs were asked for an opinion on a variety of issues, among which the legal status of national currencies at the beginning of Stage Three. Their report contained the following text on bank note issuance:[179]

‘[The (central institution) shall have the exclusive right to issue notes in the Community which shall be the only legal tender. Any transitional provisions concerning the legal tender status of national currencies shall be regulated according to the Community legislation.]’

The Secretariat of the Committee of Governors produced a new draft version of the ESCB Statute, dated 5 September 1991, which read as follows:

Article 15Notes and coins

15.1 The Council [of the ECB] shall have the exclusive right to authorise the issue of notes in the System which shall be the only legal tender.                                                ./.

15.2     Provisions concerning the legal tender status of Community currencies shall be regulated according to Community legislation. The Council [of the ECB] shall make the necessary arrangements for the exchange of notes denominated in Community currencies by the national central banks at par value.

15.3     The volume and denomination of coins issued within the Community shall be subject to approval of the Council of the System. The coins [shall] [may] be put into circulation by the System.”

draft 5 September 1990

We see that in paragraph 1 the words ‘to authorise’ were added. These words were meant to protect the System against indiscriminate issuance of notes by an NCB. (At the same time the sentence seemed to leave the right to authorize non-legal tender to others.) The introductory paragraph to chapter IV of the Statute (called ‘Monetary Functions and Operations’), of which Art. 15 was the first article, shed light on the question as to who the drafters considered should distribute the notes (and coins). This introduction read: ‘As drafted, the text does not prejudge the question of whether operations are carried out at the level of the central institution or at the level of the NCBs. The precise distribution of tasks may evolve over time with due regard to the principle of subsidiarity.’

The second paragraph refers to the situation when national currencies continue to exist. The arrangements for the exchange of notes by national central banks at par value and without any cost are designed to ensure full substitutability between the national currencies.[180] On coins the Committee of Governors did not claim the right to issue them, as this was traditionally a competence of Finance Ministries, instead it claimed that both the volume and denomination of coins issued within the Community, to be decided upon by the Council of Finance Ministers, should be subject to approval by the ECB. [181] Paragraph 1, relating as it does only to banknotes, does not exclude the possibility of giving legal tender status to (a limited amount of) coins.

Interesting changes, from our point of view, took place after 25 September 1990. During the summer the legal experts had concluded that ‘decisions, advisory functions and operations’ could not be attributed to the System, because the System would not have legal personality.[182] Where relevant ‘System’ was to be replaced by ‘ECB and NCBs’.[183] (This led de Larosière, the French governor, to emphasize even more strongly than before the principle of subsidiarity – see Art. 12.1c, section II.2.) These changes were introduced in the draft version of 8 October. Art. 15.1 did not contain a reference to the System as an actor, but only in terms of geography (‘the issue of notes in the System’). This was replaced by ‘the issue of notes within the Community’. (The article was also renumbered into Art. 16.) In the version of 25 October a new sentence appeared, which according to the commentary added by the Secretariat aimed to clarify that the notes issued by the ECB and the NCBs would be the only legal tender with unlimited legal tender status. This was a complex way of saying that coins (the other legal tender) would not have unlimited tender.[184] However, the sentence also attributed note-issuing competence to the ECB.[185] And by taking out the reference to legal tender in the first sentence it gave the ECB Council full authority over the issuance of also non-legal tender notes, which had been unclear in the version of 5 September.

The draft version of 25 October read (new sentence underlined):

Article 16Notes and coins

16.1     The Council shall have the exclusive right to authorise the issue of notes within the Community. The notes issued by the ECB and the national central banks shall be the only legal tender for any amount.

16.2     [unchanged]

16.3     [unchanged]

draft 25 October 1990

During the Governors’ meeting on 13 November Duisenberg pointed out that in the Netherlands current accounts with commercial banks (‘book money’) were legal tender as well.[186] As a result, it was agreed that the second sentence of Article 16.1 were to be replaced by:

“16.1, second sentence

The notes issued by the ECB and the national central banks shall be the only notes to have legal tender status.”

draft 15 November 1990

At the same time the (confusing) reference to ‘unlimited’ legal tender was dropped.

In the end Article 16 on Notes and coins of the final draft ESCB Statute of 27 November 1990 would read:

“ 16.1 The Council shall have the exclusive right to authorize the issue of notes within the Community. The notes issued by the ECB and the national central banks shall be the only notes to have legal tender status.

16.2 Provisions concerning the legal tender status of Community currencies shall be established according to the Community legislation. The Council [of the ECB] shall make the necessary arrangements for the exchange of notes denominated in Community currencies by the central banks at par value.[187]

16.3 The volume and denomination of coins issued within the Community shall be subject to approval of the Council [of the ECB]. The coins shall be put into circulation by the ECB and/or the NCBs.“ [188]

draft 27 November 1990

During the IGC the Commentary was not discussed, because the Commentary is not part of the Treaty text.

II.3 History: IGC

Under the Luxembourg presidency banknote issuance was discussed at several occasions. During the deputies meeting of 23 April the French (Trichet), Belgian (Snoy) and Irish delegates expressed the view – which did not raise objections – that in stage three in each country both ecu banknotes and its national banknotes should be legal tender, while only banks (and for instance not shopkeepers) would have to accept (and change for free) the banknotes of other MU countries. The draft ESCB Statute, including Art. 16, was discussed during the deputies’ meeting on 10 May 1991.[189] Chairman Yves Mersch decided to delete Art. 16.2, relating to the legal tender status of Community currencies, from the Statute, because this could be dealt with in the Treaty or in the chapter on transitional provisions (see Art. 52-ESCB on the terms for exchanging notes denominated in Community currencies by the NCBs). The Spanish delegate Conthe argued that there was no need at all, also not in the Treaty, for provisions concerning the legal tender status for the single currency, for Spain had done a long time without. Conthe also stressed that any transitional period during which national currencies would continue to circulate alongside the single currency should be kept short, at most two years, to ensure in the eyes of the public the irreversibility of the process. According to the French Treasurer-General Trichet the Treaty should clarify that the competence to issue coins should lie with the Ecofin Council.

The non-paper of 12 June of the Luxembourg presidency of the IGC showed the following article on notes and coins in the Treaty text (Article 105(2), following on Article 105(1) containing the so-called basic tasks of the ESCB):[190]

“Article 105(2):

The ESCB shall regulate the issue and circulation of notes and coins, which alone shall be legal tender.”

non-paper 12 June 1991 [191]

The Luxembourg non-paper also contained a replica of the whole ESCB Statute with only few minor amendments to make the articles consistent with their proposed Treaty language.[192] Art. 16 read:

“Article 16 – Notes and coins

16.1 The Council of the ECB shall have the exclusive right to authorize the issue of notes within the Community. The notes issued by the ECB and the NCBs shall be the only notes to have legal tender status.

16.2 The volume and denomination of coins issued within the Community shall be subject to approval by the Council of the ECB. The coins shall be put into circulation by the ECB and/or NCBs.”

annex to non-paper 12 June 1991

Article 105(2) did not take into account that in the Netherlands payment with money on bank accounts is also accepted as legal tender. This was corrected in the first draft texts of the Dutch presidency which took over in the second half of 1991.

On 25 September the Dutch presidency presented a new draft text on Articles 105-108. Article 105(2), containing all the basic tasks of the ESCB mentioned in Article 3 of the draft ESCB Statute, now also included the issuing of banknotes.

Article 105(2), fourth indent, read:

“Article 105

The ESCB shall have the exclusive right to issue and circulate notes within the Member States; the notes issued by the ECB and the national central banks shall be the only notes to have legal tender status;”[193]

Dutch presidency 25 September 1991 [194]

Article 105(2) mentioned the ECB has the right to ‘issue notes’, while Article 16-ESCB Statute mentions the right ‘to authorise the issue of notes’. This was probably due to an oversight and would be corrected in the next official draft version.

In order to be consistent the Dutch presidency’s version of Article 16 of the draft ESCB Statutes included a cross-reference to Article 105(2)-EC:

“Article 16 – Notes

In conformity with Article 105 par. 2 of the Treaty, the Governing Council shall have the exclusive right to authorise the issue of notes within the Member States. The notes issued by the ECB and the national central banks shall be the only notes to have legal tender status.”

Dutch presidency 26 September 1991 [195]

Unlike Art. 16-ESCB, Art. 105 does not specify that it is the Governing Council which authorizes the banknote issuance, because the monetary chapter of the Treaty follows a generic approach, i.e. referring to the ESCB and ECB (of which the Governing Council is the highest decision-making body).[196] The Dutch presidency dropped the reference to coins, arguing that the issuance of coins should be, in line with the existing procedures in most of the Member States, a responsibility of the Council of Ministers rather than of the ECB and coins were of minor monetary importance anyhow. This view would be validated by a majority in the IGC. Henceforth coins would be dealt with in Art. 108, par. 4 (later par. 3). For the final version of Art. 108(3), see footnote at the end of this section.[197]

During the summer the Dutch Finance Ministry had experimented with replacing all articles of the Statute which were also mentioned in the Treaty by a simple cross-reference to the relevant Treaty article, without specifics on the content.[198] This experiment was – among others after urgent request from the Dutch central bank – not pursued, but in the process Art. 16 had slipped back – unnoticed by anybody – as the last article of Chapter III of the ESCB Statute (Organization of the System), instead of the first of Chapter IV on Monetary Functions and Operations.

During the meeting of the EMU Working Group on 17 October 1991 the relevant provisions were also discussed. France, supported by Portugal, proposed that a ceiling for the issuance of banknotes should be provided for in secondary legislation (i.e. at the level of the Ecofin). Other delegates rejected this as not making any economic sense (the volume of banknotes being demand determined) and as conflicting with the ECB’s monetary autonomy.

An important document is the Dutch draft Treaty text of 28 October 1991 (UEM/82/91). The banknote task had been taken out of the list of basic tasks (Art. 105(2)) and was now referred to in a separate paragraph 4 of Article 105:[199]

“105.4 The ECB shall have the exclusive right to authorise the issue of notes within the Member States. The ECB and the national central banks may issue notes. The notes issued by the ECB and the national central banks shall be the only legal tender notes within the Member States.”

Dutch presidency 28 October 1991

The second sentence is new. According to an internal document of the Dutch presidency this sentence was added, because the right of the ECB to issue banknotes ‘had not been specified elsewhere in the Treaty.’[200] The words ‘within the Member States’ had been added to the third sentence to indicate the banknotes would have legal tender status in all Member States. (This had raised problems with the Spanish delegation during an earlier meeting.) These changes were also copied into Art. 16 of the ESCB Statute. In subsequent drafting, ‘notes’ was to be changed into ‘bank-notes’ and ‘Member States’ was changed into ‘Community’.[201]

During the meeting of the Working Group EMU on 27 November 1991 the presidency made a concession[202] to the UK, by adding to Article 16-ESCB and Article 105(4)-EC the following sentence:

“105.4 (last sentence) In carrying out these functions, the ECB shall respect as far as possible regional traditions.” [203]

Dutch presidency 28 November 1991[204]

During the same meeting the Working Group rejected the UK request to introduce the explicit freedom for Member States/central banks to determine the effigies on the banknotes. That would have allowed the British authorities to tell their population that entering Monetary Union would not necessarily imply that the portrait of the Queen would disappear from the notes and coins issued by the British authorities. This matter was referred to the meeting of the deputies IGC, which met on 30 November. Again, a majority opposed the British requests. A majority of delegations also proposed to refer the sentence on respecting regional traditions to a (non-binding) Declaration.[205] This forced British Finance Minister Lamont to raise the issue again during the ministerial IGC of early December. During these final negotiations the UK succeeded in having the following sentence inserted in the Treaty:

“105.4 (last sentence)

The ECB shall respect as far as possible existing practices regarding the issuing and design of bank-notes.”

early December 1991

In the end this particular sentence was not included in Article 105a, for being too specific for a main Treaty text. Instead it was added to Art. 16 of the Statute. Furthermore, the phrase ‘the only notes to have legal tender status’ would be changed into ‘the only such notes to have legal tender status’.[206]

The full final texts read as follows:

Article 105(4)-EC:

“The ECB shall have the exclusive right to authorize the issue of bank-notes within the Community. The ECB and the national central banks may issue such notes. The bank-notes issued by the ECB and the national central banks shall be the only such notes to have legal tender status within the Community.”

Article 16-ESCB:

“In accordance with Article 105 paragraph 4 of this Treaty, the Governing Council shall have the exclusive right to authorize the issue of bank-notes within the Community. The ECB and national central banks may issue such notes. The bank-notes issued by the ECB and the national central banks shall be the only such notes to have legal tender status within the Community.

The ECB shall respect as far as possible existing practices regarding the issuing and design of bank-notes.”

10 December 1991

This was the text approved at Maastricht. During the nettoyage juridique early 1992 paragraph 4 of Article 105, relating to banknotes, and paragraph 3 of Article 108,[207] relating to coins, were put together to form a new Article 105a.

One could wonder why the UK was so successful on this issue at the last moment. One possible explanation is that the Dutch chairmanship wanted to minimise the risk that John Major would refuse to sign the whole Treaty. The item was probably considered small change for getting an overall agreement, which in the end was not reached, because the UK negotiated an opt-out clause. On the other hand, the UK did not block the other countries to go ahead, which had been feared as a possible outcome until the very last moment by the Dutch presidency.

Notes

[1] With these articles we cover also the following articles of the EC Treaty: Article 105(5) (= Art. 3.3-ESCB); Article 105(6) (= Art. 25.2-ESCB); Article 105a(1) (= Art. 16-ESCB).
[2] The Delors Report was relatively short on the instrumentalization and governance of the ESCB, most of which can be summarized by quoting part of par. 32 of said report:
‘[The ESCB] could consist of a central institution (with its own balance sheet) and the national central banks. [….]
– The policy instruments available to the System, together with a procedure for amending them, would be specified in its Statute; the instruments would enable the System to conduct central banking operations in financial and foreign exchange markets as well as to exercise regulatory powers;
– while complying with the provision not to lend to public-sector authorities, the System could buy and sell
government securities on the market as a means of conducting monetary policy.
[….]
– establishment of a Board (with supporting staff), which would monitor monetary developments and oversee the implementation of the common monetary policy;
– national central banks, which would execute operations in accordance with the decisions taken by the ESCB Council.’
[3] Article 105(6) specifies that the Council of Ministers can only activate this specific enabling clause by a unanimous vote. For the full text of Article 105(6), see section II.3 below.
[4] Prudential supervision is usually distinguished from market conduct supervision, the former dealing with issues like capital adequacy and the level of liquidity and risk management, the latter dealing with issues like market behaviour, prevention of insider trading and misleading consumer information.
[5] Sources: national central bank laws; European Commission (1990a); Hans Aufricht (1967); EMI, Progress towards convergence, November 1996.
[6] In Denmark regulation and supervision never belonged to the central bank. In 1988 banking and insurance supervisory agencies were merged.
[7] See Art. 7 of the Gesetz über das Kreditwesen, 10 July 1961. BaFin superseded BAKred in 2002.
[8] Other members of this Banking Control Commission were the Head of the Treasury Department, a specialized member of the Council of State, a government appointed representative of the banking community and a bank staff representative nominated by trade unions.
[9] See in this respect for instance Annual Report 1989 of the Dutch central bank, p. 120: ‘A major consideration for the central banks is that it allows banking supervision to be exercised in conjunction with other tasks, such as those pertaining to monetary policy, payment transactions, the foreign exchange, money and capital markets, and the proper functioning of the international financial system.’
[10] Traditionally, the Landeszentralbanken evaluate the monthly balance sheets, the annual reports and the statutory reports of the auditors. The Bundesaufsichtsamt does not have regional offices. The administrative jurisdiction of the state authorities in matters relating to bank supervision had only been ended in 1961 by the Banking Act of 1961, which among others established the Bundesaufsichtsamt. (See Aufricht (1967), p. 287.)
[11] Pöhl (1988), section II.B.7.
[12] Van den Berg and Van Oorschot (2000), ‘Who is the lender of last resort in EMU?’ Maandschrift Economie, Vol. 64, February 2000, p. 77-85 (only available in Dutch).
[13] ECB Annual Report 2001, p. 72.
[14] Based on Prochnov (ed.) (1960), The Federal Reserve System, p. 247-250, and Board of Governors (1994), Purposes and Functions of the FRS as well as Annual Reports of the Board of Governors.
[15] FRBs make no charge for their examination. This is not undisputed – see M. Mayer (2001), p. 271-272.
[16] This explains that the examination of national banks by the OCC is stipulated in the Federal Reserve Act. FRA (1988), Section 21(2): ‘The Comptroller of the Currency, with the approval of Secretary of the Treasury, shall appoint examiners who shall examine every national bank as often as the Comptroller of the Currency shall deem necessary.’ This was a continuation of the situation before the FRA, when banks chartered under the National Banking Act of 1863 were examined by the OCC. (FRB of Boston (1990), Historical Beginnings … The Federal Reserve, p. 11.) See also the description in section I.2 of Art. 16-ESCB.
[17] See Prochnov (1960), p. 30-31, for the pro’s and con’s of such membership for state banks. Since the Monetary Control Act (MCA) of 1980 (see Art. 12.1c, section I.1 and appendix 2 at the end of cluster II) advantages for state banks of membership had diminished, as the Fed has to offer its services to all depository institutions (at a cost).
[18] The obligation of state member banks to accept supervision by the Federal Reserve is explicitly mentioned since 1917 in Section 9(7)-FRA (1988). Examinations may be performed by direction of the FRBs, but the examiners must be selected or approved by the Board (Section 9(7)-FRA (1988). Section 21(5)-FRA (1988) provides that ‘[i]n addition to the examinations made and conducted by the OCC, every Federal Reserve may, with the approval of the Federal reserve agent or the Federal Reserve Board, provide for special examination of member banks within its district.’
[19] At year-end 2001 there were more than 2100 national banks (oversight by OCC) and 970 state member banks, 6318 US bank holding companies, 259 foreign banks with state-licensed or federally licensed (OCC) branches. (OCC-publication; Board of Governors Annual Report 2001, p. 143/4 and 150/1.) And there are many more non-member state communal banks, like local savings banks etc.
[20] An examiner tries to determine whether the auditing procedures are adequate and he also appraises the loans and the lending policy, and the investment and investment policy of the bank. He can reclassify loans, leading to higher capital requirements or even write-offs.
[21] The Bank Holding Company Act of 1956 authorizes the Board to examine such companies; the International Banking Act of 1978 idem. Under Section 11(k) of the FRA (introduced in 1966), the Board of Governors is authorized to delegate any of its functions, other than those relating to rulemaking and monetary policy decisions, to Federal Reserve banks.
[22] During 2001, the Reserve Banks conducted 534 examinations of state member banks (some of them jointly with the state agencies; state banking departments conducted 264 independent examinations of state member banks); Reserve Bank examiners conducted 1212 bank holding company inspections and they conducted or participated with state and federal regulatory authorities (like the FDIC) in 289 examinations of state-licensed or federally licensed branches of foreign banks. In addition, the Federal Reserve conducted 119 special examinations of banking organizations with special clearing or broking functions. (Board of Governors, Annual Report 2001, p. 143-151.)
[23] The banking supervisors developed a Uniform Bank Performance Report to allow for aggregation and comparison.
[24] This category encompasses more than member banks.
[25] FRA (1988), Section 11(a)(1) and 11(a)(2). Reporting requirements had also existed before 1913. Under the National Banking Act of 1863 nationally-chartered banks had been required to report on their reserve ratios to the newly-established Office of the Comptroller of the Currency, which was an agency of the Treasury. This OCC also conducted bank examinations. (FRB of Boston (1990), p. 11.)
[26] FRA (1988), Section 11(a)(2).
[27] The other three general areas are: conducting the nation’s monetary policy; supervising and regulating banking institutions to ensure the safety and soundness of the nation’s banking and financial system and to protect the credit rights of consumers; and providing certain financial services to the U.S. government, to the public, to financial institutions, and to foreign official institutions, including playing a major in operating the nation’s payments system.
[28] In response to this crash the Fed issued a one-sentence statement before the start of trading on 20 October: ‘The Federal Reserve, consistent with its responsibilities as the nation’s central bank, affirmed today its readiness to serve as a source of liquidity to support the economic and financial system.’
[29] Quote taken from Fed publication Purposes and Functions of the Federal Reserve System (1994), p. 72.
[30] Examples are the Consumer Lease Act of 1976 and the Fair Credit and Charge Disclosure Act of 1988.
[31] Board of Governors of the FRS (1994), Purposes and Functions of the Federal Reserve System, chapter 6.
[32] CSEMU/5/88, 2 December 1988, Part II.4.
[33] CSEMU/10/89, 31 January 1989.
[34] No documentation available which explains the difference.
[35] Article 2.2 had been renumbered into Article 3.1. Article 2 now only contained the system’s objective.
[36] The last indent was put between square brackets for a while, awaiting the report of the Banking Supervisory Sub-Committee (BSSC), one of the three sub-committees of the Committee of Governors. The membership of the BSSC included non-NCB banking supervisors, like the German Bundesaufsichtsamt. In a note dated 5 July the BSSC argued as follows: ‘The Sub-Committee considers it important to acknowledge that the primary objective of price stability can effectively be pursued and maintained only in the context of a stable banking system and that an ESCB has a role to play in securing these conditions. Furthermore, the process towards EMU is likely to lead to greater integration of banking and financial systems within the Community with consequences for the structure and activities of banks therein. The Sub-Committee therefore sees a role for the proposed ESCB in the area of banking supervision.’ On 10 July 1990 the governors would delete the square brackets around the last indent.
[37] Minutes of meeting of Committee of Governors on 13 November 1990.
[38] What survived was the idea of simplified amendment procedure for articles of a more technical nature. See Article 41-ESCB.
[39] Opinion of the BSSC of 11 October 1990. The Bundesaufsichtsamt had entered a general reservation concerning Article 25.2. In an earlier report the BSSC had assigned all tasks to the System (Report to the Committee of Governors on the Role of the ESCB in Banking Supervision, dated 5 July 1990, and a chairman’s report to the Committee of Governors, dated 29 August 1990). In its report of 11 October the BSSC had replaced ‘System’ with ‘ECB’ in most cases, except in Art. 26 bis 1 where advice to national authorities was involved.
[40] In his view the ECB should only coordinate supervision where necessary for the conduct of monetary policy. More specifically, the Commission representative objected to giving the ECB the right to interpret Community legislation. This was the Commission’s responsibility. He also pointed out that the Statute should make clear that the term ‘other financial institutions’ would be interpreted in the (restrictive) sense of the Second Banking Directive of 1989 – which would exclude inter alia insurance companies and pension funds. Responsibility for formulating Community-wide legislative proposals in the supervisory field lies with the EC Commission – assisted by the Banking Advisory Committee, members of which are central bank supervisors (whether central banks or governmental agencies) and the Finance Ministries of the EU Member States. The BAC does not concern itself with problems relating to individual institutions. (The so-called Groupe de Contact is an informal body consisting of representatives from national supervisory authorities of the EU Member States, who regularly meet to exchange information on aspects largely of a practical and technical nature.)
[41] Delegation should anyhow be limited to operational or secondary functions and should be known to the public. Compare section 11(k) of the Federal Reserve Act, cited in section I.2 above. See also Art. 12.1, second paragraph, which will be dealt with in cluster III.
[42] See Viebig (1999), p. 503-505.
[43] UEM/52/91, dated 12 June 1991. The text of Article 25 was left unchanged, with the exception of the word ‘interpretation’ which was replaced by ‘scope’ in Art. 25.1 and the word ‘interpret’ which was deleted altogether in Art. 25.2 – the argument probably being that ‘interpretation’ (in a legal sense) is the provenance of the Court of Justice.
[44] The difference in wording might be due to translation from French to English. The bracketed indent of Art. 3 of the Statute reads: ‘[- to participate as necessary in the formulation, co-ordination and execution of policies relating to prudential supervision and the stability of the financial system].’
[45] CONF-UEM 1617/91.
[46] UEM/66/91 of 25 September 1991.
[47] In line with this the Dutch presidency retained Article 25. For Art. 108.4-EC, see the further genesis of Art. 25-ESCB hereafter.
[48] The officials of the Dutch Ministry of Finance in charge of preparing the IGC were of the opinion that the door for broader responsibilities for the ECB should not be closed entirely, though other parts of the Ministry were afraid the ECB would claim supervisory responsibility over other financial institutions as well.
[49] Article 3.1-ESCB was changed in the same vein.
[50] Suggested i.a. by France during the EMU working group session of 6 November 1991.
[51] For the same reason this concern was shared by the Danish delegation.
[52] Report by the Nederlandsche Bank of deputies IGC meeting of 13 November 1991. Therefore, the term ‘financial system’ should be seen as encompassing more than the banking system. This should also apply to Art. 3.3-ESCB and Art. 105.5-EC. This explains why the term ‘credit institutions’ was maintained (even though an interim version of the EMU texts presented to the deputies IGC by the chairman of the EMU Working Group (UEM112/91, dated 22 November 1991) used the term ‘banking institutions’ instead of ‘credit institutions’.
[53] UEM/66/91, dated 25 September 1991.
[54] UEM/82/91, dated 28 October 1991.
[55] France, Germany, the UK and Luxembourg favoured deleting Art. 108(5), while Portugal, Italy, Spain and Denmark wanted to retain it or to strengthen it.
[56] UEM112/91, dated 22 November 1991 (consolidated EMU texts as presented to the deputies IGC by the chairman of the EMU Working Group).
[57] In legal terms it was an improvement, as the term ‘banking institution’ was not defined in existing Community legislation, whereas ‘credit institutions’ and ‘insurance undertakings’ were, though ‘financial institutions’ are defined in various ways – see Smits (1997), p. 358.
[58] Deputies meeting of 6 November 1991. See also Art. 41-ESCB, section II.3.
[59] According to then existing Community procedures a unanimous Council decision requires either consultation or assent of the Parliament. Early December 1991 the ministers opted, in this case, for the assent procedure.
[60] Other member states may also participate on a voluntary basis (art. 2.1).
[61] This Bundesbank-model is therefore different from the first so-called FSA-model of the UK, where the Financial Services Authority responsible for all supervision in the UK and the bank of England hardly worked together.
[62] Likewise Eurostat, the statistical agency of the Commission, does not collect information at source, but receives its information through the national statistical bureaus. The same is true for the BIS, which does not collect at source, but receives its information from central banks and data vendors.
[63] Art. 19-ESCB. The secondary legislation puts limits on the minimum reserve ratio and lays down the rules for calculating the basis over which the ratio is to be applied.
[64] Art. 34.3-ESCB. This article determines that the only sanctions the ECB may impose are of a pecuniary nature, i.e. fines and periodic (e.g. daily) penalty payments, for as long as the obligation is not fulfilled. The secondary legislation defines maximum amounts.
[65] Art. 4(a)-ESCB. Secondary legislation determines the fields of competence.
[66] Council Regulation EC/2533/98 of 23 November 1998 defines the reporting population and sets limits on the sanction the ECB may impose in case of non-compliance. These limits fall within the framework defined by Council Regulation 2532/98 of 23 November 1998 concerning the sanctioning power of the ECB.
[67] Council Regulation/2533/98 of 23 November 1998, Art. 3.
[68] FRA (1988), Section 11(a)(2).
[69] Taken from draft version dated 8 October 1990.
[70] These accounts are used to conduct foreign exchange operations, e.g. necessary for the management of their foreign reserves. See also Smits (1997), p. 307.
[71] The BIS performs banking and statistical functions for central banks and sometimes participates in international lending operations to a country facing external financial problems, with the bulk of the loan usually being provided directly by other national governments/central banks. The financial risk of participation by the ECB is ultimately covered by its shareholders (the NCBs), the risks for the NCBs by their shareholders (usually the Member States).
[72] The five largest countries (in terms of IMF quota) have a chair of their own in the 23 member IMF Board, while the other countries form separate constituencies.
[73] On issues pertaining purely to the System (like reactions on IMF comments on the ESCB’s monetary policy) the ECB coordinates the input of the euro area NCBs, which is sent to the Executive Director at the IMF representing the Member State which at that moment has the presidency of the EU, while the ECB’s observer at the IMF is also kept informed.
[74] Kettl (1986), p. 46.
[75] See Art. 12.1c, section I.2 (specialization).
[76] Friedman and Schwartz (1963), p. 380.
[77] Prochnov (1960), p. 278.
[78] New York had also been accused of bending domestic conditions, not for domestic reasons, but to help pound sterling, sometimes leading to a too accommodative stance in the late twenties. Kettl (1986), p. 33-34.
[79] See Art. 31.1-ESCB.
[80] The legal experts had also proposed to include that ‘It [the central institution] may represent the Community and the Member States.’ This was not taken up in the draft Statute. The possibility that the ESCB may represent the Community – outside the area where it is already exclusively competent – is covered by Art. 109.3-4-EC. See on the relation between Art. 6-ESCB and Art. 109.4-EC Smits (1997), p. 409-410.
[81] Summary of Commission staff of EMU Working Group of 20 November 1991. Probably just intended as an editorial improvement.
[82] Art. 103 refers to procedures in the area of multilateral surveillance of economic policies and Art. 105 refers to the basic tasks of the ESCB.
[83] The decision on the seat required unanimity among the Heads of State (Art. 37). In 1992 they decided after strong pressure by Helmut Kohl in favour of Frankfurt, which is also the location of the German central bank.
[84] The General Documentation (a public document) also contains lists of eligible collateral and counterparties, and other details relevant for counterparties of the ESCB.
[85] See General Documentation (1999), par. 5.2, and Art. 17-24-ESCB.
[86] FRBs also circulate coins (which they buy from the Treasury). Coins are a direct obligation of the Treasury.
[87] FRA (1988), Section 16(3). An amendment of the FRA in June 1917 allowed non-member banks to become clearing members of the FRBs as well. While checks are cleared at par, collection fees, fixed by the Board (Section 16(13)), were and are defrayed upon the clearing members. This legislative development shows that the FRA of 1913 did not state clearly a Congressional intent as to the role of the Fed in the payments system. Though already soon, and supported by president Wilson, its facilitating role (and the importance of that role for the economy) was recognised and enhanced. See also R.A. Gilbert (1998), ‘Did the Fed’s Founding Improve the Efficiency of the U.S. Payments System’, FRB of St. Louis Review May/June 1998.
[88] FRA (1988), Section 16(4). Section 16(14)-FRA authorizes the Board of Governors to designate one of the FRBs to run clearing house for the transfer of funds between the FRBs. The Board is authorized to exercise the functions of the clearing house itself, making this a rare example of an operational function the Board is allowed to exercise, though, as formulated, it is an intra-system function and not a function vis-à-vis the banks. Indeed, in the first years the Gold Settlement Fund, located at the Board, fulfilled this function of clearing positions between FRBs (e.g. due to nationwide check clearance), for which it was necessary to use the normal commercial telegraphic system. In 1918 the function of the Fund was taken over by a leased wire system, operated by the FRB of Chicago, and these services were offered to banks as well. (FRB of Chicago, Annual Report 1988, p. 16.) Until 1980 this service (Fedwire) was only for member banks and free of charge. After passage of the Monetary Control Act in 1980 the service was open to all depository institutions at a charge (see FRB of St. Louis Annual Report 1997; see also appendix 2 at the end of this cluster). Fedwire operates alongside private sector transfer systems. Offering and developing payment services as such is seen as falling mostly in the realm of the FRBs. This is reflected in the Annual Report of the Board which reports on payment system developments under the heading of the FRBs. The Board may require each FRB to offer local clearing facilities. The Board of Governors has taken responsibility for issues in the area of payment system risk, to which end the Board has issued a Policy Statement on Payment Systems Risk (see e.g. the Board’s Annual Report 2001, p. 207-208).
[89] In the eurosystem’s weekly refinancing operations the euro area NCBs deal with around 500 counterparties. The total number of counterparties for the deposit facility of the eurosystem is around 3400 (the total number of registered counterparties is more than 7100, but this number also includes many members of cooperative banks which have a separate banking license, but operate and report through their mother banks).
[90] After a period in the early years of the Fed during which member bank borrowing exceeded their reserve balances, continuous borrowing became objectionable to the System. It considered itself as a ‘lender of last resort’, and not as a source of continuous financing. It could have raised the discount rate to make rediscounting unattractive. Instead it adopted the policy that ‘continuous indebtedness at the reserve banks, except under unusual circumstances, is an abuse of reserve bank facilities,’ that ‘the proper occasion for borrowing at the reserve bank is for the purpose of meeting temporary and seasonal needs.’ (Quotations come from Annual Report of the Federal Reserve Board for 1928, and are quoted by Friedman & Schwartz (1963), p. 268.) But even the seasonal use of the discount window is limited in the US, as this use is seen as a distress signal of the bank using the window. As of 1980 discount window credit is also available to other depository institutions (non-member banks) (Monetary Control Act 1980, see appendix 2). The discount window proved very important in the first few days after the terrorist attacks on 11 September 2001, which had created communication and connectivity problems in the nation’s payment system infrastructure. Depository institutions that were affected borrowed heavily from the windows for a few days. (See Annual Report of the Board of Governors 2001, p. 174/5.)
[91] Board of Governors of the FRS (1994), p. 110-111.
[92] FRA (1988), Section 12A(b). Before 1933 coordination of OMOs between the FRBs took place on a voluntary basis. The FOMC, in which the Board has a majority of the votes (see Art. 10.2-ESCB, section I.2), decides on the desired level of the federal funds rate, which is the rate commercial banks use when they lend federal reserve funds to each other. The FOMC instructs the New York Fed to conduct open market operations necessary to achieve the desired funds rate.
[93] See Art. 6-ESCB, section I.2.
[94] See Art. 3.3-ESCB, section I.2, and Art. 5-ESCB, section I.2, respectively.
[95] Santomero (2002).
[96] Board of Governors, Annual Report over 2001, p. 185-187.
[97] Half of the operating expenses of FRBs relate to ‘priced services’ and are thus recovered.
[98] Board of Governors of the FRS (1994), p. 108.
[99] See Art. 3.3-ESCB, section I.2.
[100] See also Meltzer (2003), p. 400 and 408-409.
[101] In practice, however, control would shift to the open-market committees, consisting of (until 1935) only FRB governors (see appendix 1 below). At the time the FRA was drafted, open-market operations had not been seen as a major monetary policy instrument.
[102] The difference between the US in 1913 and Europe in 1990 could also be described in terms of currencies: in the US there had been one currency – though banknotes issued by far-away (less-known) banks circulated at a discount and checks might move for weeks from bank to bank before arriving at the bank at which it was drawn; in Europe there were more than ten different currencies, which had adjustable exchange rates between them.
[103] HWWA (1993), p. 310.
[104] The original German sounds even stronger: ‘Ohnehin ist vor dem Endstadium einer Einheitswährung nur ein föderatives Zentralbanksystem denkbar.’
[105] Partly based on a paper by prof Thygesen (member of the Delors Committee), distributed to the other members of the committee on ‘A European central banking system – some institutional considerations’ (29 October 1988, p. 8-9; not included in the annex of the Delors Report). Some arguments were developed later on.
[106] Based on the same argument Thygesen also envisaged the possibility of specialization among NCBs, e.g. the responsibility for interventions in third currencies could be delegated to the major reserve currency or financial market centre, i.e. the Bundesbank.
[107] Ideally Treasuries should bank with commercial banks, in which case fluctuations in their balances would not affect the liquidity of the money market anymore. At present, almost all euro area Treasuries, while using their NCB as payment hub, place their end-of-day surpluses above a certain amount back in the market.
[108] This argument was based on the idea that financial markets could – at least for a while – remain segmented, which in practice would not be the case, however.
[109] Part of section 32 of the Delors Report.
[110] This view is supported by the fact that according to the Skeleton Report of December 2 (CSEMU/5/88), page 28, the central institution would only hold foreign reserve assets and claims on and liabilities to the participating central banks. The idea of pooling reserves at the centre had been strongly promoted by the French governor. The German and Dutch were opposed to the idea of centralizing intervention tasks in Stage Two, because they feared that in Stage Two interventions in Dmark – even if taken by majority vote in the ESCB Council – could dilute the monetary autonomy of the Bundesbank. (According to the Delors Report (par. 57) the ESCB was to established (early) in Stage Two.) Pooling of part of the reserves in stage three was not contested, because non-pooling would not have been credible. Regarding stage three the Dutch were more worried that some reserves would remain in the hands of some governments, which would also mean trouble.
[111] Pöhl (1990a), ‘Grundzüge einer europäischer Geldordnung’, speech, Paris, 16 January 1990; printed in Bundesbank Presseauszüge 1990, nr. 4.
[112] In the draft ESCB Statute of 27 November 1990 this article would be part of Article 14 on the National Central Banks. During the IGC Article 14.4 would be transferred to Article 12 on the Responsibilities of the decision-making bodies.
[113] The Commentary accompanying Chapter IV (Monetary functions and operations) shows an interesting parallel with Article 12.1c. The General comments at the beginning of this chapter read as follows (draft version of 22 June 1990): “As drafted, the text does not prejudge the question of whether operations are carried out at the level of the central institution or at the level of the national central banks. The precise distribution of tasks may evolve over time with due regard to the principle of subsidiarity. Some of the Alternates were firmly of the opinion that virtually all operations should be executed by national central banks. The operating procedures would be harmonized to the extent necessary; full harmonization being neither necessary nor appropriate.”
[114] Minutes of Committee of Governors’ meeting of July 10, 1990. Pöhl had already expressed a similar view on the role of the NCBs in a speech held in Paris on 16 January 1990, quoted in section I.1 above.
[115] Probably one should read here ‘tasks of the System’.
[116] The addition of the word ‘the’ is significant, as it points to the involvement of all NCBs. Documentation does not show whether this was at the particular request of a Governor, or whether it resulted from the Secretariat.
[117] This was in line with the French view of a decentralized system, while at the same time borrowing the international strength of the Bundesbank in the area of exchange rate policy.
[118] As regards operations on the foreign exchange market, there was more agreement among the Alternates: all of them considered it necessary to centralize foreign exchange interventions, which should be entrusted to the central institution. This led them to conclude that all or part of the reserves would have to be pooled (there would be debate on the size and on the rules for the remaining non-pooled reserves – see Art. 30-ESCB)
[119] ‘Appropriate’ refers especially to being compatible with a single monetary policy, according to an internal report on of this meeting by De Nederlandsche Bank.
[120] Presentation to the Committee of Governors’ meeting of 13 November 1990.
[121] The reference in the final version to Art. 14 is probably a remnant from the earlier version, when Art. 12.1 was part of Art. 13 (later 14) before being moved to Art. 12. The need to refer to Art. 12.1 was only discovered in the EMU Working Group of 26-28 November 1990.
[122] The formulation first appeared in the draft version of 19 October 1990 (that text had been prepared by Lagayette of the Banque de France, arguing that the wording of September 11 did not adequately reflect the implementation of the principle of subsidiarity).
[123] De Larosière could have had in mind Art. 5.2 – see Art. 5-ESCB.
[124] Minutes of CdG meeting on 13 November 1990.
[125] The French had proposed to use the word ‘one’, but had offered as an alternative to use the word ‘some’.
[126] This position was echoed in the General comments at the beginning of Chapter IV (Monetary Functions and Operations) of the ‘Commentary’ on the draft Statute of 27 November – see also the footnote at the beginning of section II.2 for a quote of an earlier version of this part of the Commentary. These comments read: “This Chapter describes the monetary functions and operations that may be undertaken by the ECB and national central banks. The relevant Articles recognise that both are the operational arms of the System and do not prejudge as to how the execution of monetary operations will be distributed among them in line with the principle of subsidiarity (see comment on Article 14). Although national central banks are already authorised under their present statutes to perform many of the operational functions mentioned in this Chapter, reference is made to them in this Chapter [instead of just referring to ‘the System may ….’] in order to reaffirm that they have the necessary operational powers for executing the System’s tasks, and to indicate the areas in which operational procedures may need to be harmonised.” See further the quote taken from the Introductory Report accompanying the draft Statute, as quoted at the end of paragraph II.2 of the section dealing with Article 1.
[127] Wicks formulated a compromise, taking elements from both alternatives of the draft Statute of 27 November 1990: starting from the more centralized, second alternative, he took out ‘Executive Board’, which he replaced by ‘ECB’ (where the governors would have a majority) and inserted ‘full’ in ‘to the extent possible’, which then came to read ‘to the full extent possible’.
[128] Article 12.2 stipulates that the Executive Board may instruct the NCBs.
[129] See previous footnote.
[130] UEM/34/91 would appear in Europe daily, No. 5458 of 23 March 1991, in slightly different wording (probably due to translation from a French version): ‘5. To an extent which is considered possible and adequate, and without prejudice to the provisions of the above paragraph, the European Central Bank has recourse to the central banks of Member States for the execution of operations arising from the system’s assignments.’
[131] The Statute also having Treaty status.
[132] See footnote 3 of UEM/66/91, dated 25 September 1991.
[133] Kapteyn/VerLoren van Themaat (1999), p. 139, observe that this is a typical political principle: it can be invoked as a justification for Community action, but also in opposition to it.
[134] This issue is discussed in the same vein in R. Smits (1997), p. 111/112.
[135] Taken from report of said meeting by the Dutch Ministry of Finance (IMZ/nr. 91-500).
[136] This is understandable as each of them had its own ‘personal’ history, some central banks existing already for centuries.
[137] ‘Issuing’ banknotes is a System function, but does not necessarily entail their production, as can be readily derived from that fact that a number of NCBs buy their banknotes from private sector printing houses.
[138] For an example of a non-System tasks performed by an NCB, see J. B. Jansen (2001), The position of the Nederlandsche Bank N.V. under the Bank Act 1998, Bankjuridische Reeks of NIBE-SVV, appendix C (only available in Dutch). Jansen provides a complete overview of all non-System tasks of the Netherlandsche Bank. Although the System and non-System tasks are difficult to separate, roughly one-half of the employment of the Netherlands Bank is related to System and one-half to non-System tasks.
[139] The Board’s general supervisory authority over the FRBs includes all facets of Reserve Bank activities (Akhtar and Howe (1991), p. 347.)
[140] The budgets of the FRBs are reviewed by a committee of two governors and then presented to the Board of Governors for final action (see Board of Governors (2000), Annual Report Budget Review, p. 3). In the case of the ESCB the NCBs have full control over their own budgets, while the Governing Council supervises the budget of the ECB.
[141] Examples taken from FRA (1988), Sections 4(4), 4(22), 11(a)(1), 11(f), 11(h), 11(j), 12A and 14(d).
[142] 2000/2001 figures for FRS; figures are relatively stable over time. 1999-figures for ESCB, including Greece (numbers for NCBs are declining, number for ECB is increasing (1265 in 2003)).
[143] The size of the other FRBs ranges from 1270 to 2762 staff.
[144] Estimated number for System-related tasks (e.g. excluding prudential supervision by NCB’s).
[145] To allow for a comparison with the Board of Governors one should reduce the number of staff of the Board of Governors that work in areas not covered by the ECB, i.e. banking supervision and regulation (220) and consumer protection affairs (78).
[146] The requirement to ensure compatibility of the national legislation including the NCB Statutes with the Treaty and the ESCB Statute would henceforth be part of Art. 13.1 (later 14.1).
[147] Possibly as a result of the remark of the German legal expert who pointed out that according to Art. 12.2 ‘policy guidelines’ are an instrument of the Council and ‘instructions’ an instrument of the ECB.
[148] UEM/82/91, 28 October 1991.
[149] Examples taken from BIS (1963), Eight European Central Banks – a descriptive study and De Nederlandsche Bank, Bank Act 1948 (Edition 1991).
[150] The only legislation required relates to the arrangements for legal tender during the period in which national banknotes would still exist. Euro banknotes (and euro coins) were only introduced as of 1 January 2002, that is three years after the start of the third stage of EMU. These three years, during which national banknotes continued to be issued and to circulate, were necessary to design and print a large amount of banknotes (and strike coins) and to prepare the logistics – in practical and legal terms – of the changeover. The legal framework for the changeover is contained in two Council Regulations, viz EC/1103/97 of 17 June 1997 and EC/974/98 of 3 May 1998. During these first three years of EMU the money, financial and foreign exchange markets had already adopted the euro as their unit of account, but in daily life national currencies were still used, the national currency officially being sub-denominations of the euro as of 1 January 1999. Banknotes and coins denominated in national currency retained their status as legal tender within, and confined to, their territorial limits, until the first few months of 2002. Each central bank though stood ready during this period, through one or more of its offices, to exchange banknotes of other euro area countries at par. After this transitional period remaining national banknotes can be exchanged for euro banknotes at the central bank’s head office in the country of issuance, for periods which vary per country (varying from 10 years to indefinite).
[151] See R. Smits (1997, p. 206) for a discussion on the expression “to authorize the issue”. The authorization relates to all instances of bringing into circulation, withdrawing or re-issuing banknotes including “decisions as to cancellation, compensation for loss and other acts relating to the circulation, for all of which the ECB’s Governing Council [and not the NCBs] is exclusively competent.”
[152] ‘Legal tender’ denotes money a creditor is obliged to receive in payment of a debt. See The New Palgrave Dictionary of Money and Finance, edited by Newman and others, Macmillan, London, 1994. See for legal tender also R. Smits (1997), p. 207-208.
[153] ECB (1999), Report on the legal protection of banknotes in the European Union Member States, November 1999, p. 35-36.
[154] These notes held are included in UK banknote circulation figures. In 1999 they represented some 10 percent of the total amount of Bank of England banknotes in circulation. (Ibidem, p. 35.) These banknotes are not legal tender (also not in Scotland or Northern Ireland), but act as an authorized currency and in effect enjoy a status comparable to that of English banknotes. (Information received from the Bank of England.)
[155] Decision of the European Central Bank of 7 July 1998 on the denominations, specifications, reproduction, exchange and withdrawal of euro banknotes (ECB/1998/6) as amended by ECB Decision of 26 August 1999 (ECB/1999/2), published in the Official Journal of the European Communities No. L 8 of 14 January 1999, p.36, and the OJ L 258 of 5 October 1999, p.29 respectively.)
[156] The two qualities of issuing, i.e. the legal aspect and the physical distribution, can be separated (if central bank X circulates legal tender notes issued by central bank Y, NCB Y receives a claim on NCB X). While ‘legal tender’ is a quality of the banknote itself, ‘legal issuer’ refers to the issuing institution. While a commercial is ‘legal issuer’ of its own banknotes, these notes need not have legal tender status.
[157] Seigniorage is defined here as the income generated by the assets which are held against the issued non-remunerated banknotes (some authors define seigniorage as the nominal value of the issued banknotes). Monetary income of NCBs is pooled and reallocated over all the NCBs participating in the euro area.
[158] ECB’s Annual Report 2001, p. 119: ‘In accordance with the principle of decentralization in the execution of Eurosystem operations, the 12 NCBs of the euro area will put into and withdraw from circulation, and will physically process, all euro banknotes, including those issued by the ECB.’ The banknotes are printed under the aegis of the NCBs, either in-house or at private sector companies. Production volumes and desired stock levels are coordinated centrally.
[159] An implicit recognition of fungibility is contained in article 3 of ECB Decision ECB/1998/6 of 7 July 1998 which obliges NCBs “upon request, to exchange mutilated or damaged legal tender euro banknotes in the following cases: (a) when more than 50% of the banknote is presented: (b) when 50% or less of the banknote is presented if the applicant proves that the missing parts have been destroyed” – i.e. irrespective of their origin.
[160] écu was also the name of an old French gold coin. When the ecu was introduced as a basket currency at the inception of the EMS, Giscard d’Estaing had pointed out the double way ecu could be read. In the German versions of the Treaty ecu was consequently spelt with capitals (ECU).
[161] See Smits (1997), p. 490-491, for a critical legal assessment of this ex post interpretation of the name ECU as an abbreviation. According to Grosche (member of the German negotiating team in 1991) the name ‘euro’ had circulated even then, so there is no clear originator of the name.
[162] The starting value of the currency was fixed, as Art. 109L(4) stipulated that the substitution of the ecu for the national currencies ‘shall by itself not modify the external value of the Ecu’. (Art. 109g had confirmed the basket currency character of the existing ecu.) The quoted sentence was inserted to prevent that the starting point could become a nasty negotiation element.
[163] After the closing of the Second Bank of the United States many states started to reform their (until then very cumbersome) bank chartering systems, so that entry into the banking industry would be easier. (The Second Bank had branched out through the country having established 25 branches by 1836 and had been an extensive provider of banking services, which void had to be filled after its closing.) Most free banking laws allowed anyone to operate a bank as long as two requirements were met: all notes the bank issued had to be backed by state bonds deposited at the state auditor’s office; and all notes had to be redeemable on demand at par, or face, value. Otherwise, the auditor would close the bank, sell the bonds and pay off the noteholders. According to a study by Rolnick and Weber (1982) the relatively high rate of bank failures in that period was caused not so much by fraud (so-called Wildcat Banking), but by periods of steep bond price declines, which would instigate runs on banks.
This period was called free Banking Era, because there was no federal regulation (but only state regulation). Many banks were established, by private persons, or state-owned. Relatively many banks failed. The Second Bank of the United States had helped promoting the soundness of the banking system by regularly presenting for payment the currency of state banks it suspected of over-issuing.
[164] The state banks survived, because demand deposits (checking accounts) had become the most important source of funds to the banks (FRB of Boston (1990), p. 9-12). In other words, banks issued checking accounts instead of banknotes.
[165] See also Art. 12.1c (section I.2) above.
[166] FRA (1988), Section 2(3).
[167] FRB of Boston (1990), p. 24. For the struggle to establish the FRA see chapter 6 above under the paragraph ‘Federal Reserve’ and Studenski and Krooss (1963), Financial History of the United States, p. 225-260.
[168] This reflected the so-called Real Bills doctrine. Eligible commercial securities were defined as the commercial notes and bonds eligible for rediscount under Section 13 of the FRA.
[169] One of the nine directors of each FRB (to be exact: one of the class C directors) is appointed Federal reserve agent by the Board of Governors. (FRA (1988), Section 4(20)) Federal reserve banks apply for Federal reserve notes through the Federal reserve agent, who checks whether these notes are backed by sufficient collateral. (FRA (1988), Section 16(2).)
[170] Formulation of FRA of 1913. In March 1933 the United States abandoned the gold standard, with the purpose of allowing the dollar to depreciate. In January 1934 Congress passed the Gold Reserve Act, placing the United States on a gold-bullion standard internationally and on an irredeemable paper standard domestically. The ‘gold clauses’ in domestic contracts were voided by Congress and the reference to redemption in gold was dropped from Section 16 of the FRA. The last sentence of Section 16 would henceforth read: ‘[Said notes] shall be redeemed in lawful money on demand at the Treasury Department [in Washington D.C.] or at any Federal reserve bank.’ Lawful money was defined as gold and silver coin, greenbacks, gold certificates, silver certificates and Treasury notes of 1890 (Studenski and Krooss (1963), p. 259.) Right after passage of the Gold Reserve Act president Roosevelt, by proclamation, set the gold content of the dollar at 59 percent below its former value. (Studenski and Krooss (1963), p. 383-390.) Congress appropriated $ 2 billion of the valuation gain resulting from the dollar depreciation to the Exchange Stabilisation Fund (ESF); $ 1.8 bln of that was later used to fulfil the (national currency part of the) initial U.S. quota subscription to the IMF.
[171] M. Mayer (2001), p. 73-74. Congress still hesitated to impose ‘paper money’ on the public.
[172] The letter-number combination is an obligation following from Section 16(3) of the FRA. The seal of the individual Federal Reserve Banks has disappeared from the design of the new 5, 10, 20, 50 and 100 Federal Reserve notes. It is replaced by a seal of the “Federal Reserve System” (which is remarkable because the FRS is not a legal entity). (One could envisage the same for a future design of euro banknotes, showing the name not of the ECB, but of the eurosystem, especially if the eurosystem would be given a formal legal basis by being defined and mentioned in the Treaty. At present the term eurosystem is only defined in the Glossary of the ECB’s Annual Report.)
[173] C. Moore (1990), The Federal Reserve System: a history of the first 75 years, p. 37.
[174] Fungibility between banknotes issued by different FRBs would anyhow seem to be an ephemeral problem in practice, as the notes can be redeemed at the Treasury Department (see footnote 22).
[175] FRA (1988), Section 16(3), second and third sentence.
[176] CSEMU/10/89, 31 January 1989, section 6.
[177] CSEMU/14/89, 31 March 1989, section 24.
[178] Version of 3 July, see p.78 above.
[179] Report by the Legal Experts, 31 August 1990.
[180] Commercial banks would be free to charge commissions to cover transaction costs but it was expected that competition would reduce these to a level not significantly higher than that for transactions in a single currency. See Commentary accompanying the draft ESCB Statute of 27 November 1990.
[181] Complementary legislation under Art. 104-EC would limit coin-holding by the ECB and the NCBs in order to avoid significant lending to the issuers of such coins (which would amount to monetary financing).
[182] See Art. 1-ESCB, section II.2, especially footnote 41.
[183] See Art. 1, section II.2.
[184] Money usually is unlimited legal tender, but there are exceptions with regard to ’small change’ (usually there is a limit up to which one has to accept payment in the form of coins) and with regard the large denomination banknotes. For instance in the Netherlands many gas stations depicted a note on the door expressing they do not accept 1000 guilder banknotes. It would force them to keep too large cash balances, which would create a security risk.
[185] According to Hans-Peter Scheller, a leading member of the Secretariat, the formulation was deemed necessary to prevent possible legal battles or even the need for a Treaty change in case one were to decide that the ECB would issue banknotes. Source: Oral information by Hans-Peter Scheller, April 2000. At stake was not the note-issuing capacity of NCBs, as most governors had in mind that the System would probably start with the NCBs still issuing their national banknotes. See also Art. 52-ESCB for the exchange of banknotes in Community currencies during the transitional period and Council Regulation (EC) No 947/98 of 3 May 1998 on the introduction of the euro.
[186] Section 6:114 of the Netherlands Civil Code holds that payment through the banking system is a valid means of discharge of a monetary debt unless the creditor has validly excluded this method of payment.
[187] Second sentence of Article 16.2 later to become Article 52 ESCB-Statute. The first sentence would be deleted by the IGC.
[188] This last sentence of Article 16, relating to coin distribution, would not survive the IGC.
[189] The Commission’s draft Treaty text of December 1990 served as a guide for the discussion in the deputies IGC under the Luxembourg IGC presidency, but was not discussed in detail. The Commission’s draft had mentioned banknotes in two places: Article 106b.1 (“For the purpose of the preceding Article [a reference to the system’s objective, i.e. price stability], Eurofed’s tasks shall be: – …; – to issue notes and coins denominated in ecus as the only legal tender throughout the Community, subject to the provisions of Article 109h(2);”) and Article 109h.2 (“The Council, acting in accordance with the procedure provided for in paragraph 3, shall adopt, in so far as is necessary, the technical arrangements under which Member States’ currencies may provisionally remain legal tender.”). As regards banknotes, the French draft Treaty (Projet de Traité, 25 janvier 1991) contained exactly the same wording.
[190] An earlier version had appeared in UEM/34/91 of 13 March 1991 (Luxembourg non-paper containing draft versions of Art. 105-108).
[191] UEM/52/91.
[192] For instance the term ‘Council’ had been replaced by ‘Council of the ECB’ to avoid any confusion with the Council of Ministers.
[193] Article 105(2) mentioned the ECB has the right to ‘issue notes’, while Article 16-ESCB Statute mentions the right ‘to authorise the issue of notes’. This is probably due to an oversight and would be corrected in the next official draft version.
[194] UEM/66/91.
[195] UEM/67/91, dated 26 September 1991.
[196] See Art. 12.1-ESCB, second and third paragraph, in cluster III for the division of labour between the Executive Board and the Governing Council.
[197] The Dutch presidency had thus also suppressed the approval by the ECB of the volume of coin issuance. However, this requirement would reappear in the consolidated draft Treaty version of 22 November 1991 (UEM/112/91).
[198] For instance, Art. 7-ESCB had read: ‘The independence of the System is set out in Art. 107 of the Treaty.’
[199] Paragraph 3 contained a derogation to paragraph 2, allowing governments to hold a small amount of foreign exchange in the form of working balances.
[200] Internal note of the Dutch Ministry of Finance (IMZ/nr. 91-1976), dated 16 October 1991.
[201] The problem of derogation countries (which are part of the Community) was to be solved through a special article for derogation countries.
[202] This concession however would subsequently be contested at the deputies’ meeting of 30 November 1991 where a majority of delegations favoured putting this sentence into a Declaration. However, the UK insisted on having this in the Treaty.
[203] The British delegation would have liked the following, stronger formulation: ‘In doing so, the ECB shall respect as far as possible regional and national rights and traditions.’
[204] UEM/118/91.
[205] ‘The ECB shall respect as far as possible existing practices regarding the issuing of bank-notes within the United Kingdom.’ (Revision to UEM/118/91 – Conclusions of the meetings on 30 November 1991.)
[206] UEM/118/91, late November 1991.
[207] Article 108(3), relating to coin issuance, as approved in Maastricht read: “Member States may issue coins subject to ECB approval of the volume of the issue. The Council may, acting by a qualified majority on a proposal from the Commission and after consulting the ECB and in cooperation with the European Parliament, adopt such measures to harmonize the denominations and technical specifications of all coins to the extent necessary to permit a smooth circulation of coins within the Community.”

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