IMF COMMITTEE ON BALANCE OF PAYMENTS STATISTICS
CURRENCY UNIONS TECHNICAL EXPERT GROUP (CUTEG)
ISSUES PAPER (CUTEG) # 10
DEFINITION AND ALLOCATION OF RESERVE ASSETS IN A CURRENCY UNION
Prepared by Remigio Echeverría, ECB
DEFINITION AND ALLOCATION OF RESERVE ASSETS
"1. This paper analyses the definition of reserve assets in the context of a Currency Union (CU) and the allocation of transactions and positions in reserve assets in the balance of payments, international investment position and international reserves statements of both the CU and the CU’s participating countries. The general principles on the definition of reserve assets set out in the BPM5 and in the IMF “International Reserves and Foreign Currency Liquidity: Guidelines for a Data Template” (hereinafter ‘the IMF Template’) should assist in identifying the key elements guiding the most appropriate reflection of reserve assets in both national and CU aggregate statistics."
I. Current international standards for the statistical treatment of the issue
[Mrt: very interesting reading]
II. Concerns/shortcomings of the current treatment
[Mrt: well articulated]
III. Proposed treatments
Definition of reserve assets in a CU
Domestic versus foreign currency denominated assets
7. A key question to be clarified is whether the single currency could be regarded as foreign currency from the
point of view of the CU national member states’ institutional units. The so-called “dual nature of the single currency” theory sustained that the single currency of a CU area could be considered as both a domestic and foreign currency from a national viewpoint. It considers that for each Member State participating in CU, the single currency is both a “national” and a “foreign” currency, since each of them is responsible for its issuance and accepts it as a legal tender, but none of them has full control over it. Should this be the case, CU NCBs’ claims denominated in the single currency and vis-à-vis non-residents of the CU or residents of other CU member states could theoretically be regarded as reserve assets in national statistics.
8. However, the institutional setting of a CU determines that the single currency, in view of its unitary nature,
should be solely regarded as domestic currency in all the CU national member states. In addition, assets denominated in the single currency may be ineffective for any interventions in case of a crisis affecting the CU currency. For these reasons, it is proposed not to consider CU CB/NCBs’ claims denominated in the single currency as reserve assets in CU and national statistics.
Foreign assets vis-à-vis other CU residents
9. In a CU, three relevant groups of residents could be identified: (i) residents of an individual CU national
member state (domestic residents); (ii) residents of the other CU national member states (other CU residents3); and (iii) residents of countries outside the CU (non-CU residents). Consequently, when defining reserve assets at the nationallevel, groups (ii) and (iii) would comprise the relevant non-resident population, whereas only group (iii) would constitute the non-resident counterpart for identifying reserve assets at the CU level.
10. A first and immediate conclusion is that CU CB/CU NCBs’ foreign currency claims on non-CU residents (group (iii)) are to be considered as reserve assets both in CU and national statistics. Likewise, a second immediate result is that CU CB/CU NCBs’ foreign currency claims on other CU residents (group (ii)) cannot be regarded as reserve assets at the CU level, because they represent ‘domestic’ (as opposed to ‘external’) assets from the CU perspective and do not thus abide by the BPM5 definition of reserve assets.
[Mrt: Note, now we use BPM6]
11. A less clear-cut case arises as regards the reflection of CU NCBs’ foreign currency claims on other CU residents in national statistics. From a strictly national viewpoint, it could be argued that these assets would fulfil the definition of reserve assets prescribed by the BPM5. However, the concept of reserve assets in a CU has a unitary nature, meaning that only one definition (concept) can apply for the whole CU and this should be consistent with that applied at national (single CU member) level for a number of important reasons.
12. Firstly, the extent to which this type of assets could be used for foreign exchange policy (intervention) purposes is questionable. Foreign currency denominated deposits held by CU NCBs in financially weak banks resident in other CU member states, which would likely not be available for use in a crisis affecting the CU financial system, would however be reflected in national statistics, leading to overestimation of reserves.
13. Secondly, an interpretation of the meaning of reserve assets at the national level might be difficult to sustain, if they are not considered as reserves for the CU at the same time, bearing in mind that the holding and management of the reserves of the CU is one of the basic tasks of the monetary authority of the CU and no longer a task of the individual CU NCBs.
14. Finally, the exclusion of these assets from the reserve assets definition at the national level would permit that the sum of the individual reserves of the CU NCBs and the CU CB would be equal to the CU consolidated reserves, enhancing transparency and credibility of the CU in exchange rate related issues. CU CB and CU NCBs reserves are to be seen as homogeneous elements of the very same aggregate, i.e. the reserve assets of the CU as a whole, and therefore the definition of reserves at national level should necessarily be consistent with the CU definition.
15. Therefore, and as a third conclusion, CU CB/CU NCBs’ foreign currency claims on other CU residents (group (ii)) should preferably not be regarded as reserve assets at national level. This also implies that CU NCBs’ foreign currency claims on domestic residents (group (i)) should a fortiori not be considered as reserve assets both at the CU and at the national level.
16. Finally, gold, special drawing rights (SDRs) and the Reserve Position in the IMF held by the CU CB/CU NCBs are to be considered as reserve assets both at the CU and at the national level.
Allocation of reserve assets in a CU
17. Once the issue of what kind of assets qualify for reserve assets in a CU, the question arises on the way the CU total reserve assets are allocated/attributed to the CU CB and CU NCBs. This allocation is important to the extent that it will subsequently determine how the overall reserves of the CU are shown in the CU CB statistics and the statistics of Page 5 of 8 the CU member states. It should be noted that whatever criteria is used to allocate the CU reserves to the CU NCBs, this will by no means alter the total reserves of the CU as a whole. Moreover, it is also worth mentioning that the analytical of this information is questionable, as they could hardly be interpreted as more than simple proportions on the total CU reserves with no economic meaning in itself. However, the allocation criterion chosen will determine the amounts of reserves shown at the national level, and this makes this criterion an undoubtedly sensitive issue because of the political dimension of the reserves figure.
18. In this regard, it is clear that the particular institutional setting of the CU may play a crucial role in determining the sharing of the CU reserves among the CU participating countries, as this question is connected with the effective control of the assets. As a first result, it can be concluded that the total reserves of the CU will always be the addition of the reserve assets of the CU CB and the CU NCBs, whatever the institutional setting for the CU monetary authority has been established.
[Mrt: rest of reading interesting for application in different types of CU.]