BANK OF ANNUAL REPORT 1999

3 ANNUAL REPORT 1999

1 2 BANK OF FINLAND BANK OF FINLAND

Established 1811

Street address Snellmaninaukio,

Postal address P.O.Box 160, FIN-00101 Helsinki, Finland

Telephone national (09) 1831 international +358 9 1831

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Oulu Kajaaninkatu 8, P.O.Box 103 90101 , Telephone (08) 3108 800 The figures in the Annual Report are based on data available in February 2000. Hämeenkatu 13, P.O.Box 325 33101 Tampere, Telephone (03) 2486 111 ISSN 1239-9345 (print) Linnankatu 20, P.O.Box 373 ISSN 1456-579X (online) 20101 Turku, Vammalan Kirjapaino Oy Telephone (02) 2326 066 Vammala 2000

4 BANK OF FINLAND Contents

The governor’s review 9

Monetary policy, economic developments and implementation of in the area 13

Price stability prevailed in the euro area in 1999 13 Transition to the single monetary policy was accomplished without major problems 13 Key lowered in April 15 Key interest rate raised at the beginning of November 15 Favourable economic performance in the latter part of the year 16 Market interest rates rose in the course of the year 17 Th euro depreciated 18 Favourable economic conditions helped reduce the euro area general government deficit by more than had been anticipated 19 Implementation of monetary policy within the 20 Monetary policy instruments 20 Only minor changeover problems in euro area money markets 22 Main refinancing operation became the key instrument for managing system liquidity 23 Finnish credit institutions’ role in Eurosystem operations 24 Collateral arrangements for credit become uniform throughout the Eurosystem 24 Changes in collateral management in Finland 25 Use of collateral in the euro area and Finland 26

Economic developments in Finland 27

Rise in prices picked up towards the end of the year 27 Lending grew rapidly 28 Growth was driven by domestic demand in the early part of the year 29 Export prospects improved in the latter part of the year 30 Electronics and telecommunications boosted industrial output 31 There was a further rapid improvement in employment 32 There was a further strengthening in public finances 32 The trade surplus narrowed slightly 33

Financial markets 35

Banks 36 Structural changes in banking 36 Bank profitability and efficiency 37 Securities markets 38 Structure of securities markets 38 Developments in securities markets in 1999 39 Developments in supervision and regulation 40 International financial supervision 40 Domestic financial legislation 42

Payment and settlement systems 43

Changes in the operating environment 43 Development of payment and settlement systems 43 Oversight 44 The BoF-RTGS and TARGET 45 Other domestic payment systems and electronic money 46 Large-value payment systems in the euro area 47 Retail payment services in the euro area 48 Central securities depositories in the euro area and links between them 49 Securities and derivatives settlement systems 49 Changeover to the year 2000 in payment and settlement systems 50 Cooperation in the area of payment and settlement systems in Finland 50 Developments in legislation and EU directives 51

Annual Report 1999 5 Maintenance of the currency supply 52

The markka is making way for the euro 52 Preparations for cash changeover were stepped up 53 Further increase in value of currency in circulation 55 Sharp increase in banknote flows 56 Redemption of national banknotes of euro area countries started 57 No changes in flow of coins 57

Management of foreign reserves 59

International activities 62

The Bank of Finland as part of the European System of Central Banks 62 Other activities related to the 64 International Monetary Fund (IMF) 65 Other international activities 67

Economic analysis and research 69

Statistics 72

Information and publications 75

Organization and personnel 77

Personnel 77 Staff development and training 79

Information technology 81

Financial statements 82

Balance sheet 82 Profit and loss account 84 Appendices to the financial statements 85 Notes to the financial statements 87 Accounting conventions 87 Accounting principles applied to the profit and loss account 87 Notes to the balance sheet 88 Notes to the profit and loss account 89 Auditors’ report 91 Statement regarding the audit as defined in Article 27 of the European System of Central Banks Statute 92

Appendices 93

Monetary policy measures of the Eurosystem 94 Key measures affecting the financial markets 96 Main opinions issued by the Bank of Finland 99 Bank of Finland publications 122 The Bank of Finland’s organization 123

Tables 103

1. Monthly balance sheet of the Bank of Finland 104 2. Main refinancing operations of the Eurosystem 106 3. Key interest rates of the Eurosystem 106 4. Longer-term refinancing operations of the Eurosystem 107

6 BANK OF FINLAND 5. Euro area banking system’s liquidity position, averages of daily positions 108 6. Reserve base of euro area credit institutions subject to reserve requirements 110 7. Reserve maintenance of euro area credit institutions subject to reserve requirements 110 8. Euro area monetary aggregate M3 and corresponding items of Finnish monetary financial institutions 112 9. Harmonized Index of Consumer Prices for the euro area and Finland 112 10. Key market interest rates 113 11. Effective exchange rate of the euro and competitiveness indicator for Finland 113 12. Irrevocable euro conversion rates as from 1 January 1999 113 13a. Key euro exchange rates 114 13b. Other euro exchange rates, averages 114 14a. Key markka exchange rates 116 14b. Other markka exchange rates 116 15. Notes and coin in circulation 118 16. Deliveries of notes and coin 119 17. Notes sorted at the Bank of Finland 119 18. Bank of Finland interbank funds transfer system (BoF-RTGS) 120 19. Banks’ intraday credit limits 121 20. Domestic clearing operations 121

Charts

1. Harmonized Index of Consumer Prices for the euro area 14 2. Energy prices in the euro area 14 3. Monetary and credit aggregates in the euro area 14 4. Real GDP growth in the euro area 15 5. Official interest rates 15 6. Inflation differentials in the euro area 16 7. Unemployment rate in the euro area 16 8. Three month money market rates 17 9. Ten-year government bond yields 17 10. External value of the euro 18 11. Euro exchange rates against the US dollar and the Japanese yen 18 12. General government fiscal position in the euro area 19 13. Eurosystem interest rates and money market rates 22 14. Use of standing facilities in the euro area 22 15. Main refinancing operations of the Eurosystem 23 16. Cross-border use of collateral by central banks in the EU area 26 17. Value of pledged collateral assets held at the Bank of Finland in 1999 26 18. Price stability in the euro area and Finland 28 19. Stock of bank lending to households and companies in Finland 28 20. GDP in Finland and the EU area 29 21. Structure of supply 29 22. Consumption and consumer confidence 30 23. Housing prices in Finland 30 24. Industrial production 31 25. Number of employed and unemployment rate 32 26. Public finances 33 27. Trade account and current account 34 28. Net international investment position 34 29. Financial performance of deposit bank groups 37 30. Deposit banks: lending stock and interest rate margin 38 31. Bonds issued in Finland 39 32. Ratio of market capitalization of listed shares to GDP in selected countries as at 31 December 1999 40 33. Mutual funds registered in Finland 41 34. Turnover in derivative instruments on HEX 41 35. TARGET 44 36. Transactions in BoF-RTGS 46 37. Finnish banks’ minimum reserve deposits and intraday credit limits 47 38. TARGET cross-border payments in the EU, 1999 47 39. Large-value payment systems in the euro area: average daily number and value of payments, 1999 48 40. Monthly values of securities transactions settled in the systems operated by the Finnish Central Securities Depository (APK) 50 41. Holdings of notes and coins 54 42. Notes and coins in circulation in relation to GDP 54 43. Value of notes and coins in circulation 55 44. Flow of notes and coins through the Bank of Finland 56 45. The Bank of Finland’s operating expenses and income 78 46. The Bank of Finland’s training expenses 80

Annual Report 1999 7 Board of the Bank of Finland. From the left: Esko Ollila, Matti Vanhala, Matti Louekoski and Matti Korhonen.

8 BANK OF FINLAND The governor’s review

new era in European eco- the members of the Executive Board nomic integration dawned of the ECB and the governors of the Ain 1999 when Finland and NCBs of the participating countries. ten other European countries en- Implementation of monetary policy tered the Third Stage of Economic remains the responsibility of the and Monetary Union (EMU), be- NCBs, a task which they carry out gan to conduct a single monetary together with the ECB. policy and adopted a single curren- In view of the magnitude of cy, the euro. The transition to mon- these changes, the Eurosystem’s etary union went very smoothly, single monetary policy got off to a which was helped by the fact that good start. Decision-making within the changeover had been carefully the Governing Council was based planned and the participating coun- on the approved strategy, in-depth tries had already achieved price analysis and ongoing discussion stability and convergence in inter- and deliberation. The current as- est rates before the starting date. sessment is that the necessary mon- This created a good basis for the etary policy decisions taken by the single monetary policy that the new body in the course of the year (ECB) were reasonably well timed. began to conduct together with the At the onset of monetary un- national central banks (NCBs). ion, inflation in the euro area had For the countries involved, already slowed to a very moderate transition to the single monetary rate by historical standards. Fur- policy brought with it a fundamen- thermore, the increased competi- tal change in the operating environ- tion resulting from the opening up ment of monetary policy. The Euro- of economies, freeing of competi- system’s stability-oriented mone- tion, greater ease of conducting tary policy strategy, which is based trade and improved comparability on two pillars, was introduced of prices was conducive to mainte- without any noteworthy problems. nance of price stability. It is to be The aim is to maintain price stabili- hoped that monetary union will ty, the primary objective assigned also have an impact on wage agree- to the ECB, from the point of view ments and the pricing of goods and of the euro area as a whole. Mone- services in a way that is compatible tary policy decision-making is with price stability. Although the centralized in the Governing Coun- rate of increase in prices picked up cil of the ECB, which comprises in the course of 1999, largely be-

Annual Report 1999 9 cause of higher oil prices, it re- In recent months economic planned spending cuts, budgetary mained within the limits set by the growth in the euro area has gained positions in a number of EU coun- ECB for the price stability objec- momentum and the rate of increase tries are sensitive to an economic tive throughout the year. in prices has accelerated. Accord- slowdown and higher interest rates. The transition to monetary ing to forecasts, price stability will There is still a concern that in some union took place in conditions of be maintained in 2000, but stronger countries the 3% reference value relatively low interest rates. The economic growth, higher energy for the budget deficit will be NCBs of the participating countries prices and rapid credit growth have breached unless new fiscal meas- had completed the convergence of increased inflation risks. These ures are taken. In many countries their official interest rates in late risks are being monitored closely the consolidation of public financ- 1998. For various reasons, includ- within the Eurosystem and it will es calls for more ambitious meas- ing the Asian and Russian crises, be endeavoured to decide at the ures than those announced so far. economic activity slowed and the appropriate time on necessary After a gap of a couple of rise in prices virtually came to a monetary policy measures to safe- years, EU countries should now halt. In spring 1999 the Governing guard price stability. exploit the potential provided by Council of the ECB decided to The adoption of the single the recovery in economic activity reduce interest rates further. The monetary policy has increased the to put government finances on a interest rate on the main refinancing demands on the various areas of sounder footing and to mitigate operations was lowered to 2.50%, economic policy where decisions long-term structural problems. It and money market rates and bank are taken at national level. Given a should be stressed that the medium- lending rates responded by falling single monetary policy, only na- term objective stated in the Stability to historically very low levels tional fiscal, incomes and structur- and Growth Pact to achieve budg- throughout the euro area. As, more- al policies can address problems etary positions close to balance or over, the euro depreciated, monetary that are due to differences in in surplus is not intended to deal policy in Europe was very easy in national economic performance. solely with the risks associated 1999. Therefore monetary policy The objective of the Stability and with normal cyclical fluctuations provided strong support to the euro Growth Pact, which sets out the but also with pressures on public area economies. Unemployment guiding principles for fiscal policy, expenditure caused by excessive nevertheless remained at a high is to achieve budgetary positions in debt ratios and population ageing. level in Europe and it continues to general government finances that Government spending must be be a major problem. are close to balance or in surplus reined in so as to allow a narrowing In summer and autumn 1999 within the next few years. in the tax wedge. Moreover, the the euro area economy began to Although most EU countries prerequisites for growth and em- show signs of recovery. Besides the are estimated to have achieved the ployment must be enhanced by easy stance of monetary policy, the budget targets they set for 1999, in reforms that improve the function- upturn in activity benefited from many countries the structural bal- ing of markets and increase effi- robust economic growth in the ance in general government financ- ciency in the public sector. An United States and recovery from es did not strengthen to any signifi- accelerated reduction in public recession in the Southeast Asian cant degree. The reduction in defi- debt in the fastest growing coun- economies. The Governing Council cits was due in large part to a de- tries would alleviate inflationary raised interest rates in early No- cline in interest payments and, in pressures in these countries and vember. The markets welcomed the some countries, also to faster-than- help to foster balanced growth. rate hike. Even after the increase, expected economic growth. There The Finnish economy contin- interest rates in the euro area were was only a very small decline in ued to grow at a robust pace in still very low, and easy monetary the euro area’s large public debt. 1999 and at noticeably faster than conditions continued to support the Despite the improved econom- the euro area on average. Growth recovery of the euro area economy. ic outlook for the euro area and slowed in the first half of the year

10 BANK OF FINLAND because of a weakening in export the public sector in 1999. Tax re- cerned particularly with risks that demand, but strong domestic de- ceipts grew notably while public could jeopardize the reliable func- mand and a recovery in exports in expenditure, including employ- tioning of the entire financial sys- the second half of the year helped ment-related spending and interest tem. The transition to economic to sustain relatively rapid growth payments, declined and the in- and monetary union has increased throughout the year. Employment crease in government transfers the challenges for oversight and continued to grow and unemploy- slowed as a result of cuts decided underlined the importance of coop- ment fell. Structural unemployment in previous years. Central govern- eration between the relevant au- remains high, however. The struc- ment finances moved towards bal- thorities in the euro area. ture of exports diversified and ance and the surplus of the public The start of the Third Stage of price competitiveness remained sector as a whole increased. The EMU has been reflected in euro good. As the traditional sectors large public deficits that character- area financial markets in many were hit by the weakness of export ized the early 1990s have been ways. A wave of mergers, alliances demand, the growth of industrial replaced by surpluses and a down- and take-over bids has speeded up production rested entirely on the ward trend has been established in the pace of structural change in the continued strong growth of the public debt. banking sector in the euro area. electronics and telecommunica- The surplus in public finances, There are also signs of a trend tions sector. and especially central government towards increasing cross-border The fall in interest rates boost- finances, will grow over the next consolidation in the banking indus- ed private consumption and invest- few years as a consequence of try. The single monetary policy and ment. Private investment in non- good economic performance and the launch of the EU-wide TARGET manufacturing sectors grew con- a decline in interest payments on payment system have contributed siderably. Housing prices rose in government debt. However, the to the rapid integration of money response to lower interest rates, balance in public finances is built markets. The securitization of euro strong income expectations, a sub- on a very high level of taxation, area financial markets is well under stantial increase in equity wealth which, for structural reasons, is way, as evidenced in a marked and internal migration. Although unsustainable in the longer term. If increase in share and corporate there was a marked increase in hous- growth is to be secured in the fu- debt issues. ing investment, it was not enough to ture, there will have to be a signifi- Finnish banks have entered eliminate the imbalance between cant reduction in taxation. This will economic and monetary union in supply and demand in growth cen- have to be accompanied by further good condition by historical stand- tres. Confidence in the future was adjustment in public spending so as ards. Following the banking crisis, attested by the fact that both firms to make it possible to maintain the banking sector has gone and households increased their balance in central and local gov- through a process of streamlining borrowing and indebtedness. ernment finances in conditions that has left it structurally competi- Inflation increased in Finland where the tax burden is substantial- tive, and Finnish banks are now towards the end of 1999, mainly ly lower than at present. among the most profitable and because of higher oil prices, and In addition to the maintenance efficient in Europe. With the ex- exceeded the euro area average. In of price stability, the Bank of Fin- ception of wholesale banking, for- December the 12-month change in land is responsible for promoting eign banks still have a relatively consumer prices increased to over the stability and efficiency of the small presence in Finland. But the 2%, as measured by the Harmo- financial system. This task, which ever faster pace of consolidation in nized Index of Consumer Prices. is referred to as oversight, covers the banking sector and heightened Continued robust economic the banking sector, the securities interbank competition worldwide growth and a fairly tight stance in markets and financial market infra- pose great challenges for spending helped to structure, ie payment and settle- banks in the future. On top of this, strengthen the financial position of ment systems. Oversight is con- competition extending across dif-

Annual Report 1999 11 ferent fields of activity is changing ECB in preparatory work through work of the Bank of Finland in the the nature of banking. participation in the committees and form of an increase in the quantity A striking feature of develop- associated working groups set up of material produced and a heavier ments in Finnish securities markets to deal with matters in various workload. The Bank of Finland has in 1999 was the very rapid growth fields. These bodies have become endeavoured to increase transpar- of market capitalization and trade a central element of cooperation ency within the ESCB by, inter in the equity market. The growth of within the ESCB, and this has had alia, starting the publication of its equity transactions has placed pres- a major impact on day-to-day work own forecasts and disseminating sures on the settlement of trades, at the Bank of Finland. At home, information on issues related to and attention will have to be given the Bank of Finland seeks to pro- economic and monetary union to in the future to upgrading settle- mote national fiscal and other eco- the general public. ment procedures. The globalization nomic policies that are compatible The Bank of Finland’s organi- of securities markets is leading to with the ECB’s monetary policy. zation was streamlined and its op- rapid integration of market infra- The Bank is also actively involved erations revamped to better corre- structure in Europe. In Finland this in efforts to ensure that financial spond to the demands of coopera- has meant, inter alia, the establish- and payment systems in Finland tion within the ESCB. The most ment of links with national securi- are safe and efficient. important changes were the merger ties depositories in the German and Implementation of monetary of the two key departments respon- French securities markets. policy decisions – ECB money sible for economic analysis and The changeover to the single market operations – is decentral- preparation of monetary policy and monetary policy has brought with ized through the NCBs. The Bank the combination of statistical tasks it many operational and organiza- of Finland manages its own foreign previously scattered among differ- tional changes at the Bank of Fin- reserves, in addition to part of the ent departments into a single de- land. It is the Bank’s task and obli- ECB’s foreign reserves. Transition partment. Though some functions gation to endeavour to be an effec- to monetary union has entailed a were streamlined, the total number tive influence within the European marked increase in statistical tasks of staff did not decline significant- System of Central Banks (ESCB) and in cooperation in the sphere of ly in 1999 as the transition to mon- and for this reason the Bank de- statistics, both at home and within etary union meant an increase in votes considerable resources to the ESCB. The ECB’s active exter- tasks in some areas. expertise in the ESCB’s wide-rang- nal communication and publication ing work. The NCBs assist the policy has been reflected in the

12 BANK OF FINLAND Monetary policy, economic developments and implementation of monetary policy in the euro area

Price stability prevailed is to achieve this target over the in the euro area in 1999 medium term. The ECB’s strategy for attain- Transition to the single ing price stability comprises two monetary policy was pillars. The first is the money sup- accomplished without ply. In this connection, a reference major problems value of 4½% was set for the annu- al growth rate of the broad mone- The European Central Bank (ECB) tary aggregate M3 in 1999, as and the national central banks of measured by the three-month mov- the EU countries that adopted the ing average. The other pillar is a euro assumed responsibility for the broad assessment of the outlook euro area’s single monetary policy for price developments and the on 1 January 1999. The ECB’s risks to price stability in the euro Governing Council set the interest area. The assessment is based on rate on the main refinancing opera- analysis of conditions in the finan- tions of the Eurosystem at 3%, cial markets and a wide range of which was the common national other economic indicators. steering rate adopted by all the The deceleration in inflation euro area countries, except Italy, in in the euro area countries, which December 1998. At the same time, had started in mid-1998, continued the interest rate on the marginal until the beginning of 1999, by lending facility was set at 4.5% and which time the annual rate of in- the deposit rate at 2%. crease in the HICP was well below Such a low initial setting for 1% (Chart 1). The slowing of infla- the ECB’s key interest rate was tion was a result of declines in the made possible by the prevailing prices of goods imports and partic- conditions of price stability and ularly energy prices. The prices of slowing economic growth in the services, which have an impact on euro area. The interest rate settings domestic inflation, rose considera- were in harmony with the primary bly faster than goods prices. objective of Eurosystem monetary The rate of increase in euro policy – price stability – which is area consumer prices picked up defined as an annual rate of in- slightly during the first half of crease in the Harmonized Index of 1999, partly because of a strong Consumer Prices (HICP) of less upturn in crude oil prices from the than 2% for the euro area. The aim start of the year (Chart 2). A slow-

Annual Report 1999 13 Chart 1. ing in the rate of increase in food Harmonized Index of Consumer Prices for the euro area and services prices had a dampen- 12-month percentage change ing effect on inflation. Deregula- 4 tion in the telecommunications sector and tightening competition 3 2 in certain euro area countries helped to slow the rise in service 2 1 prices.

1 The growth of monetary ag- gregates was fairly subdued in the

0 early part of 1999 (Chart 3). None- 1996 1997 1998 1999 1. Total index theless, the average rate of increase 2. Services in the broad aggregate M3 did Source: Eurostat. climb marginally above its refer- ence value in response to a decline in interest rates. However, the gap was rather small in view of the Chart 2. uncertainty and special factors Energy prices in the euro area associated with the inception of the Index, 1995 = 100 112 euro area. Lending in the euro area 110 grew at a considerably faster pace 108 than M3, particularly lending to the

106 private sector. Growth was fastest

104 in the small peripheral countries,

102 where interest rates had fallen rap-

100 idly and the economic outlook was better than the euro area average. 98 1996 1997 1998 1999 The slowing in global econom- Source: Eurostat. ic growth became more evident in growth in the euro area countries in the latter part of 1998. The finan- cial crisis in Brazil in early 1999 Chart 3. Monetary and credit aggregates in the euro area provided a reminder of the vulner- 12-month percentage change ability of emerging market econo- 11 4 mies. But output in the United 10 States continued to grow at a fast- 9 er-than-expected pace. Moreover, 8 7 there were signs of incipient recov- 6 ery in several Asian countries, 1 5 although Japan continued to be 2 3 4 plagued by serious economic prob- 3 lems. 1997 1998 1999 1. M3 The slowest phase of GDP 2. M3 (3-month centred moving average of 12-month percentage change) growth in the euro area occurred in 3. Reference value for the growth of M3 early 1999 (Chart 4). The slowing 4. Bank lending to the private sector Source: European Central Bank. was particularly pronounced with regard to industrial production.

14 BANK OF FINLAND Economic growth was sustained by Despite a surge in the world oil rate differentials across euro area domestic demand, which offset the prices in the early part of the year, countries narrowed as output in the negative impact of net exports and the resulting rise in energy prices hitherto slower growing economies inventory changes. Private con- was reflected only gradually in the also gained momentum. sumption and investment both overall level of consumer prices in made positive contributions to the industrial countries. The rise in economic growth. prices was mitigated by both tight- Key interest rate raised er competition in many sectors and at the beginning of November the continued existence of spare Key interest rate lowered capacity. The annual rate of infla- On 4 November the Governing in April tion in the euro area, as measured Council decided to raise the inter- by the HICP, rose above 1% in the est rate on the main refinancing In April the Governing Council latter part of the summer. operations of the Eurosystem by decided to ease monetary policy by During the spring and summer 0.5 percentage point to 3%. Thus lowering the interest rate on the months growth prospects for the the rate returned to the level that main refinancing operations by 0.5 world economy improved, as the had prevailed before the cut in percentage point to 2.5% (Chart 5). outlook for GDP growth in Japan April. The rationale for the rate The decision was based on the picked up and the crisis economies hike was that the build-up in price view that euro area inflation would of Southeast Asia and South Ameri- pressures that had started in the remain under 2% in the medium ca generally continued to perform early part of the summer posed a term. The Governing Council did well. Among the EU countries threat to price stability. Moreover, not consider that the slight acceler- outside the euro area, growth pros- the outlook for economic growth ation in inflation – due mainly to a pects improved noticeably in the had improved and several indica- rise in energy prices – posed a United Kingdom and Sweden. tors, particularly growth in the threat to price stability in the medi- Growth in the euro area picked up money supply and lending, pointed um term. Nor did analysis of other in the second quarter as exports to easy monetary conditions in the economic variables reveal risks that and industrial production recov- euro area. The Governing Council could jeopardize price stability in ered. In the third quarter growth judged that the rate hike would the euro area. strengthened further, and growth help to check price pressures in the

Chart 4. Chart 5. Real GDP growth in the euro area Official interest rates Percentage change compared with the same quarter a year earlier % 4 7

6 2 3 5

4 2 1 3

2 1

1 3 0 0 1995 1996 1997 1998 1999 1995 1996 1997 1998 1999 Source: Eurostat. 1. Eurosystem: main refinancing rate (German repo rate until end-1998) 2. United States: fed funds target rate 3. Japan: discount rate

Sources: European Central Bank and Reuters.

Annual Report 1999 15 Chart 6. Chart 7. Inflation differentials in the euro area Unemployment rate in the euro area % % 6 13

5 12 4 11 3 2 2 10 1 1 9 3 0

-1 8 1996 1997 1998 1999 1995 1996 1997 1998 1999 1. Inflation rate in Finland Source: Eurostat. 2. Highest inflation rate in the euro area 3. Lowest inflation rate in the euro area

Sources: Statistics Finland and Eurostat.

medium term and keep expected value – the definition of euro area Reflecting favourable develop- inflation below 2%. price stability, estimated GDP trend ments and growth prospects for the The interest rate decision was growth and the trend decline in M3 global economy, real GDP growth influenced by data on money sup- velocity – had remained essentially in the euro countries picked up ply and lending growth. The unchanged. substantially in the final months of growth rate of M3 had accelerated 1999. However, for the year as a during the latter part of the summer whole, GDP growth – at just over and the autumn. The three-month Favourable economic 2% – was notably weaker than in average for the annual growth rate performance in the latter part 1998, largely because of the poor was 5.9% for July–September, ie of the year growth performance in the first nearly 1½ percentage points above half of 1999. the reference value. Moreover, the During the final months of 1999 the Unemployment in the euro volume of lending, especially to rise in euro area consumer prices area declined in the course of the the private sector, had continued to continued to accelerate modestly 1999 and stood at just below 10% grow at fairly rapid pace. Overall, and HICP annual inflation was at year-end (Chart 7). Starting in the continuing and widening gap 1.7% in December. This was mainly the late spring the decline in the between the actual and reference the result of continued increases in unemployment rate slowed, but it growth rates for M3 suggested that prices of energy and the weakening picked up again in the final quarter there was an abundance of liquidity of the euro. A slowdown in the rate of the year as economic growth in the euro area, which was judged of increase in, for example, food strengthened. Although the unem- to pose a potential threat to price prices, was one of the factors that ployment rate for the whole euro stability in the medium term. helped to dampen overall inflation. area remained at a level that was At the beginning of December A look at the inflation differential high in comparison with the past the Governing Council decided to between the euro area countries and by international standards, keep the reference value for money with the highest and lowest inflation some tightness was observed in the growth in 2000 the same as in rates shows that the gap, which was labour markets of several of the 1999, ie 4½%. The decision was just over 2 percentage points in faster growing countries, either in based on the fact that the underly- January, narrowed slightly in the specific sectors or on an economy- ing components of the reference course of the year (Chart 6). wide basis.

16 BANK OF FINLAND The current account surplus euro area remained around 3% expecting a 25 basis point reduc- for the euro area in 1999 was EUR during the first quarter. At that tion, as reflected in the decline in 43 billion, which was nearly 1% of time the markets were expecting a market rates before the decision. GDP. The inflow of external funds further decline in interest rates rates fell sharply in re- into the euro area resulted not only (Chart 8). Confidence in the euro sponse to the interest rate cut. from the current account surplus; was reflected in a decline in long- The substantial decline in in- euro area banks also attracted a term interest rates in the euro area. terest rates quelled market expecta- large amount of external invest- In Germany the ten-year govern- tions of further rate cuts. Move- ment capital. Capital outflows from ment bond yield fell below 4% at ments in long-term rates were the euro area, both portfolio invest- the start of 1999, a decline of more dominated mainly by movements ment and direct investment, went than 1.5 percentage points com- in corresponding US rates. None- mainly to the United States. Taken pared with a year earlier. The de- theless, by early summer the differ- as a whole, the euro area’s external cline was partly the result of grow- ential between euro area and US assets and liabilities are nearly in ing uncertainty in the international long-term rates had widened to balance; Germany has a small net financial markets, which height- about 1.5 percentage points. asset position while most other ened investors’ interest in, for ex- In the early part of the summer countries have net liabilities. ample, the euro area. During the euro area long-term interest rates, same period rates on US long-term in particular, turned up. Between government bonds declined by the start of June and mid-August Market interest rates rose in slightly less than a percentage yields on ten-year government the course of the year point, resulting in a widening in bonds rose by nearly a percentage the differential between euro area point and the euro area yield curve The changeover to the single mon- and US long-term rates (Chart 9). steepened markedly. Initially, inter- etary policy was accomplished The Governing Council’s April est rates moved in response to the without any major problems, and in decision on interest rates took the rise in US long-term rates, which the early months of the year euro financial markets by surprise as was associated with expectations of area interest rates were relatively regards the magnitude of the a tightening in the country’s mone- stable. Money market rates in the change. The markets had been tary policy. Later, interest rate

Chart 8. Chart 9. Three-month money market rates Ten-year government bond yields % % 8 10 1 9 7 1 8 6 2 7 2 5 6 4 5 4 3 3 3 2 3 2 1 1 0 0 1995 1996 1997 1998 1999 1995 1996 1997 1998 1999 1. Euro area1 1. Euro area1 2. United States 2. United States 3. Japan 3. Japan

1Euribor from January 1999. Until end-December 1998 the euro area rate 1From January 1999 the weights are the nominal outstanding amounts of is calculated as the average of national rates weighted by GDP. government bonds. Until end-December 1998 yields are calculated on the basis of harmonized national government bond yields weighted by GDP. Sources: European Central Bank and Reuters. Sources: European Central Bank and Reuters.

Annual Report 1999 17 ber the three-month Euribor rate Chart 10. External value of the euro rose by nearly 0.4 percentage point Index, January–March 1999 = 100 when the first three-month agree- 115 ments maturing in 2000 were made. 110 As regards long-term interest

105 rates, the November rate hike re- duced market uncertainty and led to 100 a slight fall in market rates. At the 95 end of 1999 the yield on German 90 ten-year government bonds was 85 5.4%. Long-term interest rate differ- 1995 1996 1997 1998 1999 An upward movement in the index represents entials within the euro area remained an appreciation of the euro. small throughout the year, never Before 1999 a trade-weighted index of the currencies of euro area countries. exceeding 0.3 percentage point. Source: European Central Bank.

The euro depreciated Chart 11. Euro exchange rates against the US dollar and the Japanese yen During the first half of 1999 the EUR/USD EUR/JPY 1.6 160 euro depreciated substantially in

1.5 150 terms of the trade-weighted index (Chart 10) against both the US 1.4 140 1 dollar and the Japanese yen 1.3 130 (Chart 11). Exchange rate develop- 1.2 120 ments were largely due to cyclical 2 1.1 110 asymmetries between the US and euro area economies and especially 1.0 100 1995 1996 1997 1998 1999 to the weak economic performance An upward movement of the curve represents an appreciation of the euro. of the core countries of the euro Ecu exchange rate until end-December 1998. area. Other factors contributing to 1. Value of one euro in US dollars (left-hand scale) the euro’s weakness were uncer- 2. Value of one euro in Japanese yen (right-hand scale) Source: Reuters. tainty concerning the stance of German and Italian economic poli- cy and the prolongation of the war movements were influenced largely in response to improving growth in Kosovo. by improved growth prospects for prospects and expectations of a hike A change seemed to have oc- the euro area and expectations of a in the Eurosystem’s key interest curred in the latter part of July possible tightening in the single rates. As the decision in early No- when the euro began to appreciate monetary policy. By mid-August vember to raise the key rates was noticeably, especially against the the gap between ten-year and closely in line with market expecta- dollar. This was partly a result of three-month rates on the German tions, money market rates remained the improved prospects for the yield curve had widened to more virtually unchanged after the rate German economy. It nevertheless than 2 percentage points, compared hike. During the autumn months proved to be a transitory develop- with 0.6 percentage point at the developments in money market ment, and in the autumn the euro start of the year. rates were also influenced by uncer- depreciated again. The continued Around the beginning of Octo- tainties concerning the millennium strength of the US economy helped ber money market rates rose again changeover. At the end of Septem- to sustain the dollar against the

18 BANK OF FINLAND euro. In late November and in De- early 1999. In these programmes government deficit to euro area cember the euro was lower against the EU countries presented their GDP fell by about half a percent- the dollar than at any other time in fiscal policy plans for the next few age point from the previous year to 1999. In the course of the year the years and measures that would be about 1½%, which was slightly euro depreciated most against the taken to achieve consolidation of better than projected in the stability US, Canadian and certain Asian public finances. programmes (Chart 12). The de- currencies. By contrast, the euro’s In their stability programmes, cline in the general government exchange rate did not change as the euro area countries forecast an deficit was primarily a result of much against many European cur- improvement in government fi- lower interest expenditure, reflect- rencies, such as the Swiss franc, nances over the next few years. The ing a fall in the average interest and Norwegian euro area general government defi- rate on debt and a slight reduction krone. In terms of the trade- cit was expected to decline to 1.8% in the size of the outstanding debt. weighted index, the euro depreciat- of GDP in 1999 and further to Growth in household income and ed by 15% in the course of 1999. 1.1% in 2001; the corresponding private consumption expenditure, figures for debt-to-GDP ratios together with companies’ favoura- were 72.4% and 69.9%. Individual ble financial results, boosted tax Favourable economic countries’ programmes differed receipts in the euro area countries. conditions helped reduce greatly, however, in terms of their Economic growth helped to reduce the euro area general degree of ambition. Ireland, Lux- unemployment and related expendi- government deficit by more embourg and Finland aimed to ture. Overall, however, the ratio of than had been anticipated maintain or increase their general general government expenditure to government surpluses, while Ger- GDP remained at roughly the same EU member states published their many, France, Italy, Austria and level as in 1998 and the primary first stability and convergence Portugal aimed at reducing their surplus increased only slightly. programmes1 around late 1998 and deficits to about 1% of GDP dur- In Ireland and Finland, the ing the period concerned. general government balance re- 1 Stability programmes for euro area coun- Preliminary data indicate that mained clearly in surplus in 1999 tries and convergence programmes for other EU countries. in 1999 the ratio of the general (Table). In the other euro countries,

Chart 12. General government fiscal position in the euro area General government surplus (+) / deficit (– ) General government debt % of GDP % of GDP 0 80

-1

-2 70

-3

-4 60

-5

-6 50 1988 89 90 91 92 93 94 95 96 97 98 99 1988 89 90 91 92 93 94 95 96 97 98 99 Source: Eurostat. Source: Eurostat.

Annual Report 1999 19 Stability programme Preliminary 2) Stability programme Preliminary 2)

Table. ment deficits on a discretionary General government fiscal position basis. The leeway created by higher

General government surplus (+) / deficit (– ), tax receipts and lower debt service % of GDP1) costs was used to cut taxes and 1998 1999 Stability Preliminary2) Stability Preliminary2) social security contributions. In programme programme countries where tax reforms led to Belgium – 1,6 – 1,0 – 1,3 – 0,9 reductions in government revenue, Germany – 2,5 – 1,7 – 2,0 – 1,2 expenditure was cut only enough to Spain – 1,9 – 2,3 – 1,6 – 1,3 France – 2,9 – 2,7 – 2,3 – 2,1 offset the lost-revenue effects on Ireland 1,7 2,1 1,7 3,2 the financial balance. Italy – 2,6 – 2,7 – 2,0 – 2,0 Netherlands – 1,3 – 0,8 – 1,3 – 0,6 Austria – 2,2 – 2,4 – 2,0 – 2,2 Portugal ––1,5 – 2,0 – 1,3 Implementation of Finland 1,1 1,4 2,4 2,3 monetary policy within the Eurosystem General government debt, % of GDP1) 1998 1999 Stability Preliminary2) Stability Preliminary2) Monetary policy programme programme instruments Belgium 117,5 116,2 114,5 114,9 Germany 61,0 60,7 61,0 61,0 The operational framework for the Spain 67,4 64,8 66,4 63,5 France 58,2 60,3 58,9 60,3 single monetary policy was adopt- Ireland 59,0 55,0 52,0 52,0 ed at the beginning of 1999 for the Italy 118,2 116,8 114,6 114,7 purpose of conducting ECB mone- Netherlands 68,6 66,6 66,4 64,3 Austria 64,5 63,3 63,5 63,5 tary policy. The framework com- Portugal 58,0 56,5 56,8 54,8 prises three interrelated core ele- Finland 51,9 48,5 48,5 47,1 ments: open market operations; standing facilities; and a minimum

1) Deficit and debt figures for the stability programmes are based on the old statistical proce- reserve system. The functions asso- dures (ESA 79). The figures for the stability programme updates are based on the new statis- ciated with implementation of the tical procedures (ESA 95). The Commission estimates are based on statistical methods employed by the euro area countries, which may in some cases differ from the methodology single monetary policy are for the of ESA 79 or ESA 95. Because of the changes in statistical procedures, the stability pro- most part decentralized between the gramme figures, the stability programme update figures, the Commission figures and Statis- tics Finland figures are not fully comparable. national central banks (NCBs),

2) Sources: Austria and Portugal: Commission forecast, Eurostat and EC Economic Data which act in accordance with instruc- Pocketbook, 15 December 1999; Finland: Statistics Finland; all other countries: stability tions issued by the ECB’s Governing programme updates. Council and Executive Board. These functions include policy operations as well as payment systems and deficit reductions meant progress result of which the country collateral management. In 1999 all toward fiscal balance. The larger achieved the 2% deficit-to-GDP Eurosystem monetary policy opera- euro countries trimmed their defi- ratio set in its stability programme. tions were implemented in a decen- cits as projected. The German defi- In the smaller countries, above- tralized manner. cit declined by about half a per- average economic growth led to Eurosystem monetary policy is centage point. In France the deficit above-average improvements in conducted mainly via open market declined by over half a percentage general government balances. operations in accordance with point but was still over 2% of GDP. For the euro area as a whole, strategies determined by the ECB’s In Italy too the deficit declined by only minor progress was made in Governing Council. These opera- over half a percentage point, as a 1999 in reducing general govern- tions have an impact on short-term

20 BANK OF FINLAND money market rates. The most marginal lending facility consider- The changeover to the euro did important open market operations ably higher and the rate on the not result in any notable changes in are the weekly main refinancing deposit facility considerably lower the Bank of Finland’s monetary operations, which for the most part than the rate on the main refinanc- policy instruments. This was partly cover the central bank financing ing operations. As such a large because in the years leading up to needs of euro area banks. The main group of credit institutions has ac- the changeover the Bank revamped refinancing operations are tender cess to the standing facilities, the its policy instruments to bring them operations that are open to a large interest rates on the marginal lend- in line with those of the Eurosystem. group of counterparties and have a ing facility and the deposit facility The smallest changes were in the maturity of two weeks. form the ceiling and floor for over- standing facilities. The minimum In order to maximize the steer- night rates in the money market. By reserve system was also left almost ing effect on short-term money changing the interest rates applied intact, the major change being the market rates, the ECB conducted its to the standing facilities, the ECB payment of interest on credit insti- main refinancing operations in 1999 can also send signals concerning the tutions’ reserve deposits. only by means of fixed rate tenders. stance of monetary policy. Changes in open market opera- In addition to the main refi- The minimum reserve system tions were more significant. Where nancing operations, the Eurosystem is the third core element of the before Finnish banks operated in a provides banks with liquidity via Eurosystem’s operational frame- system characterized by excess longer-term refinancing opera- work. Credit institutions operating liquidity, they now had to adjust to tions. In these monthly operations, in the euro area are required to a general shortage of liquidity in three-month collateralized loans hold reserve deposits in NCBs. An the euro area. At the same time the are granted. As the longer-term institution’s reserve base includes main instrument for market opera- refinancing operations are not the following balance sheet items: tions, the Bank of Finland’s intended to signal the stance of deposits, debt securities and money liquidity-absorbing CD tenders, monetary policy, all of them were market paper. The reserve require- were replaced by the Eurosystem’s conducted by means of variable ment, which is 2% of the reserve liquidity-providing main refinanc- rate tenders in 1999. The Euro- base, is the minimum average bal- ing operations. system did not conduct any fine ance that a credit institution is In the course of 1999 the Euro- tuning operations in 1999. required to hold at an NCB during system met the bulk of credit institu- The primary purpose of the a given one-month maintenance tions’ central bank financing needs Eurosystem’s standing facilities is period. The averaging feature of via the main refinancing operations. to assist credit institutions in man- the minimum reserve system ena- The daily average amount of liquid- aging their liquidity. If a credit bles credit institutions to adjust ity provided to credit institutions institution with access to the stand- their reserve balances to take ad- through the main financing opera- ing facilities finds, on a given day, vantage of interest rate changes tions was EUR 137 billion; longer- that its liquidity is inadequate, it and thus tends to dampen fluctua- term financing added another EUR can obtain overnight liquidity from tions in shorter-term money market 48 billion on average. The net ef- an NCB against eligible assets. Or, rates. The reserve requirement also fect of the standing facilities was to if an institution has excess liquidity raises credit institutions’ aggregate increase total liquidity by a small at the end of the day, it can make demand for central bank financing amount: the marginal lending facil- an overnight deposit. on average by the amount of the ity provided EUR 1 billion and the In order to discourage exces- requirement. Since the Eurosystem deposit facility absorbed EUR 0.8 sive use of the standing facilities pays interest on required reserves at billion a day on average. In 1999 and encourage credit institutions to the same rate as that applied in the the average total reserve require- rely mainly on the money market main refinancing operations, credit ment for participating credit insti- for managing their liquidity, the institutions are not financially bur- tutions was EUR 102 billion. ECB sets the interest rate on the dened by the reserve requirement.

Annual Report 1999 21 Only minor changeover which helped increase the depth of tenance period was exceptionally a problems in euro area the markets. Particularly positive month longer than usual. money markets developments in this connection At the very beginning of 1999, occurred in the deposit and swap certain factors were at work that With the introduction of the single markets. Euribor rates secured an had the effect of slowing the redis- currency at the beginning of 1999, undisputed position as the main tribution of liquidity. This was the operating environment for euro reference rates in the derivatives evident in the abundant use made area money markets expanded to markets. of the marginal lending facility embrace the whole euro area. This In the initial stage of the euro (Chart 14). Owing to occasional meant that credit institutions had to area money markets, credit institu- problems involving payment sys- adjust quickly to a totally new situ- tions’ liquidity management was tems and eg credit institutions’ ation. In particular, important marked by a number of exceptional payment orders, the operating changes occurred in liquidity man- uncertainties. As reserve require- hours of the TARGET system were agement as regards instruments ments were based on balance sheets temporarily lengthened. The use of and counterparties. Overall, the at end-1998, credit institutions’ the standing facilities was not con- transition to a euro area-wide mon- individual and aggregate require- nected solely with the demand for ey market went very smoothly. ments were not known until end- overnight loans, however, as insti- The introduction of the euro January 1999. Another uncertainty tutions were at the same time mak- led to an increase in cross-border regarding liquidity needs was ing use of the deposit facility. This money market transactions. In fact, the initial unevenness of the distri- situation was symptomatic of the over half of all money market bution of liquidity within the euro initial problems that arose in con- transactions in 1999 were cross- area. Because of these uncertainties, nection with the distribution of border transactions. The volume of the Governing Council decided to liquidity among credit institutions. money market deposits and repos set an exceptionally narrow corridor The initial problems neverthe- grew considerably, the bulk of for money market interest rates less turned out to be short-lived, and transactions being in very short- from the beginning of 1999 in the Governing Council decided to term instruments. The money mar- order to improve the functioning of widen the interest rate corridor with kets integrated to a significant the money markets (Chart 13). effect from 22 January. Thus the degree in the course of the year, Moreover, the initial reserve main- ECB reduced the NCBs’ role in

Chart 13. Chart 14. Eurosystem interest rates and money market rates Use of standing facilities in the euro area % EUR million, daily average during the reserve maintenance period 5.0 4,000 1 4.5 3,000

4.0 2,000 1,000 3.5 2 1 0 3.0 2 4 -1,000 2.5 -2,000 3 2.0 -3,000 1.5 -4,000 1.0 -5,000 I II III IV V VI VII VIII IX X XI XII II III IV V VI VII VIII IX X XI XII 1999 1999 1. Marginal lending rate Month in which the reserve maintenance period ends. 2. rate 3. Deposit rate 1. Overnight deposits 4. Main refinancing rate 2. Marginal lending facility Source: European Central Bank. Source: European Central Bank.

22 BANK OF FINLAND evening out credit institutions’ li- quidity and gave the money markets Chart 15. Main refinancing operations of the Eurosystem more leeway in which to function. EUR billion % In order to increase the effective- 2,500 100 2,250 90 ness of the liquidity redistribution 2,000 80 process, the Governing Council had 1,750 70 3 earlier decided to apply an interest 1,500 60 1,250 50 rate corridor that was asymmetric 1,000 40 1 with respect to the main refinancing 750 30 rate. The result was that borrowing 500 20 250 2 10 overnight liquidity from the central 0 0 bank became relatively more costly 1999 1. Bids (left-hand scale) than making overnight deposits with 2. Allotment (left-hand scale) 3. Allotment ratio (right-hand scale) the central bank. The money mar- Source: European Central Bank. kets then began to operate more efficiently, as reflected in a dampen- ing of fluctuations in overnight interest rates and a narrowing of that, even though the ECB accept- by a half percentage point, expec- cross-country differences in over- ed all tender bids for liquidity, it tations of a rate hike led to bids in night rates. It can be said that the was unable to distribute the intend- the main refinancing operation that euro area-wide money markets ed total amount of liquidity. Then were 35 times the allotted amount began to function effectively al- on 8 April the Governing Council of liquidity. After the rate hike, the ready at the beginning of February. cut the main refinancing rate by a spread between money market half percentage point. At the same rates and the main refinancing rate time the Council made the interest narrowed substantially, and this in Main refinancing operation rate corridor symmetric with re- turn dampened the overall interest became the key instrument spect to the main refinancing rate, in Eurosystem operations as the for managing system liquidity so that the marginal lending rate year wound down. There was in was a percentage point above and fact a pronounced slowing of over- In the main refinancing operations, the rate on the deposit facility a all money market activity in De- credit institutions’ total bid amounts percentage point below the main cember as credit institutions scaled have greatly exceeded the amounts refinancing rate. back operations in the face of un- of liquidity allotted. Right from the In the early part of the third certainties associated with the mil- start of 1999 credit institutions’ quarter market expectations of a rise lennium changeover. total bids in the tenders amounted in interest rates began to take root. Another key factor behind the to about ten times the amount of As these expectations gained rise in money market rates in the liquidity allotted, and at times dur- strength, the amounts of credit insti- second half of the year was the risk ing the year total bids were substan- tutions’ tender bids increased and the premium on deposits and other tially higher (Chart 15). allotment ratios dropped to very low financial contracts maturing after By the second quarter of the levels. However, as the end of the year-end. The premia were particu- year expectations of a decline in quarter approached, expectations of larly large in mid-November. Al- interest rates began to have an an interest rate rise eased slightly, though uncollateralized loans important effect on liquidity man- only to strengthen even more at the attracted the largest premia, collat- agement, in respect of both credit start of the fourth quarter. eralized contracts maturing after institutions and the Eurosystem. At Just before the Governing year-end also included premia. the beginning of April these expec- Council’s decision of 4 November Because of uncertainties tations strengthened to the point to raise the main refinancing rate connected with the millennium

Annual Report 1999 23 changeover, the Governing Council explained by the particularly good counts, or in correspondent banks’ made temporary arrangements in liquidity situation of Finnish credit current accounts. Generally speak- respect of Eurosystem operations. institutions. In contrast to most ing, member banks of the Amalga- In each of the last three longer- other euro area countries, the Finn- mation of cooperative banks met term refinancing operations in ish banking sector had a surplus their reserve requirements via 1999, EUR 25 billion of liquidity liquidity position vis-à-vis the OKOBANK and the independent was allotted, as compared with the central bank in 1998. For this rea- cooperative banks and savings usual EUR 15 billion. In order to son, Finnish credit institutions banks via Aktia Sparbank. Other avoid the maturing of any opera- obtained a large amount of liquidi- entities subject to reserve require- tions during the first week of 2000, ty immediately at the beginning of ments held most of their reserves the Governing Council decided to 1999 with the maturing of Bank of in their current accounts at the Bank exceptionally lengthen the maturity Finland CDs that had been issued of Finland. Finnish credit institu- of each of the last two main refi- in liquidity-absorbing operations tions accounted for 1.5% of total nancing operations to three weeks. towards the end of 1998. The euro area reserve requirements. Activity in the money markets strong liquidity position of Finnish slowed markedly before year-end, companies also made it easier for but after the smooth millennium credit institutions to obtain in- Collateral arrangements for changeover, activity levels quickly expensive funding in 1999. As a central bank credit become returned to normal. result of all these factors, Finnish uniform throughout credit institutions were for the most the Eurosystem part on the lending side of liquidity Finnish credit institutions’ role transfers vis-à-vis foreign credit The onset of Stage Three of EMU in Eurosystem operations institutions in 1999. It was only brought significant changes in when money market conditions collateral arrangements for central Within the decentralized frame- became extremely tight that Finn- bank credit. The stock of assets work for implementation of Euro- ish credit institutions resorted to eligible as collateral grew and be- system monetary policy, the Bank substantial use of central bank came more homogeneous, so that of Finland’s role was to execute financing. the same securities became eligible operations in which the counterpar- The highly liquid position of throughout the euro area for use in ties were credit institutions located Finnish credit institutions was also money market operations as well as in Finland. Finnish credit institu- reflected in their asymmetric use of for intraday and overnight credit. tions’ share of total liquidity the standing facilities in 1999. Eligible assets are broken allotted in the Eurosystem’s main These institutions accounted for down into two main classes: tier refinancing operations ranged from only 1.1% of total usage of the one and tier two. Tier one assets are zero to 1.3% and averaged 0.5%. marginal lending facility in the marketable debt instruments that For the longer-term refinancing Eurosystem compared with 3.7% meet the ESCB’s uniform euro area- operations, the average share was for the deposit facility. Altogether, wide eligibility criteria. Tier two similar. During the year eight of twelve credit institutions operating assets are other securities that are of the credit institutions belonging to in Finland made use of Eurosystem particular importance for national Bank of Finland’s eleven counter- standing facilities. financial markets and banking sys- parties took part in the main re- At the end of 1999 there were tems and which meet eligibility financing operations. Four credit 346 Finnish credit institutions par- criteria set by national central banks institutions participated in the long- ticipating in the minimum reserve subject to ECB minimum criteria. er-term refinancing operations. system. These institutions held For example, the Bank of Finland The small (even in relative reserve deposits at the Bank of approves as tier two assets only terms) share of Finnish credit insti- Finland, either in their own current domestically issued marketable debt tutions in Eurosystem operations is accounts, in special reserve ac- securities in book-entry form and

24 BANK OF FINLAND denominated in euro or national rate and the initial margin. Since the same bank to the Bank of Fin- denominations of the euro. the start of 1999 euro area central land are used as security for the Securities issued in the non-euro banks have granted credit only total amount of credit obtained by EU countries, ie the United King- against adequate collateral. This the bank; there is no link between dom, Greece, Denmark and Sweden, full collateral requirement did not collateral and specific credit opera- can also be used as collateral for cause changes in collateral man- tions. The pooling model enables intraday credit, subject to bilateral agement in Finland since the Bank flexible exchange of collateral agreements between central banks. of Finland had previously required while credit is outstanding. The At year-end the total nominal adequate collateral in respect of adoption of uniform collateral value of eligible assets issued in both money market operations and assets throughout the Eurosystem Finland and held at the Finnish payments-related intraday credit. means that banks can also use CDs Central Securities Depository as collateral for intraday credit. (APK) was about EUR 57 billion. Collateral assets issued in Fin- The corresponding figure for the Changes in collateral land are processed through auto- whole euro area was about EUR management in Finland matic collateral management ac- 5,500 billion, excluding a very counts in the APK’s system. Collat- small amount of nonmarketable In Finland all assets used as collat- eral assets that have been issued in assets. Tier one assets accounted eral must be in book-entry form. other countries are handled via the for 96% of the total stock of collat- Tier one assets are mainly bench- Correspondent Central Banking eral in the euro area, compared mark bonds and other debt instru- Model (CCBM), according to with 68% for Finland. ments issued by the central govern- which central banks act as collater- The ESCB bears responsibility ment. So far, the Finnish tier two al depositories for each other. In for credit risks associated with tier list has included only bank CDs. In addition, at the end of May 1999 one assets. For tier two assets and October 1998 the Board of the the ECB approved 29 collateral- assets issued in non-euro EU coun- Bank of Finland took a decision in transfer links between securities tries, the responsibility lies with the principle to approve assets from depositories, and more have been NCBs that list the assets. non-euro EU countries as collateral approved since then. As part of the collateral man- for intraday credit in Finland. This One of the approved links is agement framework, euro area- decision became effective on that between the APK and Deut- wide risk control arrangements 16 August 1999. sche Börse Clearing AG2 , which were put in place at the beginning Prior to 1999 the Bank of Fin- can be used for two-way transfers of 1999. In calculating an institu- land’s liquidity-providing money of Finnish and German securities tion’s collateral requirement, an market operations were conducted between the respective securities initial margin is added, which var- on the basis of repurchase agree- depositories. Since the beginning of ies according to the original matur- ments using CDs issued by the December it has been possible to ity of the credit. In addition, a banks and the Bank of Finland. To use the link to route collateral assets haircut is applied to an asset’s mar- obtain intraday credit, the banks transferred from Germany to Fin- ket value in determining its collat- pledged collateral to the Bank of land directly to the Bank of Finland. eral value. The size (percentage) of Finland. CDs were not accepted as In September 1999 a link between the haircut depends on the maturity collateral for intraday credit. the French depository, Sicovam SA, of the debt instrument and whether With the introduction of the and the APK was approved. the interest rate is fixed or variable. euro, the Bank of Finland also The collateral value of securities began to conduct money market used as collateral for a central bank operations on a collateralized basis credit must always meet the total and to apply the pooling system in requirement, which comprises the collateral management. In a pool- 2 Since 1 January 2000 Clearstream Bank- amount of the credit, the interest ing system, all assets pledged by ing AG, Frankfurt.

Annual Report 1999 25 Chart 16. Cross-border use of collateral by central banks in the EU area, situation at end-1999 Breakdown by user country Breakdown by country of issue

Other Belgium Finland Other 3 % 5 % 1 % 7 %

Netherlands Netherlands 15 % 3 % Germany 24 %

Luxembourg Luxembourg 7 % Italy 14 % 45 % Spain Belgium 3 % 17 % Ireland 3 % Finland 1 % United Kingdom France Germany Spain 12 % 18 % 16 % 4 %

Source: European Central Bank.

Use of collateral in of tier two securities as collateral in than-expected use of securities is- the euro area and Finland the euro area as a whole, and those sued in other euro countries. that were used were for the most part At the end of 1999 banks lo- The use of collateral was not en- nonmarketable securities in paper cated in Finland were using 1% of tirely uniform across the euro area form. In Finland the use of tier two the total amount of cross-border during the first year, as some cross- securities was more common than in collateral in use throughout the country differences persisted. For the euro area on average. Eurosystem, compared with 24% the whole euro area, the bulk of Although banks in the euro area for banks in Germany, for example domestic collateral consisted of tier as a whole used mainly domestic (Chart 16). Of the total amount of one securities. There was little use collateral, they did made greater- cross-border collateral used in the euro area, Italian issues accounted for 45%. The corresponding figure for Finnish issues was about 1%. Chart 17. Value of pledged collateral assets held at Banks operating in Finland the Bank of Finland in 1999, end-of-month stocks began to use securities issued in EUR billion 10 non-euro EU countries as collateral 9 1 for intraday credit as soon as this 8 2 7 became possible in August 1999. 6 In other euro area countries, the 3 5 use of securities issued in non-euro 4 3 EU countries as collateral was 4 2 insignificant. 1 At year-end the total value of 0 I II III IV V VI VII VIII IX X XI XII collateral pledged to the Bank of 1999 Finland was EUR 9.5 billion 1. Foreign assets from non-euro area EU countries 2. Foreign assets from euro area countries (Chart 17), and the Bank was hold- 3. Domestic assets – tier two 4. Domestic assets – tier one ing EUR 1 billion worth of securi- Source: Bank of Finland. ties in custody for other central banks.

26 BANK OF FINLAND Economic developments in Finland

he Finnish economy grew at ed on the basis of economic condi- an exceptionally rapid pace tions prevailing in the euro area as T in the years preceding the a whole. The stance of monetary start of the Third Stage of Eco- policy does not take into account nomic and Monetary Union the special needs of individual (EMU). In the period 1994–1998 countries or regions within the GDP growth averaged 4.6% a year, euro area. Consequently, national which was noticeably faster than fiscal policy and the domestic the average for the EU area. De- labour market bear a major respon- spite robust growth, domestic pric- sibility for ensuring stable eco- es and costs remain subdued, mov- nomic growth and moderate cost ing closely in line with develop- developments. ments in the rest of the euro area. No significant imbalances emerged in the economy and the conver- Rise in prices picked up gence criteria for economic and towards the end of the year monetary union were met success- fully. At the start of the Third Stage of During the years of rapid eco- EMU, the rate of increase in con- nomic growth, the capital struc- sumer prices in Finland, as meas- ture, profitability and competitive- ured by the Harmonized Index of ness of the corporate sector all Consumer Prices (HICP), was in improved substantially. At the line with the price stability objec- same time household indebtedness tive set by the Governing Council decreased significantly and the of the European Central Bank general government fiscal position (ECB), despite robust economic moved into surplus. By contrast, growth. The same was true for the unemployment and government rate of increase in consumer prices debt were still at worryingly high in Finland throughout 1999, al- levels when the Third Stage of though it did exceed the euro area EMU started. average by a small margin, except With the launch of the Third for a short time in the early part of Stage of EMU, the euro area the year (Chart 18). adopted a single monetary policy. In January 1999 consumer This signalled the end of Finland’s prices in Finland, as measured by national monetary policy. The the HICP, were only 0.5% higher single monetary policy is formulat- than a year earlier. This was mainly

Annual Report 1999 27 base metals in the course of the Chart 18. year. Reflecting the rapid rise in Price stability in the euro area and Finland import prices, industrial producer 12-month percentage change 3.0 prices increased by 4.6%. The

2.5 higher prices of pulp and oil prod- 1 ucts, in particular, had significant 2.0 impact on producer prices. 1.5 2 Export prices remained fairly 1.0 stable in 1999, and thus the terms

0.5 of trade weakened substantially. Export prices rose by less than 2% 0.0 1996 1997 1998 1999 in the twelve months to December Harmonized Index of Consumer Prices 1. Euro area 1999, which was due in large part 2. Finland to declines in prices of electrical Sources: Statistics Finland and Eurostat. and telecommunications products. By contrast, prices of pulp and paper products rose modestly al- ready in the spring in response to Chart 19. Stock of bank lending to households and companies the global recovery in export de- in Finland mand. Similarly, prices of basic FIM billion 200 metals started to rise quite sharply 1 in the spring. Prior to that, world 175 market prices of basic metals had 150 fallen considerably for almost a 2 125 * year.

100 ** Labour costs rose only a little in 1999, reflecting the impact of 75 the two-year pay settlements 50 1989 90 91 92 93 94 95 96 97 98 99 agreed in late 1997 and the small 1. Stock of loans to households 2. Stock of loans to companies size of wage drift. In the last quar-

* Bank loans amounting to approx. FIM 5 billion were transferred to asset ter of 1999 the level of nominal management companies in December 1995. ** Following items removed from stock in connection with statistical revision: earnings was 2.5% higher than a a) bonds and other bearer instruments treated as investment assets; b) lending by foreign branches of domestic banks. year earlier. Source: Bank of Finland.

Lending grew rapidly due to the low level of world com- cially energy prices, led to a fur- modity prices, reflecting global ther increase in inflation. Meas- The rate of growth in the Finnish oversupply. In the spring the rate ured as the twelve-month change contribution to the euro area mon- of increase in prices in Finland in the HICP, consumer prices rose etary aggregate M3 varied marked- picked up, mainly as a result of by 2.2% in December. ly in the course of 1999, as in pre- rises in rents and petrol prices. In Import prices rose by 11.4% in vious years. This largely reflected addition, services prices rose at a the twelve months to December fluctuations in the public’s hold- rate that was almost one percent- 1999 as a result of a rise in world ings of money market paper. In the age point faster than the euro area oil prices, a weakening of the euro latter part of the year the rate of average. Towards the end of the against the US dollar and increases growth of the Finnish contribution year a rise in import prices, espe- in the prices of oil products and to euro area M3 was nearly the

28 BANK OF FINLAND same as for the euro area as a of the year they fell to historically weakening in export demand, and whole. In December 1999 the low levels along with the decline in in the second half of the year the twelve-month rate of change in the market interest rates and height- pace of growth picked up again as Finnish contribution to the broad ened interbank competition. In the exports started to recover. Accord- monetary aggregate was 6.0% second half of the year interest ing to preliminary data, the econo- compared with 6.2% for the whole rates on new loans moved higher my grew by 3.5% in 1999 com- euro area. For the narrow monetary as a result of a rise in market inter- pared with 5.0% in 1998. aggregates M1 and M2, the growth est rates. Banks’ interest rate mar- Because of robust economic of the Finnish contributions was gins shrank noticeably in early growth, Finland was not at the for the most part slower than the 1999, as lending rates fell by more same stage of the business cycle as corresponding euro area-wide than deposit rates. the euro area countries on average aggregates. when the single monetary policy In contrast to the monetary was launched. For this reason, the aggregates, the growth of lending Growth was driven by stance of the single monetary poli- to the private sector in Finland domestic demand in cy was relatively easy given the exceeded the euro area average. the early part of the year economic conditions prevailing in The stock of credit in Finland grew Finland. by about 12–13% whereas the The Finnish economy continued to Private consumption continued average rate for euro area countries grow at a rapid pace in 1999, albeit to grow strongly in 1999, buoyed was about 10%. Demand for loans not quite as fast as the average for by low interest rates and favoura- by both households and companies the previous five years (Chart 20). ble developments in income and was brisk in 1999, although Growth of real GDP nevertheless employment, although the rate of demand by companies did slacken exceeded the euro area average by growth slowed from the previous towards the end of the year a clear margin, as in previous year (Chart 21). Against a back- (Chart 19). years. In the first half of the year ground of increased consumer Interest rates on new loans strong domestic demand helped purchasing power, competition in were very low in 1999, which ensure that the economy grew at a markets for consumer goods tight- boosted borrowing. In the first half moderately fast pace despite a ened noticeably. Consumer spend-

Chart 20. Chart 21. GDP in Finland and the EU area Structure of supply Volume index, 1995 = 100, seasonally adjusted, Volume index, 1990 = 100 two-quarter moving average 130 180 170 2 160 120 150 140 110 130 120 1 100 110 3 100 2 4 90 90 80 1 70 80 60 1988 89 90 91 92 93 94 95 96 97 98 99 1988 89 90 91 92 93 94 95 96 97 98 99 1. Finland 1. Exports 2. EU area 2. Fixed investment 3. Private consumption Sources: Statistics Finland and OECD. 4. Public consumption Source: Statistics Finland.

Annual Report 1999 29 ing focused increasingly on con- of housing loans grew considera- in particular, investment continued sumer durables and telecommuni- bly (Chart 23). The stock of hous- to grow strongly. In industry, by cations services. Spending on ex- ing loans increased by 15.8% in contrast, investment intentions pensive categories of goods was 1999 and new housing loans weakened because of the poor evident, for example, in the car reached a record level. The average export performance in the early trade, where sales increased by interest rate on new loans fell by part of the year, and as a result 6.5% from the previous year. By 0.7 percentage point in the first fixed investment hardly increased contrast, demand for other con- half of 1999 but climbed back to at all from the previous year. In the sumer goods decreased and this the level prevailing at the start of latter part of the year, however, the was reflected in a slowdown in the the year in the second half of 1999. outlook for industrial investment growth of retail trade. According to figures compiled by improved substantially because of The favourable financial situa- Statistics Finland, prices of old good export prospects and high tion of consumers was also evident flats in the country as a whole capacity utilization rates. in the indicator of consumer confi- increased by 10.6% in the last dence published by Statistics Fin- quarter of 1999 compared with the land (Chart 22). According to the same quarter one year earlier. Only Export prospects improved in indicator, consumers’ confidence at one time in the past 30 years the latter part of the year concerning their own financial (1988–1991) have real housing position and the general economic prices been higher than they were Export demand weakened in the situation remained strong through- in 1999. first half of 1999 because of the out the year and was substantially Like consumer demand, invest- effects of the Asian and Russian higher than in EU countries on ment activity remained robust in crises. All sectors of manufactur- average. 1999. Investment in productive ing suffered, with the exception of Robust consumer confidence capacity grew strongly as a result electronics and telecommunica- concerning the future and the low of both low interest rates and im- tions (Chart 21). The sluggishness interest rates helped to sustain the proved prospects for demand and of world export demand led to buoyancy of the housing market; productivity in many sectors oversupply in manufacturing, and prices rose strongly and the stock (Chart 21). In the services sector, as a result both the volume and

Chart 22. Chart 23. Consumption and consumer confidence Housing prices in Finland 12-month percentage change Balance Index, 1983 = 100 10 20 260 8 15 240 220 6 10 1 200 4 5 2 1 180 2 0 160 2 3 0 -5 140 -2 -10 120 -4 -15 100 -6 -20 80 1989 90 91 92 93 94 95 96 97 98 99 1988 89 90 91 92 93 94 95 96 97 98 99 1. Private consumption (left-hand scale) 1. Whole country 2. Confidence index, balance (right-hand scale) 2. Old two-room flats in Helsinki Source: Statistics Finland. 3. Whole country, real price Sources: Huoneistokeskus and Statistics Finland.

30 BANK OF FINLAND value of Finnish exports declined in comparison with the first six Chart 24. months of the previous year. Ex- Industrial production 12-month percentage change port markets recovered in the sec- 20 ond half of 1999, however, and this 15 helped to boost activity in the tra- 2 ditional export industries as well. 10 For example, the volume and value 5 of exports of paper and wood 1 products turned up in the summer. 0 Moreover, with the pick-up in -5 export demand, export prices rose 1995 1996 1997 1998 1999 1. Euro area in several key sectors. The compet- 2. Finland itiveness of the export industries Sources: Statistics Finland and Eurostat. improved as a result of the weak- ening of the euro. The regional breakdown of exports in 1999 reveals that ex- ports to the EU area increased tion grew considerably from the in the sector started to slow to- slightly from the previous year previous year whereas industrial wards the end of the year, however. while exports to Russia fell sharply and agricultural construction de- The slowdown may have been owing to the poor economic situa- clined. partly due to resource constraints tion in that country. Exports to In the first half of the year the in Finland. Russia declined by about 30% in growth of industrial production The pick-up in demand for value from 1998; the food, build- was driven by the metal and engi- forest industry products in the ing materials and printing indus- neering industries but, with the summer was reflected in an in- tries were particularly badly hit. improvement in market conditions, crease in the output of the paper The value of exports to China output in the forest and chemical and wood products industry com- and some Asian crisis economies industries grew towards the end of pared with the same period a year also declined from the previous the year. All in all, industrial pro- earlier. All grades of paper benefit- year. duction increased by 5.5% from ed from the recovery in demand, the previous year (Chart 24). which was due to the faster growth Output in the metal and engi- of the world economy and in- Electronics and neering industries increased by creased use of paper products in telecommunications boosted 10% from the previous year. There connection with the millennium industrial output were contrasting developments changeover. Demand for pulp also within the sector, however: output picked up towards the end of the Manufacturing, construction and in the electronics and telecommu- year and pulp stocks declined rap- trade made the main contributions nications sector grew by 24% idly, leading to a fairly strong rise to the growth of total output in whereas output in the rest of the in prices. Overall, output in the 1999. Sales in the trade sector sector declined by 1.5%. The paper and wood products industry continued to grow at a fairly robust strength of output in the electron- increased by 3% in 1999, despite pace. Activity in the construction ics and telecommunications sector being flat in the first half of the sector remained buoyant and oper- was largely based on the continued year. The revival in export demand ating conditions and prospects in very rapid increase in world de- was also evident in the chemical the sector continued to be good. mand for mobile telephones. The industry, where output started to Housing and commercial construc- exceptionally strong rate of growth grow towards the end of the year.

Annual Report 1999 31 There was a further Chart 25. Number of employed and unemployment rate strengthening in 1,000 persons % 2,700 20 public finances

2,500 15 Continued robust economic growth 1 and a fairly tight stance in govern-

2,300 10 ment spending helped to strength- en the financial position of the 2,100 5 2 public sector in 1999. The deficit in central government finances 1,900 0 1988 89 90 91 92 93 94 95 96 97 98 99 declined substantially, local gov- 1. Number of employed, 1,000 persons (left-hand scale) ernment finances were in slight 2. Unemployment rate, % (right-hand scale) deficit overall and the surplus in Source: Statistics Finland. social security funds grew further (Chart 26). The surplus of the pub- lic sector as a whole amounted to FIM 16.2 billion, equivalent to 2.3% of GDP. The large public Industrial confidence concern- er. There were exceptionally large sector deficits of the early 1990s ing the future strengthened in increases in both the number of have been replaced by growing 1999. Towards the end of the year employed and the size of the la- surpluses and public debt has be- the industrial confidence indicator bour force. The numbers of both gun to decline. showed that confidence was higher part-time jobs and short-term con- Government revenue from than the euro area average. The tracts increased further. The fastest income and wealth taxes grew slow- quarterly survey of business confi- growth of employment occurred in ly in 1999. Wage earners’ income dence conducted by the Confeder- the services and construction sec- taxation was cut by about FIM 2 ation of Finnish Industry and Em- tors. Availability of skilled labour billion and VAT receipts grew more ployers in October indicated that weakened notably in the building slowly than in previous years be- economic conditions were expect- industry and the electronics and cause of sluggish growth of con- ed to improve further in the near telecommunications sectors. sumption. In addition, increased term. Export prospects were good The unemployment rate fell in import penetration reduced receipts in especially the paper, electronics the early part of the year, but the from other indirect taxes. In partic- and telecommunications and decline slowed in the latter part of ular, growth in receipts from excise chemical industries. the year. The seasonally adjusted duty on alcohol and tobacco slowed unemployment rate remained vir- from the previous year. tually unchanged at around 10% Similarly, the tax receipts of There was a further rapid from June to November before the local government sector grew improvement in employment dropping to 9.8% in December. An relatively slowly because the maxi- increase in the size of the labour mum amounts of the earned in- The employment situation contin- force slowed the fall in the unem- come deduction and deduction for ued to improve in 1999 (Chart 25). ployment rate, but at the same time work-related expenses in local The seasonally adjusted employ- the number of vacancies grew government taxation were raised ment rate, ie the employed as a considerably. Analysed regionally, and corporate taxes did not have percentage of persons aged 15 to unemployment fell most of all in the same impact on total tax re- 64, was just under 67% at year- the growth centres. Finland’s un- ceipts as in previous years. Contri- end, which was about two percent- employment rate was roughly the butions to social security funds age points higher than a year earli- same as the euro area average. increased more or less in line with

32 BANK OF FINLAND Chart 26. Public finances Public sector balances Public debt % of GDP % of GDP 8 80 4 6 4 3 1 60 2 2 0 -2 40 -4 -6 20 -8 1 -10 2 -12 0 1988 89 90 91 92 93 94 95 96 97 98 99 1988 89 90 91 92 93 94 95 96 97 98 99 1. Central government 1. Public debt 2. Local government 2. Central government debt 3. Social security funds Sources: Statistics Finland and State Treasury. 4. General government Source: Statistics Finland.

total wages as no significant slightly below the spending ceiling ratio of central government debt to changes were made to contribution set by the Government. The ratio GDP to below 50%; to keep real rates in 1999. Income on the assets of public revenue to GDP fell central government expenditure of the employment pension institu- slightly because of the modest unchanged at the budgeted level tions did not increase owing to the easing in taxation. for 1999 throughout the Govern- fall in interest rates. The government repaid some ment’s four-year term; and to cut The level of public expendi- FIM 20 billion of its outstanding household income tax by FIM ture remained at broadly the same debt in 1999. The weakening of the 10–11 billion over the same peri- level as in the previous year. Earn- euro increased the markka value of od. The budgetary framework ings-related unemployment bene- the debt by FIM 10 billion. The agreed in early May for the years fits, in particular, and outlays relat- debt-to-GDP ratio declined by 2000–2003 was based on the ed to maintenance of employment almost four percentage points to economic policy guidelines set out declined by a total of nearly 7% as 57%. The decline was due mainly in the Government’s programme. a result of rising employment. The to GDP growth and the proceeds Similarly, the Government’s budget ratio of general government prima- received by the central government proposal for 2000 and the Septem- ry expenditure (expenditure ex- from privatization. Holdings of ber 1999 update of the stability cluding interest payments) to GDP government bonds by the employ- programme for 1999–2003 were fell by about 1.5 percentage points ment pension institutions declined drawn up on the basis of the policy in 1999. Roughly half of the de- substantially so that the public guidelines laid down in the Gov- cline was structural, ie due to fac- debt-to-GDP ratio (Maastricht ernment’s programme and the tors that were not connected with definition) declined only a little budgetary framework. the economic cycle. The growth of (Chart 26). transfers, in particular, slowed as a The guidelines for fiscal poli- consequence of savings decisions cy over the next few years were The trade surplus narrowed taken in previous years. Central defined in the programme of the slightly government interest payments new Government in the spring in declined by a couple of billion terms of four objectives: to achieve Finland’s current account surplus markkaa. Overall, central govern- a structural surplus in central gov- amounted to about 5.2% of GDP in ment expenditure in 1999 was ernment finances; to reduce the 1999. The surplus was slightly

Annual Report 1999 33 Chart 27. Chart 28. Trade account and current account Net international investment position FIM billion, 12-month moving total % of GDP 70 0 -20 60 2 -40 50 1 1 -60 40 2 -80 30 -100 -120 20 -140 10 -160 0 -180 1995 1996 1997 1998 1999 1995 1996 1997 1998 1999 1. Trade account, fob 1. Net international investment position 2. Current account 2. Net international investment position, excl. shares and other equity items Source: Bank of Finland. Source: Bank of Finland.

smaller than in the previous year Finland’s current account sur- declined at all in recent years; at owing to a contraction in the sur- plus was again one of the largest in end-1999 it still stood at almost plus on goods. This, in turn, was the euro area. The euro area as a 30% of GDP. due to the weak performance of whole had a surplus equivalent to Finland’s net investment posi- goods exports in the early part of about 1% of GDP, according to tion, which is calculated as the the year (Chart 27). In addition, the preliminary figures. Most of Fin- difference between all liabilities rise in commodity prices, and oil in land’s surplus derived from trans- and assets, shows a substantial particular, boosted the value of actions with non-euro area coun- negative balance; at end-1999 imports in the latter part of the year. tries, which accounted for 58% of liabilities exceeded assets by FIM In volume terms, imports grew by the surplus in 1999 compared with 1,261 billion. The large size of 3.3% from the previous year. 46% in 1998. nonresidents’ holdings of Finnish As regards other current ac- As a result of the surplus, Fin- shares and the rise in share prices count items, the income account land’s external debt decreased have weakened Finland’s net in- strengthened somewhat since the further. Net external debt (external vestment position markedly in decline in interest payments on liabilities minus assets, excl. equity recent years. The market value of foreign debt was larger than the items) has declined in recent years nonresidents’ holdings of Finnish increase in dividends on nonresi- owing to a succession of current shares was FIM 1,285 billion at dents’ holdings of Finnish shares. account surpluses (Chart 28). This end-1999. The deficit on the current transfers interest-bearing external debt account increased slightly, partly amounted to about 15% of GDP at because contributions to the EU end-1999. The central govern- budget exceeded receipts. ment’s net external debt has hardly

34 BANK OF FINLAND Financial markets

nder the Act on the Bank of participation in the development of Finland, the Bank acts as supervision and regulation. Analysis Upart of the European System covers financial practices and insti- of Central Banks in the manner tutions as well as development of laid down in the Treaty establishing markets from the viewpoint of sta- the European Community and the bility and efficiency. Statute of the European System of The Eurosystem supports the Central Banks (ESCB) and of the policies of national supervisory European Central Bank (ECB). authorities by actively promoting According to the Statute, the ESCB their cooperation with each other is required to contribute to the and with the Eurosystem. This co- smooth conduct of policies pursued operation is concerned mainly with by the competent authorities relat- macro-level stability and structural ing to the prudential supervision of issues related to financial markets. credit institutions and the stability The main forum for cooperation is of the financial system.1 The Act the ESCB’s Banking Supervision on the Bank of Finland also re- Committee and its related working quires the Bank to participate in groups, which comprise representa- maintaining the stability and relia- tives of the central banks of EU bility of the payment system and member states, national supervisory overall financial system and to authorities and the ECB. participate in their development. The Bank of Finland partici- Promotion of the stability and pates in the development of the efficiency of the financial system is financial markets by taking part in referred to as ‘oversight’ or ‘macro- the legislative process, collecting prudential supervision’. Oversight and disseminating information and encompasses the banking sector, cooperating with other authorities, securities markets and financial banks and financial market partici- market infrastructure, ie payment pants. Cooperation is particularly and settlement systems. The Bank active with the Financial Super- of Finland’s primary tasks in con- vision Authority (FSA), Ministry nection with macroprudential super- of Finance and State Treasury. The vision are ongoing surveillance and Bank influences financial market analysis of financial markets and legislation by participating in

1 The ECB is also required to offer advice working groups and delivering and guidance in connection with financial opinions on legislative proposals. legislation and may be assigned special tasks in this area. The Bank also informs the general

Annual Report 1999 35 Table. by national financial institutions, Consolidation of European banks largely because of cross-country Consolidation Stage differences in taxation, supervision, starting legislation and culture. Germany Consolidation is just starting. The effects of pressure for Italy Consolidation is under way. change in the European banking France Consolidation has advanced partially. sector are evident in the form of Spain/Portugal Consolidation is taking place at national level. globalization, securitization and United Kingdom Minor changes are expected. tightening of competition. Banks Austria Consolidation is almost complete at national level. have begun to look for cost effi- Ireland Consolidation is complete at national level; ciencies, market power and new cross-border mergers to follow. markets through mergers and coop- Switzerland Consolidation is complete. erative agreements. In 1999 a Nordic countries Consolidation is complete; mergers between banks and insurance companies and cross-border mergers number of large European banks ä are expected. attempted to form alliances and

Benelux Consolidation at Benelux level; made take-over bids. Some of these consolidation at European level is expected. Consolidation restructurings reached fruition close to completion (Table).

Sources: Salomon Smith Barney and Bank of Finland. Cross-border restructurings have occurred mainly within areas that are relatively homogeneous public about structural develop- change throughout the 1990s, which economically and culturally, such ments in financial markets and intensified towards the end of the as the Benelux and Nordic coun- financial market conditions and decade. Deregulation, innovative tries. Of the international alliances, prospects. use of IT and increased emphasis on the most important in 1999 was the By working together with shareholder value have changed merger of the German Deutsche ESCB and EU bodies, the Bank is banking markets. Probably the most Bank and Bankers Trust in the able to take part in financial mar- powerful forces for change have United States. ket surveillance and development been developments in IT and tele- The MeritaNordbanken Group of supervision and regulation at communications. These have led to continued to expand in the Nordic international level. The Bank also the introduction of a broad range of countries and the Baltic States. In participates in international devel- new financial products and chan- September 1999 the group made a opment work on financial markets nels for marketing them. bid for the Norwegian Christiania carried out under the auspices of The pace of change in the Euro- Bank. The group began to simplify notably the International Monetary pean banking sector gained added its ownership structure towards the Fund (IMF), Organization for Eco- momentum with the introduction end of the year. Now the group has nomic Cooperation and Develop- of the euro at the beginning of only one holding company, Nordic ment (OECD) and Bank for Inter- 1999. This spurred the develop- Baltic Holding, which is registered national Settlements (BIS). ment of a genuine single market in in Stockholm. The holding compa- financial services. The effects of ny owns the group’s parent, Merita- the introduction of the single cur- Nordbanken, which is located in Banks rency vary a great deal across fi- Helsinki. Merita Bank and Nord- nancial services and markets, how- banken remain banking subsidiar- Structural changes in banking ever. Whereas the development of ies of MeritaNordbanken. integrated money markets in the The consolidation of the Finn- The European banking sector was euro area has been swift, retail ish banking and insurance sectors subject to strong pressure for banking markets are still dominated got under way in October when

36 BANK OF FINLAND Leonia Bank and the insurance slightly compared with 1998. At weakened the financial results of company Sampo agreed on the end-1999 they accounted for 4.6% some banks in Europe in 1998. In formation of a financial conglom- of total lending (2.8% in 1998) and Finland, only the largest banks made erate. A further step forward was 1.6% of deposits (1.9% in 1998). provisions for loan losses in connec- taken in December when some of In November 1999 Trevise Bank, tion with the Russian and Asian the shares of the insurance compa- part of the Danish Unibank group, crises. Total loan loss provisions ny Pohjola were sold to an investor commenced operations in Finland. began to decline sharply in 1999. group comprising cooperative The bank specializes in provision Although the profitability of banks, the insurance company of asset management services. Finnish banks was very good in Ilmarinen and their joint bodies. In November 1999 the Govern- 1999, the effects of a changing Previously, the overlapping of ment submitted a report to Parlia- operating environment were appar- banking and insurance business ment on bank support provided ent in their financial results. The had been based on cross-sector during the banking crisis. Accord- heightened competition brought operations. Banks formed life in- ing to the report, the sum total of about by integration and deregula- surance companies and sold insur- support, excluding interest pay- tion of banking markets had a ance products, although there were ments, was about EUR 5.6 billion. growing impact on banks. Though no significant cross-ownership The Bank of Finland’s share of the volume of banking business arrangements between the two losses amounted to about EUR 670 grew significantly compared with types of institutions. million. the previous year, the banking Tightening competition and sector’s aggregate net income from prospective institutional changes financial operations declined are forcing banks to develop new Bank profitability and slightly. Tightened competition was products and distribution channels. efficiency evident in banks’ narrower interest This led to a number of changes in rate margins. The good financial the Finnish banking sector in 1999. The worst of the threats posed to results were largely due to the low Negotiations on the continuation of European financial markets by level of loan losses (for some cooperation between Leonia Bank international crises receded in the banks, loan and guarantee losses and the Finnish postal service end- early part of 1999. Provisions for constituted a positive item because ed without results. Leonia Bank’s possible loan losses resulting from of recovery of loan losses) and cost services will not be provided in the Russian and Asian crises had reductions (Chart 29). post offices after 2000. Leonia Bank began to provide limited banking services at outlets of the Chart 29. Financial performance of deposit bank groups R-kiosk chain in November 1999. EUR billion Technological advances were a 6 striking feature of developments in 4 3 the Finnish banking sector in 1999. 2 Finland has become a world leader 4 5 0 in the application of IT in the provi- sion of banking services. For exam- -2 2 ple, Finland has the highest number -4 1 of Internet customers in relation to -6 population. In 1999 banking servic- 1995 1996 1997 1998 1999 1. Loan and guarantee losses es also became available via mobile 2. Other expenses 3. Other income phone-Internet links. 4. Income from financial operations The share of foreign banks in 5. Operating profit Source: Financial Supervision Authority. total lending in Finland increased

Annual Report 1999 37 Chart 30. the need to know local conditions Deposit banks: lending stock and interest rate margin and customs. EUR billion %-pts 70 6.5 The growth in share and deriva- tives transactions executed via the 60 6.0 Internet began to have an impact 50 5.5 4 on the operations of traditional 40 3 5.0 brokerage firms. The number of 30 2 4.5 firms offering brokerage services 20 4.0 via the Internet increased and the 10 3.5 5 volume of such transactions con- 1 0 3.0 1995 1996 1997 1998 1999 tinued to grow. In Finland, for ex- 1. Lending to companies (left-hand scale) ample, the Internet banking servic- 2. Lending to households (left-hand scale) 3. Other euro and markka-denominated lending (left-hand scale) es provided by banks include ser- 4. Foreign currency-denominated lending (left-hand scale) 5. Interest rate margin1(right-hand scale) vices that enable small investors to 1Difference between average markka lending and deposit rates; since the beginning of 1999 difference between average interest rates execute trades easily, quickly and on euro-denominated lending and deposits. at lower cost than before. In US Source: Bank of Finland. markets, in particular, Internet- oriented trading systems are being developed entirely outside stock Although Finnish banks are Securities markets exchanges. efficient compared with other Eu- European exchanges continued ropean banks, the need to further Structure of securities markets their cooperative efforts and sought streamline operations was still to form competitive alliances. The apparent in 1999. The forces making for change in most striking example of coopera- Lending to firms and house- the securities markets are similar to tion between exchanges is that of holds in Finland increased substan- those impinging on the banking eight European exchanges (Milan, tially in 1999, by 10% and 12% sector. Among the key factors at London, Zurich, Brussels, Amster- respectively. The stock of housing work are financial liberalization dam, Frankfurt, Paris and Madrid), loans grew by about 16%. The and harmonization of financial which is aimed at developing a strong growth was partly due to the market regulation within the Euro- pan-European electronic market- lengthening of repayment periods pean Union, networking benefits in place for shares of the largest (Chart 30). connection with technological European companies. In September There was a further slight in- advances, globalization of the pro- 1999 the exchanges unveiled a crease in the amount of deposits, vision of financial services and the common market model, which is although channelled a larger single currency. due to become operational by No- portion of their savings than before Changes in the operating envi- vember 2000. By contrast, the into other types of investment. As ronment have enabled the realiza- creation of a single trading plat- in 1998, about half of households’ tion of economies of scale in secu- form has been shelved for the time financial assets were held in the rities transactions. The location of being. Cooperation between the form of deposits. Investment in a marketplace has become increas- Nordic exchanges led to the crea- funds and personal pension ingly less important, and competi- tion of the Norex link by the Stock- schemes increased steadily. Finnish tion has increased between finan- holm and Copenhagen exchanges. banks successfully promoted their cial centres, stock exchanges and The Oslo exchange has also ex- own funds as investment vehicles settlement systems. Change never- pressed interest in joining the link. for households. theless continues to be hampered Investors showed a keen inter- by differences in culture, language, est in companies operating in new taxation and regulation, as well as and expanding markets. Prices of

38 BANK OF FINLAND the shares of these companies rose Chart 31. sharply, especially in the latter part Bonds issued in Finland EUR billion of the year. 14

Electronic trading systems 12 have gradually assumed greater 10 importance in European debt mar- 4 8 3 kets as well. An important step 2 6 towards electronic trade in debt 4 instruments was taken in early 2 1999 with the launch of EuroMTS, 1 0 which aims to become a market- 1980 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 place for debt instruments issued 1. Central government 2. Local government by governments in the euro area. 3. Financial institutions 4. Companies There were also several ongoing Sources: Financial Supervision Authority and State Treasury. projects aimed at developing Euro- pean repo markets. The joint German-Swiss deriva- tives exchange, Eurex, which is located in Frankfurt, was able to gain a major share of trading in between the two exchanges. More- The Finnish government’s derivatives based on the most liq- over, HEX had discussions with the borrowing requirement declined uid government debt instruments German Deutsche Börse AG on the further in 1999. This was reflected and by end-1999 it had become the use of the latter’s trading system. in bond issues in Finland. Bench- world’s largest derivatives ex- mark government bonds were the change. Trading in money market only item of government borrow- instruments based on Euribor rates Developments in securities ing that grew in 1999. No debt was is now centred on the London markets in 1999 issued in foreign currencies. The Futures and Options Exchange share of short-term debt fell to a (LIFFE). European trade in stock The introduction of the euro has few per cent of total borrowing derivatives was also becoming brought about a rapid change in (Chart 31). partially concentrated on Eurex investor behaviour. As exchange As before, Finnish companies and LIFFE. rate risk is no longer a concern, made little use of bond financing, Efforts were made to bring many institutional investors, in and issue activity declined slightly securities trading practices in Fin- particular, began to invest increas- from the previous year. In the other land into line with global trends. ingly in interest rate-based instru- European countries, companies’ HEX Ltd, Helsinki Securities and ments issued by other euro area reliance on this type of financing Derivatives Exchange, Clearing- countries. This boosted demand for has been on the increase. To a house (HEX) launched several debt issued by the core European greater extent than in previous projects aimed at improving its countries whereas demand for debt years, European companies fi- operational efficiency and increas- instruments issued by the smaller nanced acquisitions and restructur- ing cooperation in order to countries decreased. ings with debt financing obtained strengthen its position in the face Central governments were from the bond markets, instead of of growing competition. In Sep- again the largest issuers of euro- resorting to bank financing. De- tember 1999 trading in HEX’s most denominated bonds, accounting for spite rapid growth, corporate issues liquid derivative instruments was 44% of the total value of issues. accounted for only about 10% of initiated on Eurex, in accordance Financial institutions accounted for total euro-denominated issues. with an agreement on cooperation less than 40%. Integration of euro area bond mar-

Annual Report 1999 39 Chart 32. Both the number and range of Ratio of market capitalization of listed shares to GDP1 in selected countries as at 31 December 1999 mutual funds increased. Besides % domestic equity, fixed-income and 300 balanced funds, investors now have 250 access to various types of interna-

200 tional funds. These provide small investors, in particular, with easier 150 access to ownership of foreign 100 shares. Banks have prepared for the 50 diminishing importance of deposits 0 by offering their customers the addi- ) 2

Italy Spain tional option of investing in funds. Japan Greece France Ireland Austria Finland Sweden Belgium Norway Germany PortugalDenmark Trading in derivatives based on Switzerland LuxembourgNetherlands USA (NYSE United Kingdom fixed-income instruments was 1GDP forecasts for 1999 are based on European Commission data, except for Switzerland and Norway, the figures for which are based on OECD data. moved off HEX with the start of 2New York Stock Exchange. Stage Three of EMU. During 1999 Source: Bank of Finland. trading in derivatives focused on contracts based on stock indices and individual shares. Trading in the kets was held back by several fac- Share turnover and the number latter was fairly active (Chart 34). tors, including national differences of listed companies in Finland A number of changes were in taxation, the decentralized na- grew rapidly in 1999. In all, 28 effected in 1999 in the primary ture of settlement activities and a new companies were listed on the dealer system for benchmark Finn- lack of credit ratings. stock exchange during the year. ish government bonds. Goldman The disappearance of the threat Their initial public offerings raised Sachs withdrew from the system in of an international financial crisis nearly EUR 2 billion in new risk February and Den Danske Bank in and low interest rates helped to capital. The share of technology October. Leonia Bank announced sustain the record growth of stock companies in companies listed on its withdrawal from the beginning markets around the world. HEX was HEX increased further in 1999. of 2000. The French Banque Na- again one of the fastest growing The central government’s pro- tionale de Paris (BNP) joined the exchanges in the world, and share ceeds from sales of its share hold- system in June 1999. values on HEX were more volatile ings amounted to over EUR 3.4 than the average for European stock billion, with Sonera shares ac- exchanges. HEX’s market capitali- counting for a major part of the Developments in zation-to-GDP ratio rose further and total (about EUR 3 billion). supervision and regulation was one of the highest in the indus- The importance of internation- trial countries (Chart 32). al investors in trading on HEX International The high volatility was mainly continued to grow in 1999. At financial supervision due to the fact that a large portion year-end foreign investors held just of stock exchange turnover was over 60% of the market capitaliza- In June 1999 the G10’s Basel Com- based on trading in shares of just a tion of listed companies. mittee on Banking Supervision few technology companies. For Mutual funds registered in issued a proposal for a new capital example, Nokia shares accounted Finland grew steadily during 1999, adequacy framework for banks and for about 60% of HEX’s total mar- led by equity funds. Fixed-income other financial service providers. ket capitalization at end-1999 and and balanced funds also grew, albe- At the same time the European technology companies as a group it at a slower pace than equity Commission was working on a for about three-quarters. funds (Chart 33). revision of a directive along broad-

40 BANK OF FINLAND Chart 33. Mutual funds registered in Finland By type of fund By geographical area of investment activity EUR billion EUR million EUR billion 12 600 12

10 500 10 8 400 5 8 6 3 300 4 6 3 4 200 2 4 2 100 2 1 0 0 2 1 -2 -100 0 1995 1996 1997 1998 1999 1995 1996 1997 1998 1999 1. Equity funds (left-hand scale) 1. Finland 2. Fixed income funds (left-hand scale) 2. Euro area 3. Balanced funds (left-hand scale) 3. International 4. Risk funds (left-hand scale) Source: HEX Helsinki Exchanges. 5. All funds: net subscriptions (right-hand scale) Source: HEX Helsinki Exchanges.

ly similar lines as the Basel Com- Among the issues dealt with by amendments to the UCITS direc- mittee’s proposal. The main aim of the European Council in 1999 were tive is to bring it into line with the planned reform is to modify the two Commission proposals for market developments and remove minimum capital requirements for amendments to the Council Direc- major ambiguities in its interpreta- banks’ claims on companies to tive on undertakings for collective tion, which have impaired uniform conform more closely to actual investment in transferable securi- application of the directive. The credit risks. Draft proposals were ties (UCITS) and proposals for directive on the distance selling of distributed for comment, and work- directives on the distance selling of financial services is aimed at pro- ing groups are continuing to hone financial services and take-over moting the free flow of financial the details. Within the EU the pro- bids. The purpose of the proposed services by harmonizing member cess is being coordinated by the Commission’s Banking Advisory Committee (BAC), which includes Chart 34. representatives of the Bank of Fin- Turnover in derivative instruments on HEX land as well as the Ministry of No. of contracts in millions 6 Finance and Financial Supervision Authority. 5 4 In November 1999 the Finan- 4 cial Services Policy Group (FSPG), 3 3 which was set up in December 2 2 1998, published a progress report on implementation of the Commis- 1 1 sion’s action plan for financial 0 1995 1996 1997 1998 1999 services. The report called for all 1. Stock index options available means to be used to speed 2. Stock options 3. Currency derivatives up the regulatory process in view 4. Interest-rate derivatives of the rapid changes occurring in Source: HEX Helsinki Exchanges. the financial markets.

Annual Report 1999 41 states’ legislation on distance sell- areas of insurance, subject to cer- raised the tax rate on capital in- ing and consumer protection. tain exceptions concerning statuto- come from 28% to 29% and anoth- In February 1999 the central ry earnings-related pensions. Al- er Government bill on removing bank governors of the G10 coun- though the ISA is administratively the tax-exempt status of interest tries decided to change the name of subordinate to the Ministry of So- earnings on deposits. These laws the Euro-currency Standing Com- cial Affairs and Health, it is inde- entered into force in January 2000. mittee to the Committee on the pendent in its decision-making. The latter law is applicable to inter- Global Financial System and to The ISA’s costs are covered by est earnings on bank deposits only clarify its remit. The Committee’s inspection fees collected from from 1 June 2000. primary task is now to promote the supervised entities. A new law on mortgage bank- stability and efficiency of the glob- The ISA and FSA cooperate ing entered into force at the begin- al financial system. closely with each other and, for ning of 2000. The law covers mort- In April 1999 the finance min- example, have largely overlapping gage banking activities conducted isters and central bank governors boards. They have drafted a com- by special credit institutions that of the G7 countries set up a new mon supervisory protocol, which have the exclusive right to finance cooperative body, the Financial defines their cooperative activities their operations by the issuance to Stability Forum, to address issues in practical terms. the general public of bonds backed concerning the international finan- New regulations concerning by real estate or government enti- cial markets. The Financial Stabili- securities market crimes entered ties. The activities of mortgage ty Forum aims to promote the sta- into force in June 1999. In connec- banks were restricted to the grant- bility of international financial tion with the reform, the provisions ing of loans secured by shares of markets through exchange of infor- on penalties included in the old housing or real estate companies, mation between supervisors and Securities Markets Act and the Act occupancy rights or real estate international cooperation. on Trading in Standardized Options mortgages. Loans can also be and Futures were transferred to the granted to government entities. penal code, which lays down penal- Under the law, the easing of restric- Domestic financial legislation ties for misuse of inside informa- tions on mutual fund investments tion, price distortion and disclo- and capital adequacy calculations A new Mutual Funds Act entered sure-related crimes. These crimes for insurance companies (allowed into effect in February 1999. The are now subject to more severe under an EU directive) can be ap- act applies to the activities of man- penalties than before and involve plied to mortgage bonds. agement companies and custodians the penal liability of a legal person. The continuously evolving as well as to the marketing of mutu- A law on security and contract nature of the financial markets is al fund units to the general public. of suretyship entered into force in giving rise to pressures for reform The Act on the Insurance Su- October 1999. The new law im- of financial market legislation. In pervision Authority (ISA) entered proves the position of private per- autumn 1999 the Ministry of Fi- into force in April 1999. The act sons acting as guarantors. How- nance established a working group established the ISA under the Min- ever, it was attempted to draft the on banking services to assess the istry of Social Affairs and Health law in such a way that it does not need to further develop regulations and assigned it the task of super- significantly weaken the strength on the acceptance of deposits and vising and inspecting entities en- of a guarantee. other demand liabilities as well as gaged in insurance and pension In December 1999 Parliament the availability of services. insurance business and in other approved a Government bill that

42 BANK OF FINLAND Payment and settlement systems

Changes in in the euro area in general changed the operating environment over completely to trading and settlement in euro from the begin- The introduction of the euro gave ning of 1999. The Finnish Central added impetus to the major chang- Securities Depository’s (APK) es in payment and settlement sys- BoF-RTGS account with the Bank tems in the euro area brought about of Finland provides participants by rapid advances in information with safe securities settlement us- technology. The European System ing central bank money. of Central Banks (ESCB) contrib- The changes caused by the uted actively to this development, introduction of the euro, together together with the European Com- with the ongoing rapid technical mission. At the beginning of the development of payment systems year the EU-wide TARGET system and the introduction of new pay- (Trans-European Automated Real- ment methods and instruments, time Gross settlement Express meant that the operating environ- Transfer; Chart 35), linking togeth- ment of banks and the central bank er national real-time gross settle- was in a constant state of flux. For ment systems (RTGS), was intro- instance, the volume of payments duced. The launching of TARGET based on self-services offered by was a prerequisite for a single banks grew continuously in the monetary policy in the euro area. It course of the year. In Finland growth also contributed to the swift inte- was strongest in Internet-based gration of money markets in the services. Both the range and use of euro area. Internet banking services increased. The Bank of Finland’s BoF- Share trading on the Internet also RTGS system provided a safe and became increasingly popular. reliable mechanism for the transfer of euro-denominated domestic and cross-border payments and settle- Development of payment ment of interbank payments. The and settlement systems other domestic payment systems made a partial transition to the euro The Bank of Finland bears part of environment in that they had the the responsibility for ensuring that capacity to process both markka payment and settlement systems in and euro-denominated payments. Finland function smoothly, reliably Securities markets in Finland and and efficiently. Similarly, in ac-

Annual Report 1999 43 Chart 35. TARGET – Trans-European Automated Real-time Gross settlement Express Transfer system

TARGET

• 11 euro area central banks + European Central Bank + 4 other EU central banks

• More than 5,000 account holders in national RTGS systems

• Real-time gross payment system for all credit transfers in euro within the euro area

• System open from 8.00 am to 7.00 pm Finnish time

• Possibility of reaching almost any EU credit institution • Nearly 30,000 cross-border payments per day

Source: European Central Bank.

cordance with the Treaty establish- portant area was the ongoing de- Oversight ing the European Community and velopment of the ESCB’s own the Statute of the European System services, primarily TARGET. The In keeping with their duties, the of Central Banks, the ESCB plays Bank’s aim was to ensure that con- Bank of Finland and the ESCB a key role in promoting the stable siderations and needs of impor- seek to ensure that payment and and smooth operation of the finan- tance for Finnish financial markets settlement systems function relia- cial system in the euro area. As a received adequate attention in the bly and smoothly and without risk member of the ESCB, the Bank of development of the systems. to users. This is done, inter alia, Finland promotes the smooth oper- The Bank of Finland also con- through development of the sys- ation of payment and settlement tributed to the stability, reliability tems, risk assessment and macro- systems and financial stability in and efficiency of payment and prudential supervision. These ac- the whole euro area. settlement systems through its tivities are referred to as oversight. The Bank of Finland partici- oversight of the systems, as well as The tasks and objectives of the pated actively in the work of the by delivering opinions on system central bank as laid down in the ESCB’s Payment and Settlement rules and taking an active part in Act on the Bank of Finland consti- Systems Committee and its various legislative work in the field. The tute the legal basis for the Bank’s working groups. The work focused Bank worked closely with other oversight of payment and settle- on the oversight, monitoring and competent authorities in the field, ment systems. development of payment and set- in particular with the Financial Through its oversight of pay- tlement systems in the euro area Supervision Authority (FSA), the ment and settlement systems, the and the drafting of common stand- Ministries of Finance and Justice Bank endeavours to keep payment ards for the systems. Another im- and the competition authorities. system risks at an acceptable level.

44 BANK OF FINLAND The central bank’s task is specifi- The reporting of particularly give the Governing Council reason cally to oversee payment and settle- the APK on the operation of its to decide otherwise. Notwithstand- ment systems in their entirety, securities settlement systems was ing this, the ECB is responsible for whilst the supervision of the risks improved in the course of the year. the oversight of the euro settlement of individual market participants The monitoring of the APK’s share system (Euro 1) operated by the falls within the purview of the FSA. clearing and settlement system Euro Banking Association (EBA). Difficulties experienced by one required much work, especially It is the duty of the ECB and the segment of the financial markets or towards the end of the year. NCBs to ensure that uniform over- by a single market participant may The tasks of the ESCB as laid sight policy is applied to all sys- spread quickly via payment and down in the Treaty on the Europe- tems. With the changeover to the settlement systems to the whole an Union constitute the legal basis euro, the differences between do- financial system and significantly for the oversight conducted by the mestic and cross-border systems impair the operation of financial ESCB. Oversight contributes to the have become blurred, which means markets (systemic risk). Another efficient execution of the ESCB’s that cooperation between the NCBs danger is that risks and problems monetary policy operations and and the ECB will become increas- may be transmitted from country to promotes stable and smooth pay- ingly important in the future. country via international payment ment systems and a well function- The ESCB has not yet adopted systems. To prevent the occurrence ing single market. a common policy for the oversight and spread of disruptions in pay- During the year the Bank was of securities settlement systems. ment and settlement systems, the actively involved in the oversight Hence the oversight of the systems Bank participates, together with the of payment and settlement systems is based on the national legislation FSA, in developing methods for and the development of oversight of the euro area countries. As a controlling risks in the financial within the ESCB. The Governing user of securities settlement sys- sector. The primary aim of over- Council of the ECB adopted the tems, the ESCB has nevertheless sight is to prevent systemic risk general oversight policy drawn up set minimum standards for the from materializing (stability goal), by the Payment and Settlement settlement systems used for execu- in particular through the creation Systems Committee and applicable tion of monetary policy and for the of barriers limiting the spread of to systems used for both domestic custody of collateral for central risks. It is also important for over- and cross-border payments. Over- bank money. sight that the conditions for access sight policy covers issues such as to systems are open and equal and efficient execution of monetary thus conducive to free competition policy, financial stability, competi- The BoF-RTGS and TARGET (efficiency goal) and that the sys- tion neutrality and cross-border tems have a sound legal basis. payments within the EU and in The Bank of Finland provides In Finland the Bank’s oversight respect of third countries. banks and clearing houses with fast takes many different forms, includ- The oversight policy adopted and safe payment and settlement ing regular meetings with the par- by the Governing Council is imple- services in central bank money. ties involved. System operators are mented by the ECB and the nation- Therefore the Bank’s BoF-RTGS further required to report any prob- al central banks (NCBs). The main system helps to safeguard the stabil- lems to the Bank as soon as they responsibility for the oversight of ity and efficiency of markets. The arise. They are also required to international payment systems in establishment of a link between the submit regular reports on the func- the euro area (cross-border, off- BoF-RTGS and TARGET opened tioning of systems. The reports are shore and multi-currency systems) the way for safe payment transfers analysed to identify any risk fac- rests with the national central bank throughout the euro area. tors and problems in advance and of the country whose national leg- Following the introduction of thus enable remedial action to be islation is applicable to the system, TARGET, the number of payments taken in good time. unless the features of the system effected via the BoF-RTGS in-

Annual Report 1999 45 Chart 36. Transactions in BoF-RTGS Value of transactions, daily average Number of transactions, daily average EUR billion Number 25 2,500

20 2,000 1 1 15 2 1,500 2 3 3 4 10 1,000 4 5 5 5 500

6 6 0 0 1998 1999 1998 1999 1. Incoming TARGET customer payments 2. Incoming TARGET interbank payments 3. Outgoing TARGET customer payments 4. Outgoing TARGET interbank payments 5. Loro payments (before October 1998 loro clearing) 6. Other RTGS payments and payments between the Bank of Finland and settlement account holders Source: Bank of Finland.

creased considerably in 1999. An to several days before their value Other domestic payment average of 1,740 payments a day date. Queued payments are execut- systems and electronic money were processed in the system with ed in the order of priority indicated an average daily value of about by the account holder and on a Most banks operating in Finland EUR 17 billion. Compared with ‘first in, first out basis’. The sys- have signed the interbank agree- the previous year, the number of tem also has a mechanism for the ment on payments, which regulates payments more than doubled and solution of gridlock in the system. the transfer of interbank payments the aggregate value doubled. Meas- The banks’ liquidity position was in the PMJ interbank system and ured in terms of aggregate value, very good during the year and the the POPS system. The interbank TARGET payments accounted for queuing facility was resorted to payment system (PMJ) is used for a little more than half of the pay- only in exceptional circumstances. payment transfers, recurrent pay- ments effected via the BoF-RTGS. At the end of the year the ag- ments, direct debits and bank card However, in terms of volume, the gregate amount of the banks’ intra- payments. Settlement of these pay- majority of the payments processed day credit limit stood at some EUR ments is effected twice a day by the by the system, 70%, were domestic 6.5 billion. The average usage rate of Bank of Finland, at 8.30 am and at payments. Following the change- the limits remained low (Chart 37). 3.45 pm. In spring 2000 the morn- over to the euro, the share of so- With the introduction of TAR- ing settlement will be replaced by called loro payments in the total GET, the criteria for access to the an automatic settlement run after value of payments effected via the BoF-RTGS and the rules on intra- midnight. BoF-RTGS declined substantially, day credit were revised to conform The POPS system is used for although they still accounted for a to the international guideline on interbank express transfers, fairly large proportion of the total TARGET. The new rules entered cheques and bank drafts. The set- volume of payments (Chart 36). into force on 1 January 1999. Un- tlement method applied to POPS The BoF-RTGS has a built-in der the new rules, investment firms payments depends on the value of centralized queuing facility de- are also eligible for intraday credit, the payment. Payments exceeding signed to facilitate banks’ manage- subject to special conditions. How- the interbank bilateral limit – the ment of intraday liquidity. Banks ever, no investment firm applied for RTGS limit – are settled on a gross can put payments into a queue up access to intraday credit in 1999. basis in the BoF-RTGS before the

46 BANK OF FINLAND client’s account is credited with the Chart 37. payment. Smaller payments are Finnish banks' minimum reserve deposits and intraday credit limits netted bilaterally so that the banks’ EUR billion net positions vis-à-vis each other 5 4 are updated constantly during the 3 day by the exchange of payment 2 5 1 2 settlement data. 0 4 3 The ATM network and card- -1 -2 based electronic cash scheme are -3 operated by the Automatia compa- -4 1 -5 nies, Automatia Pankkiautomaatit -6 and Automatia Rahakortit, which 1998 1999 1. Total limits1 are owned by Finland’s largest 2. Monthly average of end-of-day balances 3. Maximum use of limits2 banks. Automatia Rahakortit oper- 4. Average use of limits1 5. Minimum reserve deposits, total ates the Avant payment system, 1Five-day moving average. which is based on electronic mon- 2Five-day moving maximum. Source: Bank of Finland. ey stored in smart cards. Use of electronic money was not yet very widespread in 1999. In the course of the year the Bank monitored progress in the use and regulation Chart 38. of electronic money and participat- TARGET cross-border payments in the EU, 1999 Shares of participating countries in total value ed in the debate on the directive of outgoing TARGET cross-border payments regulating the issue of electronic % 30 money both at home and within the 26.6 ESCB and EU. Oversight of elec- 25 tronic money also falls within the 20 16.7 purview of the Bank. 15.6 15

10 8.5 8.4 7.5 Large-value payment systems 5 3.9 2.5 2.3 2.1 1.6 1.5 1.3 1.2 0.4 in the euro area 0 DE FR UK NL IT BE LU GR AT ES SE IE DK FI PT Source: European Central Bank. Measured in euro, TARGET was easily the most widely used Euro- Ratio of outgoing TARGET cross-border payments to GDP1 pean system for cross-border pay- in participating countries ments. During the year an average GDP ratio 50 204 of 29,000 cross-border payments a day were transmitted via the sys- 40

30 tem, with an aggregate value of 30 some EUR 360 billion. Germany 21 20 20 was the main user of TARGET, 16 12 11 11 11 accounting for approximately 27% 9 10 7 7 7 of the volume of payments, meas- 4 3 0 ured in terms of the value of outgo- DE FR UK NL IT BE LU GR AT ES SE IE DK FI PT ing payments. The corresponding 1 GDP forecasts for 1999 are based on European Commission data. Sources: Bank of Finland, European Central Bank and European Commission. figure for Finland was about 1%.

Annual Report 1999 47 In relation to GDP, however, the within the EU. The volume of pay- of EMU had little practical impact Benelux countries, headed by Lux- ments transmitted via the system on cross-border retail payments. In embourg, were the largest users averaged 66,500 a day, so that use many countries charges for retail (Chart 38). of the system clearly exceeded that cross-border payments were still TARGET enhanced the effi- of TARGET in terms of number of higher and execution times longer ciency of the transmission of large- payments. Four euro area countries than for domestic payments, leav- value payments in the euro area also have their own large-value ing considerable room for improve- and reduced the risks associated netting systems. The two largest ment in terms of efficiency. This with large-value payments. How- systems are Euro Access Frankfurt situation is partly due to differenc- ever, there is still room for improve- (EAF) in Germany and Paris Net es between the systems of the euro ment in terms of the availability Settlement (PNS) in France. The area countries and the systems’ and operational reliability of the Spanish Servicio Español de Pagos different stages of development. system, as use of the system in the Interbancarios (SEPI) and the Finn- The implementation of the euro area was impaired for a few ish POPS system are much smaller directive on cross-border credit days during the year as a result of (Chart 39). transfers (97/5/EC) also highlight- disruptions in some countries in ed the need for improving cross- continental Europe. border retail payment services. In Euro 1, which is operated by Retail payment services in September 1999 the ECB published the Euro Banking Association, is the euro area a set of objectives for improving an EU-wide netting system for cross-border retail payment servic- large and medium-value payments The euro area constitutes a single es in the euro area, calling on the in euro. Two Finnish banks, Merita market area, and consequently the industry to put the enhanced sys- Bank and Leonia Bank, participat- execution of payments within the tems in place by 1 January 2002, ed in the system. Together with area should be as efficient and when euro notes and coins will be TARGET, this is the second major reliable as within a single country. put into circulation. The objectives system for cross-border payments However, the launch of Stage Three concern, inter alia, fees and execu-

Chart 39. Large-value payment systems in the euro area: average daily number and value of payments, 1999

Value Number EUR billion 1,000s 600 160 140 500 120 400 100

300 80 60 200 40 100 20

0 0 1 2 3 4 5 6 7 1 2 3 4 5 6 7 1. TARGET payments (cross-border payments within the EU) 2. Domestic RTGS payments 3. EBA's Euro 1 (Euro Banking Association) 4. EAF (Euro Access Frankfurt: until 1998 Elektronische Abrechnung Frankfurt) 5. PNS (Paris Net Settlement) 6. SEPI (Servicio Español de Pagos Interbancarios) 7. POPS (pankkien on-line pikasiirrot ja sekit) Sources: European Central Bank and banks.

48 BANK OF FINLAND tion times for cross-border retail ries for the cross-border transfer of system functioned reliably in the payments in the euro area, which securities. The eligible central se- year, without any notable disrup- the ECB argues should be made curities depositories and their links tions. The RM system is used for comparable with those for domes- are listed on the ECB’s website the safekeeping of Finnish eligible tic payments. (www.ecb.int). securities pledged as collateral with the Bank of Finland. In the course of the year two-way links were Central securities depositories Securities and derivatives established between the RM system in the euro area and settlement systems and the systems of the German links between them Deutsche Börse Clearing AG and The APK operates systems for the the French Sicovam SA. The links Central securities depositories in settlement and registration of were approved for the transfer of the euro area both provide securi- shares (OM system) and debt in- collateral for credit granted by the ties settlement services and act as struments (RM system). Money ESCB. the principal custodians for the market instruments are settled on a The value of transactions set- collateral posted for access to cen- gross basis; by contrast, share tled in the RM system declined in tral bank funds. Their operational trades are still settled on a net ba- the course of the year, and in De- reliability is also crucial for the sis. The HEX Helsinki Exchanges cember the value of transactions smooth functioning of the banking also maintain a system for the set- settled in the OM system exceeded system. Settlement systems must tlement of standardized derivative that of transactions settled in the guarantee that central bank funds contracts. The oversight of these RM system for the first time since cannot be withdrawn until the se- systems is the responsibility of the the introduction of the OM system curities posted as collateral for Bank of Finland. (Chart 40). The reduced volume in credit have unconditionally and The OM system is a netting the RM system was largely due to a irrevocably been transferred to the system based on batch processing. switch in trading in the euro area to central bank. All trades executed on HEX are more liquid government bonds, The ESCB assesses settlement settled in this system. The volume primarily bonds issued by the ma- systems against nine standards, and value of trades settled in the jor euro area countries. Another which must be met by the central OM system grew in 1999, largely factor was the ESCB’s intervention securities depositories approved by because of heavy trading in Nokia procedures, as a consequence of the ESCB. The assessment is based shares towards the end of the year. which the Bank of Finland stopped on the minimum standards pub- Compared with one year earlier, issuing certificates of deposit at the lished by the European Monetary the value of trades settled more beginning of the year. Institute (EMI) in January 1998. than doubled (EUR 222 billion), The derivatives settlement European settlement systems that whereas their number (about 2.2 system of the HEX Helsinki Ex- comply with the standards can be million) almost doubled. This sub- changes is used for the settlement used for execution of the ECB’s stantial increase in trading volume of derivatives transactions executed credit operations. The standards led to capacity problems in connec- on HEX. In the settlement of deri- include requirements such as ade- tion with the clearing and settle- vative contracts, HEX is the counter- quate macroprudential supervision ment of share trades towards the party of the client and the securi- and operational reliability. The end of the year. Some progress was ties intermediary is responsible for assessment is updated annually. made in the course of the year in posting collateral and for other The same standards apply to the implementing the project aimed at practical measures. In keeping with assessment of the links between centralization of the book-entry the agreement on cooperation be- central securities depositories, ie system. tween HEX and Eurex Frankfurt the direct connections established The RM system is an RTGS AG, the shift in trading in deriva- between central securities deposito- system for debt instruments. The tive contracts from HEX to Eurex

Annual Report 1999 49 of the European Union started Chart 40. smoothly on 3 January 2000. Monthly values of securities transactions settled in the systems operated by the Finnish Central Securities Depository (APK) EUR billion 100 Cooperation in the area of 90 payment and settlement 80 systems in Finland 70 60 50 In the course of the year the Bank 40 1 and the FSA agreed on practical 30 20 measures for cooperation in the 2 10 supervision of payment and settle- 0 1998 1999 ment systems.1 1. Equities (OM system) 2. Debt securities (RM system) The Bank also worked closely Source: Finnish Central Securities Depository (APK). with market participants in the field of payment and settlement systems. The fora for cooperation set up in partnership with the banks in 1995, the Payment Systems started in October. This change will tral securities depository and clear- Steering Group and its subgroup, lead to a substantial decline in the ing corporation Sicovam SA an- the Payment Systems Cooperation trading and settlement of derivative nounced their intention to form an Group, convened regularly in the contracts in Finland. alliance in the near future. course of the year to consider is- Several proposals for the de- sues related to payment systems. velopment of securities settlement Various subgroups also worked services were put forward in the Changeover to the year 2000 under the Payment Systems Coop- euro area. In the course of the year in payment and eration Group, each focusing on a securities links were increasingly settlement systems specific area. The BoF-RTGS user constructed between national cen- group, comprising account holders, tral securities depositories along The millennium changeover re- also met regularly. the lines of a model proposed by quired major changes in the IT The Bank of Finland also took the European Central Securities applications of payment and settle- part in the work of the APK’s con- Depositories Association (ECSDA). ment systems worldwide, and con- sultative committees on clearing In early 1999 Cedel International, siderable resources were allocated and settlement services. The com- the Luxembourg-based internation- to these projects in Finland as well. mittees discussed improvements in al central securities depository Together with the FSA, the Bank of clearing and settlement services and clearing corporation, and the Finland coordinated the progress and other issues of topical interest. German central securities deposito- made in achieving Year 2000 com- The Bank contributed to the debate ry Deutsche Börse Clearing AG pliancy of payment and settlement on proposals for developing the announced their intention to join systems. The changeover to the OM system. The Bank also cooper- forces. This marked the start of the year 2000 proceeded without diffi- ates directly with the APK, for integration of European clearing culty, both in payment and settle- instance within the framework of a and settlement services. Towards ment systems and other banking joint coordination working group, the end of the year, Cedelbank’s systems, and no disruptions oc- rival, the Belgium-based interna- curred during the millennium tional central securities depository changeover. All systems of the 1 For a description of the Bank’s oversight activities in the financial markets, see Euroclear SA, and the French cen- ECB and the national central banks pages 35– 36.

50 BANK OF FINLAND and on an ongoing basis in opera- adopted in 1997 and member states The operator of a settlement tional issues, such as the develop- were required to implement it in system is required to notify the ment of collateral management. their national legislation by 14 Ministry of Finance of the rules of August 1999. The directive applies the system. This reporting obliga- to all credit transfers up to EUR tion does not, however, apply to the Developments in legislation 50,000 between member states of Bank of Finland, clearing organiza- and EU directives the European Economic Area. In tions as referred to in the Securities Finland the Act also applies to all Markets Act, nor corporations as The legislation on payment and domestic credit transfers. Accord- referred to in the Act on Trading in settlement systems has continued ing to the Act, a credit transfer is Standardized Options and Futures. to evolve as EU directives have executed when the sum in question The Ministry of Finance approves been transposed into national legis- is paid into the beneficiary’s ac- the rules of the last-mentioned lation. The Bank of Finland was count with a bank or another insti- entities on the basis of applicable actively involved in the preparation tution. The directive was imple- legislation. of the projects both at home and mented in Finland in August 1999. In its memorandum published abroad, for instance through partici- The directive on settlement in April 1999, the working group pation in several working groups. finality was implemented in Fin- appointed by the Ministry of Fi- In November the Ecofin Coun- land with the entry into force in nance to draft a proposal for the cil adopted a common position on December 1999 of a new Act on development of the book-entry a proposal for a directive of the Certain Conditions Applicable to system, inter alia, proposed that the European Parliament and the Securities and Foreign Exchange book-entry registers be centralized Council on the taking up, pursuit Trading and to Settlement Systems. at the APK and that the book entry and prudential supervision of the The scope of the Act was extended registrars become account manag- business of issuers of electronic to include gross settlement systems ing corporations within the APK. money. The directive is to be sub- for securities transactions. The Act The Government bill to this effect mitted to the European Parliament also applies to collateral posted is likely to be submitted to Parlia- in early 2000. with the central bank in connection ment in early 2000. The directive on cross-border with its performance of central credit transfers (97/5/EC) was banking functions.

Annual Report 1999 51 Maintenance of the currency supply

he Bank of Finland’s main task started to take concrete form. The with regard to the maintenance decisions to annul the legal tender T of the currency supply is to status of current markka banknotes ensure the secure and efficient issue and coins with effect from 1 March and handling of banknotes and coins 2002 are examples of this. and the quality, authenticity and In spring 1999 banks in the availability of notes and coins Kuopio and Vaasa districts began throughout the country. The Bank to work together on a trial basis in is also responsible for developing currency distribution. Merita the currency supply function in Bank, the OKOBANK Group Cen- cooperation with banks and other tral Cooperative, Leonia Bank and parties. In addition, the Bank is Automatia Pankkiautomaatit took responsible for preparations for the part in this cooperative arrange- issue of and coins ment. Currency supply logistics and for other currency supply tasks and management and supervision in Stage Three of Economic and of the cash centres were central- Monetary Union (EMU). ized in Automatia Pankkiauto- Finland’s entry into Stage Three maatit. In Kuopio, the Bank of of EMU at the beginning of 1999 Finland branch also participated in and the introduction of the single the trial by adjusting its service currency, the euro, directly affected hours and participating not only in the Bank’s maintenance of the cur- normal currency distribution but rency supply in two ways. First, also in filling ATM cassettes. whereas before the Bank had the exclusive right to issue banknotes and coins, it now issues notes and The markka is making way coins with the approval of the Euro- for the euro pean Central Bank (ECB). Second, during the transition period 1999– In December the Bank decided 2001 the Bank is obliged to ex- (1176/1999) to annul the legal ten- change national banknotes of other der status of 1986 and 1993 type euro area countries for Finnish banknotes from 1 March 2002. The currency at the fixed conversion 1986 type comprises 10, 50, 100, rates. In addition, the Bank’s pre- 500 and 1000 markka notes and the paratory work and cooperation with 1986 Litt. A type 50, 100, 500 and other parties regarding the issue of 1,000 markka notes. The 1993 type euro banknotes and coins have comprises the 20 markka note, as

52 BANK OF FINLAND well as the Litt. A type of this note. ning of 1999. According to Coun- cations in April and decided that All markka or penni notes older cil Regulation (EC) No 974/98, mass production could go ahead on than the current banknote series had this also pertains to national bank- that basis. Eleven printing works in been annulled earlier. The Bank had notes and coins in the euro area, the euro area are involved in pro- last annulled banknotes at the be- because they are sub-units of the duction. Each national central bank ginning of 1994. euro. In April the Governing Coun- may decide where the euro bank- In December the Ministry of cil of the ECB decided that the notes required in its country will Finance decided (1177/1999) to national central banks of the euro be printed. After the printing of test annul the legal tender status of ordi- area countries could continue to banknotes, some printing works nary 10 and 50 penni and 1, 5 and issue national banknotes without started mass production of certain 10 markka coins in the current series quantitative limits until the end of denominations already in July 1999. from 1 March 2002. The previous 2001. However, the ECB’s approv- According to current estimates, decisions on annulling markka and al is required annually for the around 13 billion euro banknotes penni coins had taken effect at the maximum amount of national with a total value of some EUR 600 beginning of 1994 and 1998. coins to be issued during the fol- billion will be produced before the As a consequence of these lowing year. notes are put into circulation on decisions the dual circulation of In 1999 the Bank of Finland 1 January 2002. These estimates markka and euro banknotes and participated actively in the work of include not only the notes needed to coins will last for only two months the ESCB Banknote Committee replace national banknotes in circu- from the beginning of 2002. After and its working groups on prepara- lation but also logistical stocks. The that time the Bank will redeem the tions for the introduction of euro estimates will be updated annually then annulled markka banknotes banknotes. This work focused on to take account of possible changes and coins for a further ten years issues related to producing euro in the demand for banknotes. until 29 February 2012. In Novem- banknotes, organizing arrange- In November 1999 the Bank of ber EU Finance Ministers meeting ments for research, quality control Finland ordered all the euro bank- in the Ecofin Council decided to and prevention of counterfeiting, notes required in Finland at the reduce the period for the changeover logistics for the cash changeover beginning of 2002 from Setec, to euro banknotes and coins from 6 and preparations for an informa- which started printing the notes to 1–2 months, because the nation- tion campaign on the cash change- around the end of November 1999. al decisions about the length of the over. The Bank participated with The Ministry of Finance has or- period were considered urgent the Ministry of Finance in the dered all the required in from the viewpoint of the prepara- work of the EU’s Economic and Finland from the . tions for the cash changeover. Financial Committee on prepara- Minting had started in September tions for the introduction of euro 1998, and by the end of 1999 coins. The key cash changeover about one-third of the estimated Preparations for issue dealt with by the committee requirement had already been pro- cash changeover were was the drawing up of a common duced. The Bank of Finland, as the stepped up statement on the length of the cash issuing authority, draws up annual changeover period for approval by estimates of the requirements for Under Article 106 (1 and 2) of the the Ecofin Council. euro banknotes and coins. Treaty establishing the European The pilot production of euro It has been widely held in the Community, the ECB obtained the banknotes was completed in Febru- euro area countries that, in order to exclusive right to authorize the ary. The results were good, and only ensure a smooth and rapid cash issue of banknotes and the right to some modifications in the technical changeover at the beginning of approve the volume of coins issued specifications of the notes were 2002, it should be possible to dis- in the euro area countries when the necessary. The Governing Council tribute euro banknotes and coins in euro was introduced at the begin- of the ECB confirmed the modifi- advance, at least to certain target

Annual Report 1999 53 Chart 41. information campaign for the intro- Holdings of notes and coins duction of the euro banknotes and FIM billion 22 coins. In Finland the agency is 20 represented by Publicis-Törmä. 18 The preparations for the cash 16 1 14 changeover gained momentum in 12 2 10 November when the Ecofin Coun- 8 cil approved a common statement 6 4 on the issue of the euro banknotes 3 2 and coins. In the statement, mem- 0 1995 1996 1997 1998 1999 ber states undertook to make their 1. Notes and coins in circulation best efforts to ensure that the bulk 2. Notes and coins held by the public 3. Banks' cash holdings of cash transactions could be ef- Source: Bank of Finland. fected in euro by the end of the first two weeks of 2002. Member states took the view that the dual currency period should last be- Chart 42. Notes and coins in circulation* in relation to GDP tween four weeks and two months. % of GDP They further felt that it would be 3.5 helpful to distribute euro bank- notes and coins to financial insti- 3.0 tutions and certain other groups,

2.5 such as security carriers and retail- 1 ers, before 1 January 2002, but 2.0 that this frontloading should not 2 lead to the putting of euro bank- 1.5 notes and coins into circulation 1988 89 90 91 92 93 94 95 96 97 98 99 1. Notes and coins in circulation before that date. Furthermore, to 2. Notes and coins held by the public * The annual average of end-of-month figures. help people familiarize themselves Source: Bank of Finland. with the new coins, limited quanti- ties of coins could be made availa- ble to the public on request, nota- bly to vulnerable groups in the groups involved in cash distribu- coins were not put into circulation population, during the second half tion. In January 1999 the Govern- until the beginning of 2002. of December 2001. The statement ing Council of the ECB decided In February 1999 the ECB nevertheless notes that these views that, under Council Regulation published a tender notice in the leave room for the participating (EC) No 974/98, frontloading of Official Journal of the European countries to implement the cash euro banknotes and coins to the Communities concerning a con- changeover in the way which bests public could not be allowed, be- tract for a Europe-wide informa- suits the specific circumstances in cause it would have the same effect tion campaign on the introduction each country. as issuing currency. However, at the of the euro banknotes and coins. Since 1988 the Bank of Fin- same time the Governing Council There were 40 applications in all. land and other banks responsible considered that frontloading of euro In early November the Governing for currency distribution have used banknotes and coins to key cash Council of the ECB selected Publi- a common data system for the distribution groups would be legally cis as the agency to assist the ECB transfer and handling of data on possible provided that the notes and in organizing the EURO 2002 the currency supply. The banks in

54 BANK OF FINLAND question have started preparations ratio was still the lowest of EU have been the case had there been to create a similar, partly more member states, apart from Luxem- no preparations for the millennium sophisticated, system for handling bourg, which forms a monetary changeover. Banks and Automatia data on euro banknotes and coins. union with Belgium. In the other Pankkiautomaatit held a large EU countries the ratio varied be- share of this amount, as withdraw- tween just over 3% to more than als by the public did not differ Further increase in value of 10%. The relatively low cash level significantly from normal and no currency in circulation is largely considered to be due to disruptions occurred. In early Jan- the sophistication of Finnish pay- uary 2000 the value of currency in Reflecting the favourable perfor- ment systems, the limited use of circulation therefore fell by consid- mance of the economy, the value banknotes for hoarding and the erably more than usual at this time of currency in circulation contin- small amount of markka banknotes of the year. ued to increase in 1999. Although circulating abroad. At end-1999 currency in circu- substitute means of payment are In December the parties re- lation amounted to FIM 19,919 becoming increasingly widespread, sponsible for currency supply million, an increase of 12.6% from the value of currency in circulation made preparations for increased the previous year. The value of has increased continuously over demand for cash, especially by the banknotes in circulation increased the last few decades, apart from public, as it was feared that the by 13.6% in 1999 and amounted to the recession years in the first half millennium changeover would FIM 17,884 million at the end of of the 1990s, when the value re- cause disruptions in payment sys- the year (Chart 43). The value of mained unchanged. The value of tems. Banks’ purchases of cash 100 markka notes in circulation currency in circulation was on from the Bank of Finland in De- increased most, by FIM 937 mil- average nearly FIM 17.5 billion in cember were much larger than in lion. The value of coins1 in circu- 1999, compared with FIM 16.8 the previous year, whereas the 1 The accounting practices of the Bank of billion in 1998 (Chart 41). increase in the amount of cash Finland were harmonized with those of the The ratio of currency in circu- returned was substantially smaller. Eurosystem from 1 January 1999. Among other things, this means that the value of lation to GDP was on average At the turn of the year the value of coin in circulation is no longer disclosed in 2.4% in 1999, which was slightly currency in circulation was almost the Bank’s balance sheet but is instead netted against total coinage and the differ- lower than in 1998 (Chart 42). This FIM 1 billion higher than would ence allocated to other assets.

Chart 43. Value of notes and coins in circulation Notes Coins FIM billion FIM million 18 2,100 2,000 17 1 1,900 16 1,800 15 1,700 2 14 1,600 1,500 13 1,400 12 1,300 11 1,200 1998 1999 1998 1999

Source: Bank of Finland. 1. Ordinary and commemorative coins 2. Ordinary coins

Source: Bank of Finland.

Annual Report 1999 55 Chart 44. Flow of notes and coins through the Bank of Finland,1999 Notes Coins Millions Millions 600 600 550 550 500 500 450 450 400 400 350 350 300 300 250 250 200 200 150 150 100 100 50 50 1 2 1 2 0 0 1000 mk 500 mk 100 mk 50 mk 20 mk Other 10 mk 5 mk 1 mk 50 p 10 p Other 1. Put into circulation 1. Put into circulation 2. Returned 2. Returned

Source: Bank of Finland. Source: Bank of Finland.

lation also increased in 1999, by in 1999 increased sharply com- current average flow-through rate 4.4%, and amounted to FIM 2,035 pared with 1998, ie from FIM 53.7 for markka banknotes. In 1998 the million at the end of the year. billion to FIM 72.7 billion. A total flow-through rate for banknotes At the end of 1999 cash hold- of 720 million banknotes were was 5.4. In 1999 the 100 markka ings by the public (incl. cash in ordered (Chart 44), which is 32% banknote had the highest flow- ATMs owned by Automatia Pankki- more than the year before. The through rate of all the banknotes, automaatit) amounted to FIM total value of banknotes returned 9.3, as against 7.1 in the previous 16,528 million, an increase of also rose, from FIM 53.9 billion to year. The rates for other banknotes 11.7% from one year earlier. Banks’ FIM 70.6 billion, or by 31%. There were more or less the same as in holdings amounted to FIM 3,390 was a particularly pronounced 1998: 0.7 for the 1,000 markka million, which is 17.5% more than increase in flows of 100 and 500 note, 2.0 for the 500 markka note, a year earlier. Banks’ cash holdings markka notes. 4.4 for the 50 markka note and 3.1 during the year were on average In the course of the year the for the 20 markka note. only 14.7% of total currency in Bank redeemed banknotes an- The Bank of Finland charges a circulation, which was half a per- nulled on 1 January 1994 to a total fee for handling banknotes, which centage point less than in 1998. value of FIM 5 million. However, is levied in accordance with the This percentage has decreased by banknotes belonging to these se- Act on government charges at cost well over a half since the beginning ries are still in circulation to a price but applicable only to the of the 1990s, mainly as a result of value of FIM 233 million. The extent that the annual rate of flow banks’ rationalization measures. redemption period for these notes of banknotes through the Bank of Nevertheless it is still relatively ends on 31 December 2003. Finland exceeds a given threshold high in long-term perspective and Banknotes in circulation value, which is based on the by international standards. flowed through the Bank of Fin- Bank’s statutory duties. In 1998 land 6.7 times on average in 1999, the Bank decided to set the thresh- which means that the banknotes old value at 4, because a higher Sharp increase in returned to the Bank at intervals of flow-through rate was considered banknote flows 1 month and 24 days on average. unnecessary for the quality control Even if the dual circulation of euro of banknotes and a smooth cash The total face value of banknotes and markka banknotes lasts only changeover in 2002. To further ordered from the Bank of Finland two months, it is longer than the enhance the impact of the measure,

56 BANK OF FINLAND the Bank also decided to review A total of 201 counterfeit deemed Finnish banknotes to a the handling fee every six months Finnish banknotes were detected in value of FIM 1,005 million. As according to the flow of banknotes 1999. In 1998 there had been 323. FIM 980 million of this amount through the Bank in the preceding In both years most of the counter- was redeemed by the German cen- six-month period. On the basis of feit notes were the result of single tral bank, the shares of the other these considerations, the note- forgeries. The Bank of Finland and national central banks were very handling fee was set at FIM 0.50 the National Bureau of Investiga- small. This partly reflects the fact per 100 banknotes throughout the tion jointly organized nine training that the redemption is organized in year. The fee was actually levied seminars on the detection of coun- different ways in different euro on 100 and 50 markka notes only, terfeit banknotes. The Bank also area countries. Most of the re- since their flow-through rates were provided material on recognition deemed banknotes were 100 mark- the only ones that exceeded the of genuine banknotes for persons ka notes, ie about 60% of the total threshold value. At the beginning who handle money in the course of amount exchanged. 1000 and 500 of December the Bank of Finland, their work. markka notes were also redeemed on the basis of the preceding re- to some extent whereas only a view period, confirmed the han- small amount of 50 and 20 markka dling fee for the first half of 2000 Redemption of notes were redeemed. at FIM 0.70 per 100 banknotes of national banknotes of the 100 markka denomination. euro area countries started Despite the increased flow of No changes in banknotes, total revenue from the From the beginning of 1999 the flow of coins handling fee decreased from FIM national central banks of the euro 6.6 million in 1998 to FIM 6.0 area countries were required to Ordinary coins put into circulation million in 1999. This was because exchange the national legal tender by the Bank of Finland had a total the handling fee was smaller than banknotes of other euro area coun- face value of FIM 580 million and in 1998. The Bank also collected tries for national currency at the ordinary coins returned to the FIM 5.8 million from the banks for fixed conversion rates. This was Bank of Finland a face value of data processing services in connec- based on the provisions of Article FIM 497 million. The value of tion with currency distribution. 52 of the Statute of the European coins put into circulation rose by This was FIM 1.2 million more System of Central Banks and the FIM 12 million whereas the value than in 1998 and was due to an guidelines for its implementation of returned coins fell by FIM 13 increase in the size of the fee. issued by the Governing Council million compared with the previ- The Bank of Finland orders of the ECB. ous year. In 1998 both the amount the banknotes it needs from Setec The Bank of Finland and its of coins ordered and returned had (see Appendices, Table 16). As the branches redeemed national bank- decreased by more than FIM 200 issue of markka banknotes will end notes of euro area countries to a million. in January–February 2002, the new total value of FIM 14 million in The Bank collected FIM 3.9 banknotes already in the Bank’s 1999. banknotes million in coin handling fees, vaults and the notes that will be represented two-thirds of the total which was FIM 1.4 million more subsequently sorted for redistribu- value, whereas the shares of the than in 1998. The increase was due tion were sufficient for the Bank to next most redeemed currencies to an increase in the size of the fee. take its last delivery of banknotes ranged between 5 and 10%. Only Three commemorative coins from Setec in August. In connection about one-tenth of the total amount were issued in 1999. To honour with its note sorting in 1999, the redeemed was done so at the re- Finland’s EU presidency, a com- Bank cancelled one-third (35 mil- quest of nonresidents. memorative 10 markka coin was lion notes) of the average number The national central banks of issued with a silver centre and an of banknotes in circulation. the other euro area countries re- outer ring of gold. The issue was

Annual Report 1999 57 limited to 3,000 coins. The coin markkaa and the number of coins Of coins annulled in 1994 and was also minted in a special ver- struck was 33,000. 1998, the Bank redeemed ordinary sion of 100,000 coins with a centre According to Council Regula- coins to a value of FIM 6 million of aluminium-bronze and an outer tion (EC) No 3603/93, the central and commemorative coins to a ring of cupro-nickel, as in the ordi- bank of an EU member state may value of FIM 0.4 million. At the nary 10 markka coin. Two coins not hold more than 10% of the end of 1999 the value of annulled were issued to commemorate Jean total value of coin in circulation. but unredeemed ordinary coins Sibelius and Finnish music. The The value of coin held by the Bank and commemorative coins amount- gold coin had the denomination of of Finland peaked on 28 February ed to FIM 295 million and FIM 1,000 markkaa and the issue was 1999 at 8.7% of the amount in 126 million respectively. limited to 8,000. The silver coin circulation but stood at 4.8% at the had the denomination of 100 end of the year.

58 BANK OF FINLAND Management of foreign reserves

ince the start of Stage Three participate in developing the in- of EMU, the Bank of Fin- vestment policy through their in- S land has managed two types volvement in committee work. of foreign reserves: part of the The role of the Bank’s own foreign reserves of the ECB and its foreign reserves has changed con- own foreign reserves. siderably since the start of Stage At the beginning of 1999 the Three of EMU. The Bank holds national central banks (NCBs) of reserves in order to, inter alia, meet the euro area transferred part of any additional needs of the ECB their own foreign reserve assets to and financing requirements in the ECB, which is owned by the Finland’s relations with the Interna- NCBs. The assets transferred to- tional Monetary Fund (IMF). By talled almost EUR 40 billion, of contrast, the foreign reserves are which 15% was in the form of gold no longer used for foreign ex- and the remaining 85% in the form change operations by the Bank. of foreign currency reserves. The Moreover, the Finnish State Treas- Bank’s share amounted to about ury has started to conduct central EUR 700 million. In compensation government operations on the for- for the transfer, the Bank has a eign exchange market independent- euro-denominated claim on the ly. Consequently, the foreign re- ECB, on which the ECB pays inter- serves are very stable in size and est. These reserves are needed for they no longer need to be as liquid potential foreign exchange opera- as they were prior to Stage Three. tions by the ECB. For these reasons, investment poli- The foreign reserves trans- cy was changed significantly in ferred to the ECB are not invested 1999 by including securities issued by the ECB itself but by the NCBs, by companies with good credit subject to constraints fixed at the ratings in the list of eligible instru- ECB. These constraints are similar ments. The Bank is one of the first to those applied by the Bank in the central banks to invest part of its investment of its own foreign re- foreign reserves in these higher- serves. As the foreign reserves are yielding assets. included in the balance sheet of the The Bank’s foreign reserves ECB, the ECB bears the associated are invested in international finan- risks. Investment policy in respect cial markets in gold and debt in- of the foreign reserves is deter- struments denominated in foreign mined by the ECB, and the NCBs currency. In addition, part of the

Annual Report 1999 59 reserves are held as special draw- cies, the ’currency distribution’, is through effective portfolio diversi- ing rights issued by the IMF and as reviewed regularly on the basis of, fication and imposition of mini- a reserve tranche with the IMF. The inter alia, the previous behaviour of mum credit rating criteria in re- Bank’s foreign reserves totalled the currencies. spect of issuers and banks. about EUR 8 530 million at the end Interest rate risk refers to varia- Investment benchmarks cus- of 1999. tion in the return on reserves as a tomized by the Bank serve as guide- The objectives of the Bank’s consequence of changes in market lines for investment activity. These investment policy are security, interest rates. Interest rate risk is benchmark portfolios are fictitious liquidity and return. The security measured in terms of duration. Du- portfolios designed to take into objective refers to the requirement ration describes changes in the mar- account, as far as possible, long- that the value of assets must not ket value of investment portfolios term objectives and constraints in fluctuate excessively as a result of resulting from a change in market the investment of foreign reserves. the various risks involved. The interest rates. One of the techniques Benchmark portfolios represent a liquidity objective means that it used in setting duration is the value- neutral approach to asset allocation. must be possible to convert foreign at-risk method. This examines the In practice, the aim is to obtain a reserves into cash quickly and at distribution of returns and especial- return on invested reserves that is reasonably low cost whenever ly losses the likelihood of which is higher than the return on bench- needed. The aim is to maximize the small. Interest rate risk is also man- mark portfolios. Deviations from return on the reserves within the aged by spreading investments benchmark portfolios are restricted security and liquidity constraints. among the markets of the main by limits. Returns on actual and The key element of the investment investment currency countries and benchmark portfolios are subject to policy is effective portfolio diversi- debt instruments with different continuous monitoring. fication, the purpose of which is to maturities and by setting market- Responsibility for risk man- limit changes in the value of re- specific limits on the average dura- agement in connection with invest- serves and ensure sufficient liquid- tion of investments. ment of foreign reserves lies with a ity of reserve assets. Credit risk refers to changes in unit which is separate from portfo- The main risks associated with the value of reserves caused by lio management, and compliance the investment of foreign reserves changes in the creditworthiness of with the constraints imposed on are exchange rate risk, interest rate issuers of investment instruments investment activity is monitored risk, credit risk and liquidity risk. or deposit-takers. Credit risk is constantly. The most important of these is reduced by investing the bulk of Following the transfer of part exchange rate risk. Exchange rate the reserves in securities issued by (20%) of its gold reserves to the risk refers to changes in the value the governments of the main in- ECB, the Bank’s reserves amount of reserves caused by exchange vestment currency countries and in to some 50,000 kg, almost half of rate fluctuations. The Bank at- short-term investments for which which is invested in short-term tempts to reduce exchange rate risk these securities serve as collateral. interest-bearing gold deposits. The by spreading its holdings of foreign This also ensures adequate liquidi- risks inherent in these investments reserve assets among different ty of the reserves. Part of the for- are restricted by means of portfolio currencies, thereby preventing eign reserves is invested in securi- diversification and imposition of changes in the value of individual ties issued by companies with good limits and maturity constraints. currencies significantly affecting credit ratings and in short-term Owing to actual and assumed the value of reserves. The most bank deposits. The credit risk at- future gold sales by central banks, important investment currencies in tached to this ‘credit portfolio’ is the price of gold fell to its lowest 1999 were the US dollar, the pound managed by imposing constraints level for 20 years in 1999. In late sterling, the Japanese yen, the Dan- based on the value-at-risk method September 15 European central ish krone and the Swedish krona. and limits derived from these con- banks agreed to restrict their gold The shares of investment curren- straints. Security is also enhanced sales over the next five years and to

60 BANK OF FINLAND maintain their gold deposits at no being. Deposit rates also returned more than current levels. The to close to the average levels for measure helped stop the decline in the past few years. the gold price, at least for the time

Annual Report 1999 61 International activities

The Bank of Finland as part of NCBs and the members of the the European System of Executive Board of the ECB. The Central Banks General Council is composed of the governors of all 15 EU NCBs With the launch of the euro and and the President and Vice-Presi- the start of the single monetary dent of the ECB. It meets four policy at the beginning of 1999, the times a year. European Central Bank and the Responsibility for the day-to- European System of Central Banks day business of the ECB lies with moved from the preparatory stage the six-member Executive Board, to normal day-to-day business. which operates on a full-time basis Similarly, at the Bank of Finland, in Frankfurt. The Executive Board activities related to the single presents matters to the Governing monetary policy and other tasks Council for decision. performed jointly in the context The most important element of of the Eurosystem became part of the decision-making powers of the day-to-day central banking activi- Governing Council of the ECB is ties. deciding on the monetary policy The European System of Cen- for the euro area. In practice, how- tral Banks (ESCB) is composed of ever, these powers also cover all the national central banks (NCBs) other issues relating to ECB activi- of all 15 member states of the ties. For this reason, preparation by European Union and the European the Governor of the Bank of Fin- Central Bank (ECB), which is land for ECB Governing Council owned by the NCBs. The unofficial meetings includes a briefing pro- designation ‘Eurosystem’ is used cess in which the Bank provides when referring to the ECB and the the Governor with relevant back- 11 NCBs that have adopted the ground material and proposals for euro as an integrated whole. Pursu- positions to be taken at the meet- ant to their Statute, the ESCB and ings. The Bank’s Board also re- the ECB implement jointly the views this material prior to each tasks conferred on them. Governing Council meeting. The ECB’s highest decision- Through committees estab- making body is the Governing lished for various areas of opera- Council, which normally convenes tion, the NCBs participate, together twice a month and brings together with the ECB, in the preparation of the governors of the 11 euro area matters for submission to the ECB

62 BANK OF FINLAND Representatives of the Bank of Finland on the ECB Governing Council and General Council and on ESCB committees

Governing Council of the ECB

General Council of the ECB Matti Vanhala (Governor) Esko Ollila (Deputy Governor), Deputy Member Kjell Peter Söderlund (Head of Unit), Assistant

Committees

International Relations Committee Market Operations Committee Information Technology Committee Esko Ollila (Deputy Governor) Markus Fogelholm (Head of Department) Pertti Simola (Head of Department), Kjell Peter Söderlund (Head of Unit) Harri Lahdenperä (Head of Division) until 15 November 1999 Raimo Parviainen (Head of Division) Budget Committee Banking Supervision Committee Antti Vuorinen (Budget Planner) Heikki Koskenkylä (Head of Department) Statistics Committee Martti Lehtonen (Head of Department) Accounting and Monetary Income Monetary Policy Committee Laura Vajanne (Head of Division) Committee Pentti Pikkarainen (Head of Department) Esa Ojanen (Head of Department) Tuomas Saarenheimo (Adviser) External Communications Committee Tuula Colliander (Head of Division) Antti Juusela (Head of Unit) Banknote Committee Antero Arimo (Head of Department) Legal Committee Urpo Levo (Head of Department) Maritta Nieminen (Lawyer) Paavo Perttu (Banknote Adviser) Eija Brusila (Lawyer) Internal Auditors Committee Payment and Taina Kivelä (Head of Unit) Settlement Systems Committee Erkki Kurikka (Internal Auditor) Harry Leinonen (Adviser to the Board)

Governing Council. The commit- tional central banks, the Bank of nificant impact on daily work rou- tees have an advisory role, and Finland has one or two representa- tines at the Bank. Committee work committee proposals are not bind- tives on each committee. The com- affects a large number of the ing upon the ECB Executive Board mittees have set up several working Bank’s experts involved in prepara- when it makes its own recommen- groups to examine a large number tory work, either directly (as com- dations for decisions to be taken by of specific issues in more depth. mittee members) or indirectly (as the Governing Council. In practice, The Bank is represented on many other experts). These experts need however, the committees’ view- of the working groups as well. to familiarize themselves with points are reported to the Govern- About 60 representatives from background material and take part ing Council even in cases where various organizational levels at the in in-house preparatory meetings the Executive Board’s proposal for Bank have participated in the work where they elaborate the positions a decision deviates from the com- of committees and working groups. to be taken by the Bank’s repre- mittee’s position. However, hundreds of Bank em- sentatives. In addition, committee Altogether, there are 13 com- ployees are involved in ESCB mat- work often requires the sending of mittees in the ESCB. The commit- ters in one way or another. memorandums, letters and answers tees convene whenever the need Experience so far shows that to enquiries to committee secretar- arises. In general, meetings are committee work has become an ies. The proceedings of committee held once a month or in some cases important part of ESCB coopera- meetings are also reported system- a few times a year. Like other na- tion. This has had a direct and sig- atically at the Bank.

Annual Report 1999 63 Twelve of the 13 ESCB com- Accession Process was held in Financial Committee in 1999 were mittees work on issues related to Helsinki on 11 and 12 November issues related to economic policy central banking within the euro 1999 and was attended by the gov- coordination between member area. The work of these committees ernors of the central banks of the states, in particular between coun- is discussed in more detail in other candidate countries. The purpose tries participating in the euro area. chapters. Matters related to the of the seminar was to carry out a Questions concerning the external Eurosystem’s external relations are wide-ranging review of the central representation of the EU and the dealt with by the International Rela- banking issues involved in the euro area were also discussed on a tions Committee. The ECB and the accession process, to identify the number of occasions. NCBs of the participating member main problem areas and to enhance On the basis of preparations by states each have two representatives cooperation between the Eurosys- the Economic and Financial Com- on the committee; one of the NCB tem and central banks of candidate mittee, the ECOFIN Council sub- representatives is the deputy gover- countries. Representatives from the mitted a report to the European nor. The ECB is represented on this Eurosystem and from the central Council convening in Helsinki on committee by a member of its Ex- banks of the 12 EU candidate the experiences gained in econom- ecutive Board. The committee han- countries participated in the semi- ic policy coordination in Stage dles, inter alia, issues concerning nar. The seminar was jointly organ- Three of Economic and Monetary the Eurosystem that are raised at ized by the ECB and the Bank of Union and on proposals for ways meetings of international organiza- Finland. of improving existing procedures. tions and other international group- The report proposes the streamlin- ings and that may require a com- ing of coordination procedures and mon position of the Eurosystem. Other activities related to enhanced cooperation between the Where necessary, the Governing the European Union various compositions of the Coun- Council takes the ultimate decision cil. It also stresses the importance on such positions. With the onset of Stage Three of of the document Broad economic Important topics discussed by Economic and Monetary Union, policy guidelines in the coordina- the International Relations Com- the Economic and Financial Com- tion of member states’ economic mittee in 1999 included the proce- mittee began its work under the policies. Economic policy coordi- dure for formulating the ECB’s Council of the European Union nation respects the autonomy and common positions on international meeting in the composition of the competence of the various parties issues, structural reform of the Ministers of Finance and Economy involved. From the ECB’s point of international financial system and (ECOFIN Council). Under the view this means that, in connection international codes of conduct for Treaty establishing the European with procedures for coordination of monetary and financial policies. Community, the committee’s tasks economic policies, the ECB will On the initiative of the committee, and composition are largely the not be a party to agreements that a number of studies were carried same as those of the Monetary could jeopardize room for manoeu- out in the course of the year on, for Committee, which was dissolved at vre and independence in monetary example, indicators of financial the end of Stage Two. The Eco- policy. market stability, exchange rate nomic and Financial Committee is One area of activity that fig- cooperation between G7 countries comprised of two representatives ured prominently in the work of the and – in partnership with the Mon- from each member state, the ECB Economic and Financial Commit- etary Policy Committee – the inter- and the Commission. One of the tee was the formulation of common national role of the euro. representatives of the member state positions on international econom- Another important topic dis- is from the ministry of finance and ic policy issues. The committee cussed by the committee was EU the other from the NCB. also took part in drawing up the enlargement. On the initiative of The most important topics EU’s first common strategies with the committee, a Seminar on the dealt with by the Economic and regard to certain non-EU countries.

64 BANK OF FINLAND Representatives of the Bank of Finland on EU committees Surveillance of member coun- tries’ economies accounts for a Economic and Financial Committee Esko Ollila (Deputy Governor) significant part of the IMF’s activi- ties. The main emphasis is on bilat- Alternate Members of the Economic and Financial Committee eral Article IV consultations. In Paavo Peisa (Adviser) 1999 the world economic outlook Economic Policy Committee improved, and there were no finan- Antti Suvanto (Adviser to the Board) cial crises like those witnessed in

Banking Advisory Committee the previous years. Heikki Koskenkylä (Head of Department) Brazil, one of the crisis coun- tries in the previous years, deval- ued its currency, the real, in Janu- ary. On account of this, the Brazil- It also contributed to preparations issues. The committee played a ian government judged it necessary for both normal and ‘informal’ major part in, for example, the to revise its economic programme, ECOFIN Council meetings; the preparations for a meeting between which is supported by the IMF’s autumn informal meeting was held representatives from the Council, stand-by arrangement as part of a in Turku, Finland. the ECB and the social partners package of international financial During the year under review, that was organized for the first support. The change in the eco- the EU reached a consensus with time during the Finnish presidency. nomic programme did not affect the other parties involved on the In Finland, the Bank of Finland the amount of the stand-by ar- representation of the EU and the participated in the work of a com- rangement, and according to the euro area in international fora, mittee on EU affairs responsible Fund’s Executive Board implemen- especially in the context of the G7 for coordinating cooperation be- tation of the revised programme Finance Ministers’ and Governors’ tween ministries. The Bank took progressed well. Group. In accordance with this also part in the preparatory work of In July the IMF granted Russia agreement, during the Finnish pres- the sub-committees of this commit- a stand-by credit of SDR 3.3 bil- idency of the European Union, tee that addressed issues related to lion, which Russia will use for Finland’s representative was economic policy, the accession repayment of its former debts to present at the G7 Group meetings process, the financial markets, the IMF. Approval of the stand-by whenever they addressed issues taxation and payments. credit was hampered by confusion related to EMU and took part in about the activities of the Russian the activities of the new ‘G20’ 1 . central bank. In early 1999 it be- The EU’s Economic Policy International Monetary Fund came evident that the Russian cen- Committee was involved in draw- (IMF) tral bank had given the IMF a mis- ing up the broad economic policy leading impression of the true state guidelines and in other procedures In addition to its traditional forms of its foreign reserves in 1996. Had for coordination of member states’ of activity, such as surveillance of the IMF known the real amount of economic policies, in particular member countries’ economies and the central bank’s reserves, it is with regard to structural policy financing arrangements, the IMF possible that Russia would not have focused on strengthening the archi- obtained the disbursements of IMF tecture of the international finan- funds made at that time.

1 The G20 consists of countries that are cial system and promoting the As part of its surveillance pro- important for the stability of the interna- HIPC Initiative (Heavily Indebted cedures, the IMF held the Article tional financial system, such as the G7 countries and some emerging market econ- Poor Countries Initiative), which IV consultation with Finland in omies, as well as key international organi- aims at easing the debt burden of May-June. The concluding remarks zation and the EU. The ECB also takes part in the work of this group. the poorest member countries. issued by the IMF mission on com-

Annual Report 1999 65 pletion of the consultation were is the CCL (Contingent Credit mation. In early 2000 at the latest published for the first time. The Line) lending window, which was all countries that subscribe to the actual staff report drawn up by the approved by the IMF Interim Com- SDDS will provide national statis- mission was posted on the IMF’s mittee at its spring meeting. This tics on key economic data so that it Internet website after the Fund’s facility is designed to provide will be possible to access this data Executive Board had completed its short-term financing for strength- via the Fund’s Internet website. discussions on Finland in October. ening balance of payment positions The SDDS and the general Also published in connection with in countries that are otherwise in endeavour to increase transparency the consultation were a public sound economic condition but find in respect of the economic position information notice summarizing themselves threatened by conta- of member countries and IMF op- the discussions by the Executive gion from turbulence occurring in erations are closely related to ef- Board, a statement by the Fund’s the international financial markets. forts to strengthen the architecture Alternate Executive Director repre- No country applied for CCL fi- of the international financial sys- senting the Nordic and Baltic coun- nancing in 1999. tem. Transparency has been pro- tries on the Fund’s Executive The pattern of developments moted by, inter alia, publication of Board, a statement by the IMF typical of recent crises whereby the an increasingly wider range of IMF Staff Representatives on Finland private sector withdraws from documents. An 18-month pilot and background information on countries in crisis, leaving the re- project for publication of annual fiscal policy. sultant financing gap to be filled consultation staff reports was The staff report concentrated with public funds, has met with launched in April. Finland is par- on fiscal and structural policies. It strong criticism. Hence, in drafting ticipating in this project, as de- noted that, although Finland had plans for financing to Romania, scribed above. conducted appropriate economic Ukraine, Pakistan and Ecuador, The main achievement of the policies, there were structural prob- particular attention was paid to IMF’s Annual Meeting held in lems in public finances and the private sector participation. The autumn 1999 was to finally reach labour market, due, in part, to an arrangements made were, however, agreement on the Fund’s financial ageing population. Particular atten- very closely tied to the special contribution to the HIPC Initiative. tion was drawn to the upward pres- conditions prevailing in individual The IMF’s contribution to this debt sure on public expenditure caused countries. Reaching agreement on reduction initiative is SDR 3.9 by population ageing. Monetary uniform practices for private sector billion, broken down into the policy was discussed only in terms involvement is difficult. Indeed, the Fund’s own contribution (SDR 2.4 of demands imposed on fiscal and private sector’s responsibility for billion) and member countries’ structural policies by the single the prevention and resolution of contributions provided on a bilater- monetary policy in the euro area. financial crises is likely to remain al basis (SDR 1.5 billion). The IMF examined the single mon- on the IMF’s agenda in the future. Besides the dispute over shar- etary policy in its special spring and The IMF continues to develop ing the financing burden, resolu- autumn reports on the euro area. its standard for data dissemination tion of the HIPC financing issue In the wake of the Asian crisis, (Special Data Dissemination was also delayed by the fact that, in criticism of the IMF’s modes of Standard – SDDS), which was line with an agreement made at the operation and programmes intensi- established in 1996 and to which G7 summit in the summer, the IMF fied. Partly for this reason, the IMF Finland is a subscriber. The pur- Executive Board, as late as August seeks to develop an operational pose of this initiative is to strength- 1999, approved changes to the framework for strengthening the en the architecture of the interna- criteria applicable to this initiative, architecture of the international tional financial system by creating which was launched in 1996. As a financial system with a view to uniform statistical standards to result, debt relief will be provided preventing financial crises. One of facilitate access to information and faster, in larger amounts and to a the new tools for crisis prevention cross-country comparison of infor- larger number of countries than

66 BANK OF FINLAND originally agreed and funds freed Finland was represented on the retary of State, from the Ministry from debt service will be reallocat- Fund’s Board of Governors by of Finance. ed to poverty reduction more effi- Mr Matti Vanhala, Governor of ciently than before. The authorities the Bank of Finland. Mr Esko of each member country receiving Ollila, Deputy Governor of the Other international activities debt relief will draw up a Poverty Bank of Finland, served as his Reduction Strategy Paper, with deputy. The Bank for International Settle- assistance from the IMF and the The Danish central bank’s ments (BIS) acts as a joint bank World Bank. The IMF’s financing responsibility for coordinating the and cooperative body for central vehicle for the HIPC Initiative, the preparation of constituency posi- banks. Governors and experts from Enhanced Structural Adjustment tions for the Nordic and Baltic central banks convene monthly in Facility (ESAF), was renamed the countries came to an end at the Basle to discuss issues pertaining Poverty Reduction and Growth close of 1999. to monetary and economic policy Facility (PRGF) to better reflect the Mr Kai Aaen Hansen from and the international financial new strategy. Denmark represented the Nordic system. Financial market develop- The IMF’s Interim Committee and Baltic countries on the Fund’s ments and other questions of cur- was renamed the International Executive Board until the end of rent concern to central banks also Monetary and Financial Committee 1999. feature on the agenda for the and given permanent status. The The Nordic Financial Commis- monthly meetings. In 1999 the committee’s mandate remains un- sion (NFU) convened once in 1999 ECB became a shareholder of the changed, however. to prepare for the spring meeting of BIS, as a result of which the Bank At the beginning of 1999 the the IMF’s Interim Committee. The of Finland has indirectly increased ECB was accorded observer status Nordic-Baltic Constituency Com- its involvement in the activities of at the IMF. A representative from mittee also met only once. The the BIS. the ECB may attend all IMF Exec- meeting was mainly concerned In December 1998 the BIS utive Board meetings that deal with preparing common constitu- granted a credit facility of up to with euro area monetary policy, ency positions for the IMF autumn USD 14.5 billion to Brazil on be- staff reports on economic policies meetings. half of the industrial countries conducted by individual euro area Central bank governors and within the framework of a USD 41 member countries and various ministers of finance decided in billion international financial sup- issues concerning the world autumn 1999 to establish a new port programme. The IMF and the economy. forum for cooperation, the Nordic- World Bank also participated in the Cooperation between EU coun- Baltic Monetary and Financial programme. Finland’s share in this tries in IMF-related matters intensi- Committee. Its purpose is to en- arrangement amounted to USD 50 fied during the year under review. hance cooperation within the con- million. The Finnish government This took place primarily in Wash- stituency in the area of internation- issued an absolute guarantee to the ington between representatives from al monetary and financial issues. Bank of Finland, thus enabling the the EU countries that are on the The new committee convened for Bank to make a commitment in IMF Executive Board and, where the first time in November. The respect of a collateral arrangement appropriate, in the context of the committee and its alternate meet- providing security for the BIS’s EU’s Economic and Financial Com- ings replace the Constituency claim on the Brazilian central bank. mittee. During the Finnish EU pres- Committee. Finland is represented Within the Organization for idency, coordination of EU Execu- on the Nordic-Baltic Monetary and Economic Cooperation and Devel- tive Directors on the IMF Executive Financial Committee by Mr Esko opment (OECD), representatives of Board was managed by the Finnish Ollila, Deputy Governor of the the Bank of Finland participated in Alternate Executive Director, Mr Bank of Finland, and Mr Johnny the work of a number of commit- Olli-Pekka Lehmussaari. Åkerholm, Permanent Under-Sec- tees. The OECD’s Economic Policy

Annual Report 1999 67 Committee deals with general mac- committees. In March OECD ex- monitors financial market develop- roeconomic and structural policy perts paid their regular visit to ments and trends, and on the Com- issues. The Economic Develop- Finland to conduct a country re- mittee on Capital Movements, ment and Review Committee is view. The review was considered at which is responsible for supervis- responsible for monitoring and a meeting in June, and the country ing member countries’ compliance assessment of individual member report was published in July. with OECD codes for liberalization countries and their economic poli- The Bank of Finland was also of capital movements and services. cies. Representatives of the Bank represented on the OECD’s Finan- of Finland participated in both cial Markets Committee, which

68 BANK OF FINLAND Economic analysis and research

he primary objective of representatives from national cen- macroeconomic analysis at tral banks and the ECB. Practical T the Bank is to support the responsibility for producing the Bank’s active participation in the forecast lies with the Working decision-making and work of the Group on Forecasting (WGF) and ECB’s Governing Council, com- the Working Group on Public Fi- mittees and working groups. An- nance (WGPF), which report to the other objective is to examine and Monetary Policy Committee. The assess the impact of the single Bank is represented on both these monetary policy on the Finnish working groups. economy and domestic economic In 1999 the Bank started regu- policy from the point of view of lar publication of its macroeco- price stability and balanced eco- nomic forecast for Finland. The nomic development. forecast is published in connection In recent years there has been a with the economic review articles marked shift in the focus of macro- in Euro & talous and the Bank of economic analysis at the Bank so Finland Bulletin. The Eurosystem’s as to ensure consistency with the forecast for the euro area as a whole changed circumstances brought has not been published so far. about by the transition from auton- The Bank has a long track omous monetary policy to the euro record in econometric macro-mod- area’s single monetary policy. In elling. Macroeconometric models addition to analysis of economic are used for forecasting and scenar- developments and economic policy io analysis. In the development and in Finland, euro area issues have application of models, the focus is been identified as a key area for shifting from models describing economic monitoring and research. the Finnish economy alone towards The Bank’s macroeconomic models covering the euro area and forecasts are normally produced the world economy. The Bank par- twice a year in connection with the ticipates in developing the joint Eurosystem’s forecast. The Bank is models of the ECB and the Euro- responsible for the part of the system and bears a particular Eurosystem’s forecast concerning responsibility for modelling the Finland. The joint forecast of the Finnish economy. The development Eurosystem is drawn up under the of forecasting models within the leadership of the Monetary Policy ESCB is coordinated by the Work- Committee, which is composed of ing Group on Econometric Model-

Annual Report 1999 69 ling (WGEM), which functions changes in the sphere of central change activities and the effects of under the Monetary Policy Com- banking brought about by rapid technological advances on them as mittee. The Bank is represented on structural change in the financial well as the role of central banks in this working group. markets. The Bank’s research is safeguarding the liquidity of other Although its ongoing econom- integrated with post-graduate re- banks. ic monitoring naturally focuses on search by staff members so that Research findings are published the euro area and Finland, the Bank some of the Bank’s research in the form of mimeographed dis- also keeps abreast of developments projects are at the same time aca- cussion papers and printed publica- in non-euro area countries, notably demic studies, such as doctoral tions in the Bank’s research series. the other Nordic countries, the theses, leading to higher degrees. Electronic dissemination of research United Kingdom, the United States Economic research conducted reports via the Internet has also and Japan. Emerging market econ- by the Research Department focus- been developed lately. Abstracts of omies are another key area of inter- es on two main areas: the model- all research reports and many full est. The Bank prepares its own ling of monetary policy (research reports are posted on the Bank’s assessment of recent economic programme 1); and the future of Internet website. developments once a month, prior the financial services sector (re- An external quality evaluation to the first monthly meeting of the search programme 2). of the Bank’s research activity was ECB Governing Council. Research programme 1 is con- carried out in 1999 on the basis of With the introduction of the cerned with developing techniques a commission from the Board. The single monetary policy, domestic for analysis of the effects of mone- purpose of the evaluation was to economic policy has assumed in- tary policy. One of the main aims provide an objective basis for fur- creased importance in securing of the programme is to upgrade ther development of the Bank’s balanced economic development. macroeconomic models used in research work. The evaluation re- Accordingly, domestic economic policy preparation and forecasting port was published in early October policy, especially fiscal policy and so that they can be used to analyse on, inter alia, the Bank’s Internet labour market issues, are carefully credibility, expectations and struc- website. The external evaluation analysed at the Bank. In addition to tural change. Projects in this re- panel, comprising two foreign and domestic economic policy, the search area have included studies one Finnish expert, noted in their Bank makes a detailed assessment of the relevance of monetary policy report that there is ‘a most success- of the stance and principles of the uncertainty for inflation, policy ful research culture’ at the Bank, single monetary policy. In the selection and statistical estimation which the panel believed helped to ESCB, public sector issues are of models describing economic increase professional competence. analysed by the Working Group on behaviour. The panel also made a number of Public Finance, which functions Research programme 2 is con- recommendations concerning the under the Monetary Policy Com- cerned with forecasting structural scientific quality of the Bank’s mittee. changes in the operating environ- research, in-house research train- Strengthening economic re- ment of central banks and the ef- ing, dissemination of research search has been one of the Bank’s fects of these changes on the tasks findings, research content, internal key objectives in recent years. This of central banks and other authori- organization of research, recruit- is based on the judgement that ties. The aim is to shed light on eg ment of economists and external research that is properly oriented, the effects of electronification and contacts. of high quality and internationally the international integration of the The evaluation panel empha- recognized is a prerequisite for the financial services sector. Studies sized the central role of research on Bank’s effective and constructive carried out in the course of the year economies in transition now that participation in the activities of the as part of the projects under this the Bank is part of the European ESCB. By conducting research, the programme dealt with, inter alia, System of Central Banks. Research Bank also seeks to anticipate economies of scale in stock ex- in this area falls within the compe-

70 BANK OF FINLAND tence of the Institute for Econo- In the course of the year, coop- publications are also available in mies in Transition, which has four eration was intensified with the electronic form, which is becoming complementary functions: re- research community both at home an increasingly important channel search; monitoring; information and abroad. Cooperation agree- for their dissemination. management; and cooperation with ments of various kinds were signed The geographic focus of re- the authorities. with research institutes in Russia, search and monitoring by the Insti- Research done by the Institute the Baltic States and eastern central tute is still on Russia and the Baltic for Economies in Transition focus- Europe. The Institute contributed States, although the significance of es mainly on monetary and fiscal to the World Bank’s Transition China has increased. issues. In 1999 the Institute started Newsletter, which is also an impor- The Institute’s information to publish its research findings in tant publicity channel. service, which, at least in the Nor- its own Discussion Papers series, In 1999 a new publication dic countries, is without parallel in the printed version of which has a called Baltic Economies – The this field, was developed further, circulation of about 1,300. Efforts Quarter in Review was added to especially in respect of electronic are also being made to publish the the Institute’s existing range of information acquisition and man- Institute’s research work in external economic and financial reviews, agement. The successful establish- journals or other publication series. Russian & Baltic Economies - The ment of the ESCB and the Finnish The Institute’s electronic BOFIT Week in Review and Russian Econ- EU presidency were factors that Online publication series on its omy – The Month in Review . All increased interest in the Institute’s Internet website may be accessed these publications have been well activities. for reading seminar lectures, other received, and their circulations articles, etc. increased in 1999. The Institute’s

Annual Report 1999 71 Statistics

he Bank of Finland’s statisti- etary Union Financial Accounts; cal duties consist of the General Economic Statistics. The T compilation of money, bank- procedures for submitting statisti- ing and balance of payments statis- cal data to the ECB were estab- tics. This involves extensive coop- lished in the course of 1999. In this eration in Finland, within the context, special attention was paid ESCB and internationally. In con- to the observance of deadlines and nection with the reorganization of the authenticity and consistency of the Bank at the beginning of June statistics. 1999, all the Bank’s statistics pro- The tools used by the ECB to duction functions were combined harmonize statistics across the euro into a newly created Statistics De- area are descriptions of procedures partment. applied in the compilation of statis- The money, banking and bal- tics and oversight and checks of ance of payments statistics required compliance with instructions. The by the ECB are produced in ac- ECB’s Balance of payments book, cordance with the ECB’s statistical which describes the methods ap- reporting requirements. These sta- plied in the compilation of balance tistics are also submitted to the of payments statistics, was pub- Bank for International Settlements lished at the end of 1999. A survey (BIS) and the International Mone- on the methods used by national tary Fund (IMF). In addition, the central banks and the ECB to en- Statistics Department provides the sure the confidentiality of individ- BIS, the ECB and the IMF with ual items of data required in the general economic statistics on the compilation of statistics was con- real economy, and receives large ducted in 1999 on the basis of quantities of summary statistical instructions issued by the ECB. At data on the euro area from the the end of the year, the first statis- ECB. tics-related internal audit required Within the ESCB, matters by the ECB was carried out; the concerning euro area-wide statis- audit focused on the systems used tics are prepared by the Statistics for transmitting statistical data Committee and the working groups between the ECB and the national that operate under it in the follow- central banks. An ECB Regulation ing areas: Money and Banking stipulating that the ECB has the Statistics; Balance of Payments and power to impose sanctions in cases External Reserves Statistics; Mon- where the reporting institutions do

72 BANK OF FINLAND not fulfil stated reporting require- The International Monetary Council of the ECB has given a ments entered into force in Novem- Fund has actively developed a prominent role in its stability-ori- ber 1999. consistent publication system for ented monetary policy strategy. The Bank also participates in key economic statistics that are The national central banks calcu- statistical cooperation at European published with a short time lag late the minimum reserve require- level within Eurostat, the Statistical (Special Data Dissemination ments of MFIs on the basis of the Office of the European Communi- Standard): this system includes monthly balance sheet. The central ties, as a member of the advisory extensive descriptions of the con- role of the monthly balance sheet Committee on Monetary, Finance tents of the statistics and the meth- of the MFI sector in the monetary and Balance of Payments Statistics ods of compiling them and incor- policy of the Eurosystem under- (CMFB) and its Working Group on porates national Internet websites lines the importance of high-quali- Balance of Payments Statistics. The showing key economic figures. ty statistics. Special attention was CMFB functions as an organ for The Bank of Finland is the national therefore paid to the quality of cooperation between the euro area coordinator for this IMF project in statistics during 1999, and all euro countries, the other EU member Finland and cooperates in this ca- area central banks introduced a states, Norway, Iceland and pacity with several Finnish authori- system for monitoring the authen- Switzerland and the EU candidate ties that produce statistics. The ticity and timeliness of balance countries. In 1999 the CMFB high- Bank also cooperates extensively sheet statistics on MFIs. lighted the importance of expand- with Statistics Finland in the com- National central banks com- ing the production of statistics on pilation of other statistics. The pile, on a quarterly basis, detailed the euro area and the EU. This cooperation aims at deriving mutu- statistical data on the sectoral, cur- requires that member states be able al benefit from existing statistical rency and geographical break- to quickly produce uniform statis- data and at avoiding duplication in downs of MFIs’ balance sheets and tics on the same subjects. The fur- statistical work. on the purposes for which loans ther development of balance of On the basis of national data have been granted. This informa- payments statistics has also been supplied to it by the national cen- tion is used in in-depth monetary accorded an important role in the tral banks, the ECB compiles a policy analysis and in the financial work of the CMFB. Among other monthly consolidated balance sheet accounts that describe financial things, the CMFB has sought solu- of the Monetary Financial Institu- intermediation. The compilation of tions to problems in the collection tions (MFI) sector, based on a these quarterly statistics was initi- of balance of payments data on common definition of an MFI and ated in spring 1999. During the transactions between the euro area the application of harmonized clas- year the national central banks countries that arise as a result of the sifications and concepts across all submitted to the ECB detailed introduction of the single currency. euro area countries. In Finland, historical quarterly data dating Statistical cooperation with the deposit banks, branches of foreign back to the fourth quarter of 1997. other Nordic countries and Estonia banks in Finland engaged in depos- Interim systems for compiling continued. Nordic cooperation it bank activities and money mar- statistics on euro area securities covers money, banking and balance ket funds are classified as MFIs. markets and retail bank interest of payments statistics. Its impor- National monthly statistics on rates were introduced in 1999. The tance in the development of statis- MFIs are sent to the ECB 15 busi- harmonization of euro area statis- tical compilation methods has ness days after the end of each tics in these areas is under way. In grown, despite the fact that each month. autumn 1999 the Bank started to Nordic country has a different On the basis of the monthly compile monthly securities markets approach to integration, owing to balance sheet of the euro area MFI statistics for the ECB. In the initial which there are slight differences sector, the ECB calculates and phase, the securities markets statis- in the methods they use in compil- publishes the monetary aggregates tics cover mainly bonds and notes. ing statistics. for the euro area, to which the In 1999 the Bank also conducted

Annual Report 1999 73 an extensive survey on the availa- in cases where data collection was tistics in separate English-language bility of statistical data required for based on cross-border payments statistical bulletins, in addition to the compilation of quarterly finan- transacted by banks. The Bank did which they are published in their cial accounts. not experience such problems, entirety as a statistical annex to the From the beginning of 1999 since it uses surveys to collect data ECB’s Monthly Bulletin. The the Bank started to compile bal- from financial institutions and ECB’s Monthly Bulletin, which is ance of payments statistics accord- other undertakings. published simultaneously in all the ing to ECB requirements, ie broken However, owing to the consid- official EU languages, is translated down into data on the euro area erable increase in the item ‘Errors into Finnish by the Bank. The euro and the rest of the world. Apart and omissions’ in the balance of area statistics compiled by the ECB from the new regional breakdown, payments in 1998, matters con- are also available on the ECB’s the introduction of the single cur- cerning data collection and quality Internet Website. rency did not require any changes of balance of payments statistics The national central banks in data collection for Finnish bal- were discussed in depth at the participating in the ESCB continue ance of payments data. The pro- Bank. As a result of these discus- to publish their own national statis- duction and publication of monthly sions, the Bank initiated studies to tics. The Bank of Finland publishes and quarterly statistics continued improve the selection of recipients statistics partly in the form of sepa- almost without change. The Bank of balance of payments surveys, rate statistical bulletins and partly of Finland compiles and publishes and further developed the quality in the form of an extensive statisti- monthly statistics on Finland’s control of statistics. A seminar cal review, Financial Markets. The international investment position. focusing on quality control of sta- bulletins and the review are availa- Most of the other national central tistics was arranged jointly with ble both as printed publications and banks compile these statistics only . online on the Bank of Finland’s once a year. Within the European System of Internet Website. In 1999 the Bank In some euro area countries, Central Banks, the ECB combines of Finland started to publish sepa- the introduction of the euro re- the statistics of the separate mem- rate versions of these statistics in vealed notable difficulties in the ber states into aggregate statistics markka and euro amounts. collection of basic data required covering the entire euro area. The for balance of payments statistics ECB publishes some of these sta-

74 BANK OF FINLAND Information and publications

he start of Stage Three of ed in an increase in press releases EMU at the beginning of and other publications translated by T 1999 also meant that the the Bank and in a heavier work- Bank’s communication policy had load. The most demanding publica- to be adjusted to the new operating tions in this respect were the ECB’s environment. Informing the Finn- annual report and the Monthly ish public about the ECB’s mone- Bulletin, both of which were trans- tary policy and other activities and lated into Finnish at the Bank. It participating in the ECB’s growing was agreed that, starting from the communication activities were key beginning of the year, the Monthly elements of the Bank’s communi- Bulletin would be published simul- cation in 1999. taneously in all 11 official EU Mr Matti Vanhala, Governor of languages. In addition, a large the Bank of Finland, continued the number of ECB press releases and practice adopted in 1998 of brief- other material produced by the ing representatives of Finnish me- ECB were translated into Finnish dia on the meetings of the ECB and Swedish at the Bank. Governing Council after the press The Internet became increas- conference given by the ECB Pres- ingly important as a channel for ident. Since spring 1999 there has distributing press releases and been a direct video connection to publications. The Bank’s web pages Helsinki from Mr Vanhala’s press were revised to reflect the Bank’s conferences, thus enabling journal- new status as part of the ESCB. ists in Finland to receive the news Most of the Bank’s publications are immediately and present questions now available on the Bank’s web- to Mr Vanhala. site (www.bof.fi). The website is in The Bank participated actively Finnish, Swedish and English. in the work of the ECB’s External A new brochure describing the Communications Committee, which Bank’s role and tasks was pub- deals with the ECB’s information lished in six languages. and publishing activities. In addi- The Bank received numerous tion to the ECB’s communication requests for information concern- policy, the Committee discussed ing economic and monetary union. ESCB-wide cooperation in the The euro information phone ser- communication field. vice provided by the Bank and The ECB’s active information e-mail were important communica- and publication policy was reflect- tion channels. The Bank’s staff, and

Annual Report 1999 75 Table. ing the use of electronic communi- clude statistics previously pub- Print runs for Bank of Finland publications in 1999* cation were clarified. All commu- lished in the statistical annex to the nication concerning the entire or- Bank of Finland Bulletin. Key sta- Annual report – in Finnish 3,300 ganization was concentrated on the tistics on the euro area were also – in Swedish 800 – in English 2,000 Intranet, which became the main added. Balance of payments statis- Euro & talous 7,500 internal communication channel. tics were published regularly in the Bank of Finland Bulletin 5,800 Series A 1,600–10,000 The onset of Stage Three also statistical bulletin Finland’s Bal- Series E 1,500–1,900 Discussion Papers 800-1500 brought with it changes to the ance of Payments. No studies were Financial Markets statistical review Bank’s own publications. At the published in the Bank’s A series – markka-amount version 500 – euro-amount version 1,000 beginning of the year the name of while three studies, one of which Finnish Bond Issues 400 Institute for Economies in Transition the Finnish-language quarterly was a doctoral thesis, appeared in – BOFIT Discussion Papers 1,300 Markka & talous was changed to the E series. Twenty-three papers – Russian & Baltic Economies – The Week in Review Euro & talous, and the English- were published in the Discussion – in Finnish 900 – in English 1,350 language Bank of Finland Bulletin Papers series, which comprises – Russian Economy – began to be published on a quarter- research and analytical studies The Month in Review 1,000 – Baltic Economies – ly rather than a monthly basis. The conducted in various departments The Quarter in Review 600 contents and layout of the latter of the Bank. The Institute for * It is endeavoured to set print runs to match demand (subscriptions and orders for were also changed. Both publica- Economies in Transition produced single copies) as closely as possible. tions are now printed in four col- a wide range of publications, most ours. The Bank’s annual report was of which were published in both revised after completion of the first printed and online versions.1 year of economic and monetary In addition to its regular publi- particularly the specially trained union. cations, the Bank published various members of the EMU communica- Both Euro & talous and the brochures and guidelines for inter- tions group, held numerous presen- Bank of Finland Bulletin appeared nal and external use. tations on EMU-related issues for four times. The annual report was various groups ranging from stu- published in Finnish, Swedish and dents to pensioners, both at the English. The statistical review Fi- Bank and external locations. nancial Markets was published on 1 A list of Bank of Finland publications in The Bank’s internal communi- a monthly basis, in both markka- 1999 is included in the Appendices. A list cation was also revamped in 1999. amount and euro-amount versions. of publications by the Institute for Econo- mies in Transition is available on the In particular, the principles govern- Its contents were expanded to in- Bank’s website (www.bof.fi).

76 BANK OF FINLAND Organization and personnel

he Board decided to reorgan- The strategic policies serving ize the Bank in spring 1999 as a guideline for the Bank’s opera- T on the basis of a proposal tions over the next few years were submitted by a working group that revised after several stages of dis- was set up to examine the need for cussions within the Bank. The change in the context of the Euro- Bank aims to be an effective mem- pean System of Central Banks ber of the ESCB and an active (ESCB). The new organizational influence in Finland. Being influ- structure is better suited to the new ential means that the Bank is an conditions created by the transition active, competent and sought-after to economic and monetary union. expert at European level and takes As a result of the changes, the Bank’s an active part in developing the functional units are now larger and ESCB. In Finland, the Bank pro- more clear-cut than before. The motes economic policy that is com- most important change was the patible with the successful per- merger of the Monetary Policy and formance of the Finnish economy Economics Departments into a sin- and the single monetary policy and gle Economics Department. At the actively seeks to ensure that Fin- same time, the Board revised its land’s financial and payment sys- own division of responsibilities. tems are efficient and secure. The scenarios describing alter- native future developments in the Bank’s operating environment were Personnel revised during spring 1999. The aim of this revision was to analyse Personnel strategy in 1999 focused developments in the Bank’s operat- on renewal and development of the ing environment over a time hori- Bank’s staff structure, expertise, zon of some five to ten years. management, organizational struc- These scenarios are not forecasts ture and modes of operating. but rather a means of outlining The total number of staff will possible future courses of develop- decrease in the coming years ment in the Bank’s operating envi- through a process of natural wast- ronment. Seminars were held at age, as a significant number of which scenario work was linked to staff will retire. At the same time, the Bank’s strategic planning. The the Bank seeks to increase the staff were actively informed about share of experts in its staff through the scenarios. new recruitments. The main em-

Annual Report 1999 77 Table. The Bank of Finland’s operating expenses and income, FIM million1)

Budgeted Outturn Outturn 2000 1999 1998 Expenses Salaries and fees 169.1 168.9 166.6 Social security 23.1 24.1 24.3 Pensions 74.7 69.0 66.2 Training 9.7 7.1 7.1 Travel 10.0 8.1 8.6 IT services 23.3 24.1 21.0 Other purchased services 27.5 20.6 19.2 Banknote printing 100.0 6.7 39.8 Real estate expenses 32.7 30.8 29.7 Other 28.3 26.4 23.8 Total 498.4 385.8 406.3

Depreciation IT equipment 11.9 11.6 13.0 Money handling machines 3.0 0.3 5.5 Buildings 54.2 51.0 36.0 Other fixed assets 8.0 7.6 10.9 Total 77.1 70.5 65.4

Total expenses 575.5 456.3 471.7

Income Maintenance of the currency supply 14.6 15.2 14.1 Services sold to the Financial Supervision Authority 9.1 8.6 8.5 Real estate 31.8 33.0 29.8 Other 11.4 12.8 15.1

Total income 66.9 69.6 67.5

NET 508.6 386.7 404.2

1) Excludes the Financial Supervision Authority.

Source: Bank of Finland

Chart 45. The Bank of Finland's operating expenses and income FIM million 700

600

500

400 1 300

200

100 2 0 1998 1999 Budgeted 2000 1. Expenses 2. Income Source: Bank of Finland.

78 BANK OF FINLAND Table. Number of Bank of Finland staff, 1990– 1999

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999

Head office 755 731 735 685 675 679 655 670 679,5 681 Branches 187 178 159 140 106 117 111 106 103 104,5 Total 942 909 894 825 781 796 766 776 782,5 785,5

Source: Bank of Finland

phasis will be on the core central Of the total staff, 91% had After the Bank became part of bank functions while there will be permanent positions and 9% were the ESCB on 1 January 1999, the an increase in purchases of support on fixed-term contracts. A total of smooth operation of international services. This will support the ob- 20 staff changed jobs within the payment and communication sys- jective of maintaining a flat organi- Bank. tems was secured by introducing zational structure. The considerable number of staggered working hours in some The Bank’s objectives of play- staff retirements in the coming departments and standby and emer- ing an active and influential role in years and the changes in the Bank’s gency arrangements. The EU-wide the single monetary policy and operating environment have high- banking hours laid down for the contributing to the public debate lighted the importance of human TARGET system caused overtime on Finnish economic policy pose resource planning. In order to pre- on most bank holidays in units new challenges for the competence pare for the changes, proactive responsible for the operation and of the Bank’s managers and ex- human resource planning was in- maintenance of TARGET. perts. Competence in the basic troduced to help ensure continuity The entry into force of the Act central bank functions should be of operations, manageability of on the Openness of Government very high by European standards change and availability of exper- Activities (621/1999) at the begin- while competence in other areas tise. The impact of natural wastage ning of December served to under- should be competitive by Finnish is anticipated by planning the score the obligation of the authori- standards. quantity and quality of resources ties to promote the openness of As at the end of 1999 the Bank and the refocusing and appropriate their activities. In line with the employed a total of 785.5 staff allocation of expertise. The devel- requirements of the new act, the (including staff on leave of ab- opment of resources is analysed Bank’s modes of operating and sence): 681 at the head office and over a three-year horizon with the information systems were revised 104.5 at the branches. Expressed in aim of ensuring that the organiza- to better comply with the principle terms of man-years, the combined tional structure, tasks and expertise of openness and good information work contribution of permanent meet the requirements for operat- management practice. employees and employees on ing within the ESCB. fixed-term contracts totalled 744.6 The Bank’s pension scheme is man-years in 1999. managed by an internal pension Staff development A total of 41 staff were on fund and corresponds to the gov- and training leave of absence, 20 of whom were ernment pension scheme. Around employed by the ECB. In addition, 80% of the Bank’s pension liabili- As before, there was special focus there was considerable demand for ties are covered by reserves. A total on management of expertise. The the Bank’s experts in other banks of FIM 72 million was paid out in Bank’s areas of strategic expertise and Finnish companies. pensions in 1999. are analysis of economic and mon-

Annual Report 1999 79 took part, four were employed by the Bank on completion of the

Chart 46. programme. The Bank of Finland's training expenses The Bank’s in-house manage- ment training programme focused Other Management 2 % 7 % on team leaders in 1999. Personnel

Interactive skills, management was the main theme communication, language training in the six-day training programme 21 % Professional attended by 25 staff from various development 55 % departments.

Information The need for basic IT training technology 15 % remained great. The changeover to new office systems was completed

Source: Bank of Finland. at the end of the year. Expenses due to IT training provided for staff amounted to FIM 870,000, representing nearly 800 trainee days. In addition, computer-aided self-study programmes were intro- etary policies related to the EU and preparation of doctoral and licenti- duced towards the end of the year. Finland’s neighbouring areas, mon- ate theses at the Bank’s Research More than 100 staff members had itoring and communication of the Department required slightly more passed an examination in basic IT ECB’s monetary policy decisions than three man-years, spread over skills (computer driving licence) by and assessing their implications, six different projects. the end of the year. participation in the development of Key areas in economic training In 1999, as part of the training financial markets and management were economic policy and its coor- assistance provided by the Bank to of processes of change within the dination in the euro area, risk anal- central banks of economies in tran- organization. ysis of financial markets, econo- sition, the Bank arranged 16 visits The Bank’s training expendi- metrics and recent developments in involving 68 participants. Training ture totalled FIM 7.1 million (4.0% macroeconomics. A series of lec- assistance was primarily provided of payroll). Training focused on tures on EMU was organized in to the central banks of Russia, professional development, which cooperation with the University of Poland and Latvia. Part of the amounted to FIM 3.9 million. FIM Helsinki. Some of the lectures were training was organized in connec- 1.5 million was spent on interactive open to the public and held at the tion with a project under the EU’s skills and language training and university. A total of 18 training Tacis Programme that came to an FIM 1.1 million on development of sessions on economic and legal end in the spring. Owing to the basic IT skills. issues were organized, representing internal situation of the Russian As in previous years, the Bank some 550 trainee days. In addition central bank, some of the training continued to support post-graduate to in-house training, experts partic- sessions scheduled for 1999 were studies in the field of economics. ipated actively in external training postponed to 2000. At the Bank’s Some of the Bank’s research sessions and seminars, both at invitation, economists from the projects serve both the research home and abroad. The third Young Estonian central bank took part in needs of the Bank and the individ- Professionals training programme some training sessions arranged for ual academic aspirations of staff ended in the spring as planned. Of economists. members. During the year the the seven young economists who

80 BANK OF FINLAND Information technology

n 1999 the focus of the Bank’s timetables and implementation IT activities was on ensuring procedures, together with contin- Ithat the changes to information gency plans, were drawn up for the systems necessitated by the transi- millennium change. In the same tion to Stage Three of EMU be- connection, operational reliability came established in practice and on of the whole system was improved maintaining basic IT services. As in many areas, and contingency regards the latter, the top priority plans and back-up arrangements was achieving Year 2000 compli- were tested. ance of the Bank’s systems. A new version of the analysis The EMU-related systems and time series system used in implemented at the beginning of decision-making was introduced. 1999 were designed to meet ESCB The Ministry of Finance also ac- requirements regarding functions, quired access to this system in the capacity and support organization. autumn under an agreement with A new system was implemented the Bank. for the management of collateral The Bank’s Intranet was updat- located in non-euro area EU mem- ed. It was decided to purchase a ber states. Projects connected with new document management system currency distribution were initiated to improve document management in preparation for the introduction and fulfil the requirements of the of euro banknotes and coins. new Act on the Openness of Gov- A new project, TARGET 2000, ernment Activities. implementing new message types The systems used by the and additional night-time clearing Bank’s economists and banking of payments, was launched with a operation systems were reviewed in view to enhancing the TARGET order to secure their competitive- system. ness and identify future require- The Bank’s Year 2000 project ments. for ensuring Year 2000 compliance The Bank’s IT Help Desk was of IT systems was completed in chosen as Finland’s Help Desk of 1999. The compliance of ESCB the Year. systems was also ensured. Detailed

Annual Report 1999 81 Financial statements

Balance sheet, EUR million

31 Dec 1999 31 Dec 1998

Assets

Gold and gold receivables (1) 457 493

Claims on non-euro area residents denominated in foreign currency (2) 8,071 7,881 Receivables from the IMF 930 1,003 Balances with banks and security investments, external loans and other external assets 7,141 6,878

Claims on euro area residents denominated in foreign currency (3) 672 648

Claims on non-euro area residents denominated in euro (4) 2,389 0 Balances with banks, security investments and loans 2,389 0

Lending to financial sector counterparties of euro area (5) 1,516 3 Main refinancing operations 1,283 – Longer-term refinancing operations 230 – Other lending 2 3

Intra-Eurosystem claims (6) 768 70 Share in ECB capital 70 70 Claims equivalent to the transfer of foreign currency reserves 699 –

Other claims (7) 638 612

Total assets 14,512 9,708

82 BANK OF FINLAND 31 Dec 1999 31 Dec 1998

Liabilities

Banknotes in circulation (1) 3,008 2,647

Liabilities to euro area financial sector counterparties denominated in euro (2) 4,884 2,176 Current accounts (covering the minimum reserve system) 4,884 2,176

Certificates of deposit issued by the Bank of Finland (3) – 832

Liabilities to other euro area residents denominated in euro (4) 1 95

Liabilities to non-euro area residents denominated in euro (5) 195 3

Liabilities to non-euro area residents denominated in foreign currency (6) 239 210 Deposits, balances and other liabilities 239 210

Counterpart of special drawing rights allocated by the IMF (7) 195 170

Intra-Eurosystem liabilities (8) 1,267 –

Other liabilities (9) 11 4

Revaluation account (10) 1,232 453

Provisions (11) 2,509 2,147

Capital and reserves (12) 969 969

Total liabilities 14,512 9,708

Annual Report 1999 83 Profit and loss account, EUR million

1 Jan – 31 Dec 1999 1 Jan – 31 Dec 1998

INTEREST INCOME (1) 485 459

INTEREST EXPENSE (2) –147 –82

NET INTEREST INCOME (3) 338 377

REALIZED GAINS RELATED TO 198 –265 FOREIGN EXCHANGE RATE MOVEMENTS (4)

REALIZED SECURITIES PRICE DIFFERENCES (5) –131 43

CENTRAL BANKING PROFIT BEFORE 405 155 MONETARY INCOME AND OTHER INCOME

NET SHARE OF MONETARY INCOME (6) 0 –

OTHER CENTRAL BANKING INCOME (7) 33 47

CENTRAL BANKING PROFIT 437 202

OTHER EXPENSES Staff cost (8) –50 –49 Administrative expenses (9) –15 –14 Depreciation of fixed assets (10) 0 –18 Banknote production services (11) –1 –7 Other expenses (12) –9 –11

CHANGES IN PROVISIONS (13) –361 –103

PROFIT FOR THE FINANCIAL YEAR (14) 0 0

84 BANK OF FINLAND Appendices to the financial statements

31 Dec 1999 31 Dec 1998

Foreign currency futures contracts, EUR million Purchase contracts1 – 431.6 Sales contracts1 – 106.3

Shares and other interests, nominal value, EUR million (Bank of Finland’s holding in parentheses) Scopulus – 0.3 (100%) Setec 2.7 (40%) 2.7 (40%) Rahakontti2 0.2 (52%) 5.9 (52%) HEX, Helsinki Securities and Derivatives Exchange, Clearing House 1.6 (7%) 1.6 (7%) Bank for International Settlements 11.1 (1.67%) 9.8 (1.67%) Shares in housing companies 9.1 9.1 Real estate shares 0.2 0.2 Other shares and interests 1.1 0.8 Total 26.0 30.4

Bank of Finland’s liability share in the APK fund, EUR million 0.1 0.1

Liability arising from pension commitments, EUR million The Bank of Finland’s pension liability 360.6 346.5 – of which covered by reserves 294.5 284.2

Financial services office, EUR million – Deposits 17.7 17.2 – Loans 7.6 7.2

1 Middle rate for the currency on the last business day of the year. 2 Remaining liquidation dividend of EUR 0.2 million as at 31 December 1999.

Annual Report 1999 85 The Bank of Finland’s real estate

Building Address Year of completion Volume m3 (approx.)

Helsinki Rauhankatu 16 1883/1961 49,500 Unioninkatu 33 / Rauhankatu 19 1848/1954 50,500 Snellmaninkatu 4–6 1857/1892 16,170 Ramsinniementie 34 1920/1983/1998 4,600 Kuopio Puutarhakatu 4 1993 11,900 Päiviönkatu 15 1965 7,500 Oulu Kajaaninkatu 8 1973 17,700 Tampere Hämeenkatu 13 1942 36,000 Turku Linnankatu 20 1914 10,500 Vantaa Suometsäntie 1 1979 311,500 Inari Saariselkä 1958/1976/1998 6,100

Helsinki, 10 February 2000

THE BOARD OF THE BANK OF FINLAND

Matti Vanhala, Chairman

Esko Ollila Matti Louekoski Matti Korhonen

86 BANK OF FINLAND Notes to the financial a single revaluation is made. Gold the 1999 financial year has been statements has been valued at the market price entered by adjusting the revalua- as at 30 December 1999 (US dollar tion account downwards so that price of gold converted into euro). depreciation does not affect the Accounting conventions Bank’s income or expense.

The Bank of Finland observes the Repurchase agreements and The economic lifetimes of assets accounting principles and tech- reverse repurchase agreements are calculated as follows: niques adopted by the Governing – computers, related hardware Council of the ECB on 1 Decem- Reverse repurchase agreements are and software, and motor vehi- ber 1998, and the Bank’s annual recorded as collateralized deposits cles: 4 years; accounts for 1999 have been drawn on the assets side of the balance – equipment and furniture: up in accordance with these har- sheet. Repurchase agreements, or 10 years; monized principles. The annual repos, are recorded as collateral- – buildings: 25 years. accounts for 1998 have been ad- ized loans on the liabilities side of justed to conform with the harmo- the balance sheet. Securities sold Fixed assets with a value of less nized principles. Valuation gains under repurchase agreements re- than EUR 10,000 are written off and losses arising from the market main on the Bank’s balance sheet. during the financial year. valuation of items have been en- tered in the revaluation account. In accordance with section 11 Intra-Eurosystem items Off-balance-sheet items of the Act on the Bank of Finland, the Parliamentary Supervisory Claims and liabilities in respect of Forward foreign exchange transac- Council confirms, on the proposal central banks participating in the tions are taken into account when of the Board, the principles applied Eurosystem are shown on a net the net average cost of a currency in drawing up the annual accounts. basis in the Bank’s balance sheet. position is calculated. Gains and losses arising from off-balance- sheet items are treated in the same Gold and items denominated in Fixed assets manner as gains and losses arising foreign currency from on-balance-sheet items. As from the beginning of the 1999 In the annual accounts, foreign financial year, fixed assets have currency-denominated items and been valued at acquisition price Accounting principles gold have been converted into euro less depreciation. Depreciation is applied to the profit and at market rates and prices. Items calculated on a straight-line basis loss account denominated in foreign currency over the expected economic life- have been revalued on a currency- time of an asset, starting from the Income and expenses are entered by-currency basis. Securities have second calendar month following on an accruals basis. been valued on an item-by-item acquisition. Realized income and expenses basis. In the annual accounts for are entered in the profit and loss Revaluation differences related 1998, which have been adjusted for account. Exchange rate gains and to foreign exchange rate move- the sake of comparability, build- losses have been calculated using ments and securities price move- ings and land have been capitalized the daily net average rate method. ments are treated separately. In the in the balance sheet at market pric- Gains and losses related to securi- case of gold, however, no distinc- es, and their counteritem is the ties price movements have been tion is made between price and revaluation account. Depreciation calculated using the average cost exchange rate differences; rather, in respect of buildings and land for method.

Annual Report 1999 87 Unrealized gains are entered in Notes to the balance sheet 4. Claims on non-euro area the revaluation account. residents denominated Unrealized losses are entered in euro in the profit and loss account, if This item consists mainly of bal- they exceed previous revaluation Assets ances with central banks of non- gains registered in the revaluation participating EU countries. account in the balance sheet. Un- 1. Gold and gold receivables realized losses taken to the profit The Bank’s holdings of gold total 5. Lending to financial sector and loss account are not reversed 1,577,475 troy ounces. In the annu- counter-parties of against any future unrealized gains al accounts, gold has been valued euro area in subsequent years. If unrealized at market price. At the beginning of This item consists of the balances losses are entered in the profit and the financial year the Bank (and of monetary policy instruments and loss account in respect of a security the other central banks participat- other claims at year-end. or a currency, the net average price ing in the Eurosystem) transferred of the security or the net average about 20% of its holdings of gold 6. Intra-Eurosystem claims rate of the currency is adjusted to the ECB. This item includes the Bank’s share correspondingly before the begin- in the ECB’s capital and its claim ning of the next financial year. 2. Claims on non-euro area on the ECB equivalent to the for- Unrealized losses are not net- residents denominated in eign reserves and gold transferred ted against unrealized gains. Unre- foreign currency to the ECB. alized gains and losses in respect This item includes holdings of of securities and foreign currency- special drawing rights allocated by 7. Other claims denominated items are entered on the International Monetary Fund This item consists of coins in cir- an item-by-item basis and a curren- (IMF), Finland’s reserve tranche in culation issued in the euro area, cy-by-currency basis. Unrealized the IMF, balances with banks, in- securities classified as securities gains and losses in respect of gold vestments in securities and other held as financial fixed assets, fixed are entered separately. items denominated in foreign cur- assets (buildings, machinery and The difference between the rency. At the beginning of the fi- equipment) and valuation results of acquisition price and nominal val- nancial year the Bank transferred off-balance-sheet instruments, ue of securities is entered as in- to the ECB part of its claims de- accruals and other assets. come or expense over the maturity nominated in US dollars and Japa- of the security. nese yen. These claims and the holdings of gold referred to above Liabilities together form the Bank’s share in the funds of the ECB. 1. Banknotes in circulation This item consists of markka- 3. Claims on euro area denominated notes in circulation residents denominated in held by the public and banking foreign currency institutions. This item consists of balances with banks and investments in securi- 2. Liabilities to euro area ties. financial sector counter- parties denominated in euro Banks with an RTGS account at the Bank of Finland meet their mini- mum reserve requirement by main- taining the monthly averages of

88 BANK OF FINLAND their daily RTGS account balances 8. Intra-Eurosystem liabilities Notes to the profit and at least as high as the minimum This item consists of net balances loss account reserve requirement. with the central banks participating in the Eurosystem. 3. Certificates of deposit 1. Interest income issued by 9. Other liabilities Most of the interest income con- the Bank of Finland This item consists of accruals and sists of interest income on gold Bank of Finland certificates of other liabilities. and reserve assets and on intra- deposit were used in market opera- Eurosystem claims. tions in the 1998 financial year. 10. Revaluation account This item includes revaluations of 2. Interest expense 4. Liabilities to other land and buildings and other valua- Interest expense, EUR 43 million, euro area residents tion differences arising from the consists of interest paid on mini- denominated in euro change in accounting practice. In mum reserve deposits. The item This item consists of euro-denomi- addition, the item includes unreal- also includes interest expense on nated liabilities to banking institu- ized valuation gains arising from intra-Eurosystem liabilities and tions other than those subject to the the market valuation of foreign interest paid on balances with cen- minimum reserve requirement. currency-denominated items and tral banks of non-participating EU securities. countries. 5. Liabilities to non-euro area residents denominated 11. Provisions 3. Net interest income in euro All provisions are included in this Net interest income amounted to This item consists mainly of bal- item. The Bank of Finland’s pen- EUR 338 million. ances with central banks of non- sion liabilities total EUR 361 mil- participating EU countries and lion; 82% of this amount, ie EUR 4. Realized gains related to with international organizations 295 million, is covered by the pen- foreign exchange rate and foreign banks holding loro sion provision. movements accounts at the Bank of Finland. Under section 20 of the above- Currencies are examined on a cur- mentioned Act, provisions can be rency-by-currency basis on each 6. Liabilities to non-euro area made in the annual accounts, if business day. When a currency residents denominated in they are necessary for safeguarding position decreases in connection foreign currency the real value of the Bank’s funds with a sale of the currency con- This item includes repurchase or for smoothing out variations in cerned, a gain or loss is realized. In agreements entered into for the profit and loss arising from chang- 1999, realized gains related to purpose of managing foreign re- es in exchange rates or market foreign exchange rate movements serve assets. values of securities. The provisions amounted to EUR 198 million. made under this section amounted 7. Counterpart of special to EUR 2,211 million. 5. Realized securities price drawing rights allocated by differences the IMF 12. Capital and reserves In the accounts, securities are treat- This SDR-denominated balance This item consists of the Bank’s ed on an item-by-item basis. When sheet item is connected with the primary capital and reserve fund. securities are sold, a gain or loss is International Monetary Fund. realized. In 1999, the realized loss- es related to securities price move- ments amounted to EUR 131 mil- lion.

Annual Report 1999 89 6. Net share of monetary 9. Administrative expenses 13. Changes in provisions income This item includes rents, represen- Employees’ employment pension This item shows the allocation of tation costs, expense arising from contributions totalling EUR 1.6 monetary income to the Bank as the purchase of outsourced servic- million were collected from sala- the net sum of monetary income es, cost of equipment and expenses ries during 1999 and transferred to paid to the Eurosystem and mone- involved in the training, travel and the pension provision. In addition, tary income redistributed from the recruitment of staff. the pension provision was in- Eurosystem. creased by crediting employees’ 10. Depreciation of fixed assets pension contributions and pension 7. Other central banking Depreciation on movable property provisions made in prior years with income amounted to less than half a mil- interest. Interest was calculated at This item includes dividend in- lion euro. the rate of 3%. The pension provi- come, commissions and fees and sion was increased by a total of other income. 11. Banknote production EUR 9 million. services The provision in accordance 8. Staff cost Purchase of banknotes amounted to with section 20 of the Act on the Staff cost amounted to EUR 34 EUR 1 million. Bank of Finland was increased by million. Social security costs, EUR EUR 348 million. 16 million, include EUR 11 million 12. Other expenses in pensions paid during the finan- The bulk of other expenses is relat- 14. Profit for the financial year cial year. ed to the use and maintenance of After adjustments, the result for the real estate. financial year was EUR 0 million.

90 BANK OF FINLAND Auditors’ report

In our capacity as the auditors elected by Parliament, we have audited the accounting records, financial statements and administration of the Bank of Finland for the financial year 1999 in accordance with generally accepted auditing standards.

During the financial year the Bank’s Internal Audit unit audited the Bank’s accounting records and activities. We have examined the internal audit reports.

We have read the Bank’s annual report and received explanations from the Board concerning the Bank’s activities.

The Authorized Public Accounting Firm Arthur Andersen Oy has audited the accounting records and the financial statements in accordance with Article 27 of the Statute of the European System of Central Banks. We have studied the audit report dated 6 March 2000.

The financial statements have been drawn up in accordance with the principles on financial statements approved by the Parliamentary Super- visory Council and current rules and regulations. The financial statements give a true and fair view of the Bank’s financial position and results.

We propose that the profit and loss account and balance sheet for the financial year audited by us be approved.

Helsinki, 6 March 2000

Johannes Leppänen

Ville Itälä Reino Majala Authorized Public Accountant

Iivo Polvi Matti Saarinen Chartered Public Finance Auditor, Approved Auditor ./. Kalervo Virtanen Authorized Public Accountant

Annual Report 1999 91 Statement

regarding the audit as defined in Article 27 of the European System of Central Banks Statute

In our capacity as independent auditors as defined in Article 27 of the European System of Central Banks Statute, recommended by the Governing Council of the European Central Bank and appointed by the Council of the European Union, we have audited the accounting recordes and the financial statements of the Bank of Finland for the period 1 January – 31 December 1999. The financial statements, which comprise the profit and loss account, balance sheet and notes to the financial statements, have been prepared by the Board.

The financial statements have been audited to the extent necessary to obtain reasonable assurance that the financial statements are free of material misstatement.

In our opinion, the financial statements have been prepared in accordance with the Accounting Principles and Methods approved by the Governing Council of the European Central Bank on 1 December 1998. The financial statements present a true and fair view of the profitability and financial position of the Bank of Finland.

Helsinki, 6 March 2000

ARTHUR ANDERSEN OY Authorized Public Accounting Firm

Teppo Rantanen Authorized Public Accountant

92 BANK OF FINLAND Appendices

Annual Report 1999 93 Monetary policy measures of the Eurosystem

1998 and central bank governors of Den- mark and Greece decided, in a December common procedure involving the On 22 December 1998 the Govern- European Commission, to fix the ing Council of the ECB decided central rates against the euro for that the first main refinancing op- the currencies participating in the eration of the Eurosystem would be exchange rate mechanism which a fixed rate tender offered at an came into operation on 1 January interest rate of 3.0%. In addition, it 1999. Further to this decision on was decided that the first longer- the euro central rates, the ECB, term refinancing operation would and the be conducted through a variable established by rate tender using the single rate common accord the compulsory allotment procedure. intervention rates for the Danish The Governing Council further- krone and the . A more decided to set the interest rate fluctuation band of ± 2.25% would for the marginal lending facility at a be observed around the euro cen- level of 4.5% and the interest rate tral rate for the . The for the deposit facility at a level of standard fluctuation band of ± 15% 2.0%, with effect from 1 January would be observed around the euro 1999. As a transitional measure, central rate for the Greek drachma. between 4 and 21 January 1999, the interest rate for the marginal lend- ing facility was set at a level of 1999 3.25% and the interest rate for the deposit facility at a level of 2.75%. January On 31 December 1998 the On 12 January 1999 the Governing Council of the European Union, Council of the ECB announced that acting with the unanimity of the the first longer-term refinancing member states of the European operations of the Eurosystem would Union without a derogation, adopt- be conducted by means of three ed the irrevocable conversion rates parallel tenders, with EUR 15 billion for the euro, with effect from being allotted in each operation. 1 January 1999. The same amount would be allotted On 31 December 1998 the in each of the longer-term refinanc- ministers of the euro area member ing operations conducted during the states, the ECB and the ministers first three months of 1999.

94 BANK OF FINLAND On 21 January 1999 the Gov- was to continue to allot an amount October erning Council of the ECB decided of EUR 15 billion per operation. On 21 October 1999 the Governing to revert to the interest rates on the Council of the ECB decided that, Eurosystem’s two standing facili- for the next three longer-term refi- ties which it had set for the start of May nancing operations, the intention Stage Three, ie to set the interest On 20 May 1999 the Governing was to allot an amount of EUR 25 rate for the marginal lending facili- Council of the ECB decided to billion per operation. ty at a level of 4.5% and that for change the maturity of the longer- the deposit facility at a level of term refinancing operation sched- 2.0%, with effect from 22 January uled to be settled on 30 September November 1999. 1999. The redemption date of this On 4 November 1999 the Govern- operation was brought forward ing Council of the ECB decided to from 30 December to 23 December raise the interest rate on the main March 1999. Correspondingly, the longer- refinancing operations of the Eu- On 4 March 1999 the Governing term refinancing operation which rosystem by 0.5 percentage point Council of the ECB decided that was originally scheduled to be to 3.0%. In addition, the interest for forthcoming longer-term refi- announced on 27 December 1999 rates on both the marginal lending nancing operations of the Eurosys- and to be allotted and settled on 30 facility and the deposit facility tem the multiple rate method of December 1999 would be an- were increased by 0.5 percentage allotment would be applied, start- nounced on 21 December, allotted point to 4.0% and 2.0% respective- ing with the next longer-term refi- on 22 December and settled on ly, both with effect from 5 Novem- nancing operation. 23 December 1999. ber 1999.

April September December On 8 April 1999 the Governing On 23 September 1999 the ECB On 2 December 1999 the Govern- Council of the ECB decided to released to the public the indicative ing Council of the ECB decided to reduce the interest rate on the main calendar for the Eurosystem’s ten- confirm the reference value for refinancing operations by 0.5 per- der operations in 2000. It also an- monetary growth, namely an annu- centage point to 2.5%, starting nounced that no new main refi- al growth rate of 4½% for the with the next refinancing opera- nancing operation would be initiat- broad monetary aggregate M3. As tion. In addition, the interest rate ed in the first week of the year before, the Governing Council on the marginal lending facility 2000, and that no such operation would assess monetary develop- was lowered by 1.0 percentage would mature during the week. For ments in relation to the reference point to 3.5% and the interest rate this reason the maturity of the main value on the basis of a three-month on the deposit facility by 0.5 per- refinancing operation of 21 De- moving average of annual growth centage point to 1.5%, both with cember 1999 would be lengthened rates for M3. The Governing Coun- effect from 9 April 1999. exceptionally to three weeks. To cil also decided to review the refer- On 22 April 1999 the Govern- avoid two main refinancing opera- ence value on a regular annual ing Council of the ECB announced tions maturing on 12 January 2000, basis. that, for the longer-term refinanc- the maturity of the operation of ing operations to be settled during 30 December 1999 would also be the next six months, the intention lengthened to three weeks.

Annual Report 1999 95 Key measures affecting the financial markets in 1999

Measures by to TARGET. Finnish banks’ pay- the European System of ment systems were therefore closed Central Banks (ESCB) on 31 December 1999. Under an and the Bank of Finland amendment to section 5, paragraph 2, of the Act on Promissory Notes January that entered into force on 1 No- TARGET (Trans-European Auto- vember 1999, the payment of debts mated Real-time Gross settlement and other obligations falling due Express Transfer) became opera- on 31 December 1999 could be tional on 4 January, at 8 am Finnish deferred to the following business time. TARGET was formed by day, namely 3 January 2000. linking together 15 national real- time gross settlement (RTGS) May/October systems, including the Bank’s On 20 May 1999 the Governing BoF-RTGS, and the ECB payment Council of the ECB approved and mechanism. At the same time, the published a list of links between Rules of the BoF-RTGS were securities settlement systems that changed, and the correspondent could be used for the transfer of central bank model (CCBM) devel- foreign collateral approved by the oped by the ESCB was introduced. Eurosystem. The Governing Coun- The CCBM enables cross-border cil approved additional links on use of tier one and tier two collater- 7 October 1999. al throughout the EU area.

March EU directives and On 31 March 1999 the Governing their implementation Council of the European Central in Finland Bank (ECB) decided that, in view of the Year 2000 changeover, the August TARGET system would be closed Directive 97/5/EC of the European on 31 December 1999 to facilitate Parliament and of the Council on technical preparations connected cross-border credit transfers was with changes to IT systems. The implemented nationally with the closing of TARGET applied to entry into force of the Act on Cred- both the Interlinking mechanism it Transfers (821/1999) on 14 Au- and all domestic euro RTGS sys- gust 1999. The provisions of this tems participating in or connected Act apply to cross-border credit

96 BANK OF FINLAND transfers of up to EUR 50,000 and Key regulatory and (93/22/EEC) and the ‘BCCI’ Di- to all domestic credit transfers. other measures rective (95/26/EC).

November January May On 22 November 1999 the Europe- On 12 January 1999 Finland’s Fi- In its press release of 5 May 1999 an Commission published a Green nancial Supervision Authority the FSA called on banks to revise Paper entitled A review of regulato- (FSA) appointed an attorney to their plans for reducing risks asso- ry capital requirements. This con- supervise the liquidation of Skop- ciated with their real estate hold- sultation document is based on a bank. The other liquidators had ings. Banks were requested to de- report on a new capital adequacy been appointed at an extraordinary fine the required rate of return for framework published by the Basel general meeting of Skopbank on all their real estate holdings and to Committee on Banking Super- 30 December 1998. value real estate at market value. vision in June. The consultation The FSA further required banks to process concerning the Green February publish the net present value of real Paper will continue until 31 March Members of the Forum of Euro- estate holdings not in the banks’ 2000. The Commission’s aim is pean Securities Commissions own use, as well as the basis for its that a Directive amending the (FESCO), which brings together calculation. Directives on the capital adequacy national securities regulators in the of credit institutions and invest- EEA (including Finland’s Financial June ment firms will be approved Supervision Authority, FSA), On 3 June 1999 the Basel Commit- during 2002. signed a memorandum of under- tee on Banking Supervision pub- standing on 1 February 1999. The lished a report on a new capital December purpose of the memorandum is to adequacy framework, initiating a The Directive on settlement finali- enhance cooperation between the consultation process that will con- ty in payment and securities settle- competent authorities in the fields tinue until 31 March 2000. After ment systems was implemented in of surveillance and investigation this process, the Committee will full in Finland with the entry into and to increase the exchange of issue its final recommendations on force on 11 December 1999 of a information. reforming the capital adequacy new Act on Certain Conditions framework. Applicable to Securities and For- April eign Exchange Trading and to Set- The Act on the Insurance Inspec- July tlement Systems (1084/1999). The torate entered into force on 1 April The Finnish Government issued a new Act extended the scope of the 1999, when the Inspectorate offi- proposal for abolishing the tax law to include gross settlement cially commenced operations. The exemption of transaction accounts systems for securities transactions. Inspectorate is an independent (HE 32/1999) through an amend- The Act replaced the former Act on decision-making body, although ment to the Act on Income Tax. Certain Conditions Applicable to for administrative purpose it falls Other proposed changes concerned Securities and Foreign Exchange under the Ministry of Social Af- the right to deduct voluntary pen- Trading and to Payment Systems. fairs and Health. sion insurance premiums from The provisions of the Act limit the On 26 April 1999 FESCO income tax. It was proposed that possibility of netting or otherwise approved European standards for the conditions for the full deducti- settling an obligation of a party to assessing the fitness and propriety bility of these premiums be tight- a transaction after insolvency pro- of directors and senior managers in ened. The proposal applies to ceedings have been opened against investment firms. These standards interest payable on deposits from that party. complement the principles estab- 1 June 2000. lished by the provisions of the Investment Services Directive

Annual Report 1999 97 August Finance that Stude’s authorization 1999. The new act supersedes the On 9 August 1999 the FSA prohib- be withdrawn. previous Act on the Publicity of ited the securities firm Stude from Official Documents. The new Act continuing to offer investment December also applies to the Bank of Finland. services. This was the first such The Act on the Openness of Gov- prohibition issued in Finland. The ernment Activities (621/1999) FSA proposed to the Ministry of entered into force on 1 December

98 BANK OF FINLAND Main opinions issued by the Bank of Finland 1999

Opinions concerning • To the Ministry of Finance con- legislation on and cerning a memorandum of the development of working group on development of the financial markets the book-entry system, 31 May

• To the Ministry of Finance con- • To the Ministry of Justice con- cerning regular disclosure obli- cerning a memorandum of the gations of issuers of securities working group on the finality of and the information to be dis- settlement in payment and secu- closed in connection with the rities settlement systems, 8 July disclosure and publication of holdings, 26 February • To the Ministry of Finance con- cerning proposed amendments to • To the Ministry of Finance con- the Act on Trading in Standard- cerning the transfer of the busi- ized Options and Futures and ness activities of HEX Ltd to the related legislation, 9 July Helsinki Exchanges as part of the restructuring of the HEX • To the Ministry of Finance con- Group, 15 March cerning proposed amendments to the provisions on tax exemption • To the Ministry of Finance con- of derivatives and stock ex- cerning a memorandum of the change trades laid down in the working group on development Asset Transfer Tax Act and to the of credit institutions legislation, provisions on capital gains and 16 April losses on the transfer of stand- ardized futures and options laid • To the Finnish Central Securities down in the Income Tax Act, Depository ( APK) concerning 30 July penal charges in respect of settle- ment lags in the OM system, • To the Ministry of Finance con- 7 May cerning amendment of the legis- lation on mortgage banks, • To the Ministry of Finance con- 31 August cerning the total amount of con- tributions to be accrued in the • To the Ministry of Social Affairs Investor Compensation Fund in and Health concerning an interim 1999, 20 May report on a study of the competi-

Annual Report 1999 99 tive aspects of occupational pen- • To the Ministry of Finance con- Other opinions sion schemes, 31 August cerning an application by Merita Bank Plc to open a branch in • To the Ministry for Foreign Affairs • To the Ministry of Finance con- Latvia, 17 November concerning securities issued by cerning an application by HEX Russia before 1917, 11 February Ltd, Helsinki Securities and • To the Finnish Consumer Agency Derivatives Exchange, Clearing concerning a revision in the • To the Ministry for Foreign Af- House for confirmation of its structure of stock exchange fees, fairs concerning the investment rules on equity trading on the 18 November protection agreements between Helsinki Exchanges, 8 Septem- Finland and Ecuador and be- ber • To the Ministry of Finance con- tween Finland and Quatar, cerning the Government’s pro- 8 March • To the Finnish Central Securities posal for amending the Credit Depository ( APK) on proposed Institutions Act, 19 November • To the Ministry for Foreign Af- amendments to decisions by the fairs concerning the investment board and managing director of • To the Ministry of Finance protection agreements between the APK, 16 September concerning confirmation of Finland and Tunisia and between amendments to the rules of the Finland and Croatia, 17 March • To the Ministry of Finance con- Investor Compensation Fund, cerning confirmation of the rules 24 November • To the Ministry for Foreign Af- of the Finnish Central Securities fairs concerning legal barriers to Depository ( APK), 21 Septem- • To the Ministry of Education mergers between Nordic compa- ber concerning a revision of the nies, 23 March maximum interest rate applicable • To the Ministry of Finance con- to study loans, 24 November • To the Ministry of Finance con- cerning confirmation of amend- cerning the commemorative coin ments to the rules of the Investor • To the Ministry for Foreign Af- to be issued in connection with Compensation Fund, 22 Septem- fairs concerning an International Finland’s presidency of the Euro- ber Convention for the Suppression pean Union, 17 May of the Financing of Terrorism, • To the Ministry of Justice con- 1 December • To the Ministry for Foreign Af- cerning new legislation on coop- fairs concerning the investment erative societies, 30 September. • To the Ministry of Finance con- protection agreements between cerning revisions to the insider Finland and Costa Rica, between • To the Ministry of Justice con- rules applied by the Stock Ex- Finland and Singapore and be- cerning a legal amendment short- change, 10 December tween Finland and Azerbaijan, ening the cash changeover period 28 May for the euro, 4 November • To the Finnish Central Securities Depository (APK) concerning • To the Ministry of Finance con- • To the Financial Supervision proposed amendments to APK cerning amendment of the Value- Authority concerning a recom- rules for the purpose of securing Added Tax Act, 1 June mendation for the inclusion of settlement in the OM system, additional information on finan- 17 December. • To the Ministry for Foreign Af- cial instruments in annual ac- fairs concerning the negotiations counts, 5 November on an investment protection agreement between Finland and China, 29 June

100 BANK OF FINLAND • To the Environment Centre of coins to be issued in the honour • To the Ministry for Foreign Af- Uusimaa concerning a proposal of Jean Sibelius and music com- fairs concerning the negotiations for the preservation of buildings position, 14 September on a free trade agreement be- by the Kruununhaka Society and tween the EC and the Coopera- the Association of the Residents • To the Ministry of Trade and tion Council for the Arab States of Kruununhaka, 5 July Industry concerning amendment of the Gulf, 15 December. of the Accounting Act and Audit • To the Ministry of Finance con- Act, 19 November cerning the commemorative

Annual Report 1999 101 2 SUOMEN PANKKI Tables

Discrepancies between constituent figures and totals are due to rounding 0 less than half the final digit shown . logically impossible .. data not available – nil _ change in contents of series

Annual Report 1999 103 Table 1. Monthly balance sheet of the Bank of Finland, EUR million

Assets I II III

1 Gold and gold receivables 389 389 389

2 Claims on non-euro area residents denominated in foreign currency 7,293 7,068 7,253 2.1 Receivables from the IMF 945 789 788 2.2 Balances with banks and security investments, external loans and other external assets 6,348 6,278 6,465

3 Claims on euro area residents denominated in foreign currency 320 459 357

4 Claims on non-euro area residents denominated in euro 680 3,848 5,479 4.1 Balances with banks, security investments and loans 680 3,848 5,479 4.2 Claims arising from the credit facility under the ERM II – – –

5 Lending to financial sector counterparties of euro area 1,234 1,644 1,053 5.1 Main refinancing operations 619 1,191 810 5.2 Longer-term refinancing operations 611 452 242 5.3 Fine-tuning reverse operations – – – 5.4 Structural reverse operations – – – 5.5 Marginal lending facility – – – 5.6 Credits related to margin calls – – – 5.7 Other lending 312

6 Securities of euro area residents denominated in euro – – –

7 General government debt denominated in euro – – –

8 Intra-Eurosystem claims 768 1,873 768 8.1 Share in ECB capital 70 70 70 8.2 Claims equivalent to the transfer of foreign currency reserves 699 699 699 8.3 Claims related to the issuance of ECB debt certificates – – – 8.4 Other claims within the Eurosystem (net) – 1,104 –

9 Other assets 602 623 639

Total assets 11,286 15,903 15,938

Liabilities I II III

1 Banknotes in circulation 2,492 2,463 2,473

2 Liabilities to euro area financial sector counterparties denominated in euro 1,030 1,962 2,120 2.1 Current accounts (covering the minimum reserve system) 1,030 1,962 2,120 2.2 Deposit facility – 0 – 2.3 Fixed-term deposits – – – 2.4 Fine-tuning reverse operations – – – 2.5 Deposits related to margin calls – – –

3 Liabilities to other euro area residents denominated in euro 28 53 77 3.1 General government – 0 – 3.2 Other liabilities 28 53 77

4 Liabilities to non-euro area residents denominated in euro 1,520 7,544 1,497

5 Liabilities to euro area residents denominated in foreign currency – – –

6 Liabilities to non-euro area residents denominated in foreign currency 99 115 193 6.1 Deposits, balances and other liabilities 99 115 193 6.2 Liabilities arising from the credit facility under the ERM II – – –

7 Counterpart of special drawing rights allocated by the IMF 172 172 172

8 Intra-Eurosystem liabilities 2,370 – 5,811 8.1 Liabilities related to promissory notes backing the issuance of ECB debt certificates – – – 8.2 Other liabilities within the Eurosystem (net) 2,370 – 5,811

9 Other liabilities 29 47 49

10 Revaluation account 430 430 430

11 Capital and reserves 3,116 3,116 3,116

Total liabilities 11,286 15,903 15,938 Source: Bank of Finland.

104 BANK OF FINLAND IV V VI VII VIII IX X XI XII

411 411 411 397 397 397 449 449 457

7,739 7,573 7,726 7,618 7,572 7,485 7,495 7,546 8,071 942 938 932 902 887 770 812 798 930

6,797 6,636 6,793 6,716 6,685 6,714 6,683 6,748 7,141

307 464 339 485 523 633 622 676 672

6,955 1,699 5,092 0 94 757 4,297 219 2,389 6,955 1,699 5,092 0 94 757 4,297 219 2,389 –– – – – –– ––

811 750 1,282 1,368 535 274 1,146 257 1,516 657 714 1,246 1,248 393 132 960 25 1,283 94 34 34 119 140 140 183 230 230 –– – – – –– –– –– – – – –– –– 59–––––––– –– – – – –– –– 22 2 2 2 22 22

–– –0 – –– ––

–– –0 – –– ––

768 2,563 4,483 5,799 1,549 2,795 768 1,544 768 70 70 70 70 70 70 70 70 70 699 699 699 699 699 699 699 699 699 –– – – – –– –– – 1,794 3,715 5,031 780 2,027 – 776 0

664 636 623 662 661 734 742 686 638

17,656 14,096 19,956 16,330 11,331 13,075 15,519 11,377 14,512

IV V VI VII VIII IX X XI XII

2,528 2,555 2,676 2,654 2,604 2,595 2,602 2,634 3,008

892 2,039 1,857 1,656 1,736 1,510 2,022 1,419 4,884 892 2,039 1,855 1,656 1,736 1,510 2,022 1,419 4,884 –– 2 – – –– –0 –– – – – –– –– –– – – – –– –– –– – – – –– ––

1422212111 –– – – – –– –– 1422212111

8,886 5,043 10,951 7,516 2,506 4,399 3,758 2,642 195

–– – – – –– ––

213 185 173 90 60 109 67 96 239 213 185 173 90 60 109 67 96 239 –– – – – –– ––

181 181 182 185 185 185 187 187 195

878 – – – – – 2,530 – 1,267 –– – – – –– ––

878 – – – – – 2,530 – 1,267

125 152 176 193 206 241 235 277 11

823 823 823 917 917 917 1,004 1,004 1,232

3,116 3,116 3,116 3,116 3,116 3,116 3,116 3,116 3,479

17,656 14,096 19,956 16,330 11,331 13,075 15,519 11,377 14,512

Annual Report 1999 105 Table 2. Main refinancing operations of the Eurosystem

Date of settlement Bids, Allotment, Allotment Allotment Participating Rate Running EUR million EUR million to ratio, credit of for Finnish % institutions, interest (...) credit number days institutions, EUR million

12345 67 1999 7.1 481,626 75,000 183 15.57 944 3.00 13 13.1 563,409 48,000 260 8.52 1,068 3.00 14 20.1 593,418 59,000 40 9.94 966 3.00 14 27.1 689,467 69,000 580 10.01 1,038 3.00 14

3.2 757,724 62,000 142 8.18 998 3.00 14 10.2 911,302 65,000 821 7.13 1,041 3.00 14 17.2 896,138 62,000 356 6.92 914 3.00 14 24.2 991,109 78,000 834 7.87 983 3.00 14

3.3 1,100,797 67,000 580 6.09 965 3.00 14 10.3 950,369 75,000 473 7.89 928 3.00 14 17.3 335,249 44,000 262 13.12 665 3.00 14 24.3 372,647 102,000 547 27.37 554 3.00 14 31.3 118,683 39,000 20 32.86 403 3.00 14

7.4 67,353 67,353 0 100.00 302 3.00 14 14.4 781,721 67,000 631 8.57 841 2.50 14 21.4 612,275 50,000 62 8.17 713 2.50 14 28.4 754,825 78,000 595 10.33 743 2.50 14

5.5 655,789 42,000 49 6.40 648 2.50 14 12.5 708,881 78,000 447 11.00 662 2.50 14 19.5 638,583 43,000 249 6.73 687 2.50 14 26.5 784,380 96,000 465 12.24 687 2.50 14

2.6 698,358 43,000 62 6.16 666 2.50 14 9.6 907,145 86,000 531 9.48 760 2.50 14 16.6 922,203 39,000 398 4.23 786 2.50 14 23.6 1,165,521 86,000 849 7.38 894 2.50 14 30.6 1,222,128 57,000 224 4.66 877 2.50 14

Sources: European Central Bank and Bank of Finland.

Table 3. Key interest rates of the Eurosystem

Interest rate on Standing facilities the main refinancing operations Interest rate on the deposit facility Interest rate on the marginal lending facility

Decision Effective % Decision Effective % Decision Effective % date date date

22.12.1998 1.1.1999 3.00 22.12.1998 1.1.1999 2.00 22.12.1998 1.1.1999 4.50 8.4.1999 14.4.1999 2.50 22.12.1998 4.1.1999 2.75 22.12.1998 4.1.1999 3.25 4.11.1999 10.11.1999 3.00 21.1.1999 22.1.1999 2.00 21.1.1999 22.1.1999 4.50 8.4.1999 9.4.1999 1.50 8.4.1999 9.4.1999 3.50 4.11.1999 5.11.1999 2.00 4.11.1999 5.11.1999 4.00

Source: European Central Bank.

106 BANK OF FINLAND Date of settlement Bids, Allotment, Allotment Allotment Participating Rate Running EUR million EUR million to ratio, credit of for Finnish % institutions, interest (...) credit number days institutions, EUR million

12345 67

7.7 1,282,746 95,000 664 7.41 867 2.50 14 14.7 1,247,454 53,000 88 4.25 856 2.50 14 21.7 1,479,409 94,000 752 6.35 915 2.50 14 28.7 1,342,169 73,000 495 5.44 858 2.50 14

4.8 1,412,815 76,000 165 5.38 834 2.50 14 11.8 1,346,203 68,000 131 5.05 816 2.50 14 18.8 1,538,142 73,000 314 4.75 876 2.50 14 25.8 1,431,145 86,000 79 6.01 830 2.50 14

1.9 1,490,635 66,000 249 4.43 808 2.50 14 8.9 1,334,847 82,000 56 6.14 783 2.50 14 15.9 1,051,251 61,000 26 5.80 749 2.50 14 22.9 660,532 92,000 106 13.93 635 2.50 14 29.9 926,416 55,000 10 5.94 694 2.50 14

6.10 1,655,341 90,000 881 5.44 673 2.50 14 13.10 1,289,972 50,000 85 3.88 791 2.50 15 20.10 1,107,860 75,000 296 6.77 833 2.50 14 28.10 1,937,221 74,000 665 3.82 941 2.50 13

3.11 2,344,082 66,000 440 2.82 888 2.50 14 10.12 404,857 74,000 36 18.28 493 3.00 14 17.11 484,348 69,000 0 14.25 486 3.00 14 24.11 687,973 74,000 25 10.76 563 3.00 14

1.12 1,018,950 72,000 156 7.07 663 3.00 14 8.12 1,141,163 92,000 156 8.06 670 3.00 14 15.12 286,824 57,000 42 19.87 527 3.00 15 22.12 1,505,405 92,000 867 6.11 840 3.00 21 30.12 485,825 70,000 416 14.41 774 3.00 20

Table 4. Longer-term refinancing operations of the Eurosystem

Date of settlement Bids, Allotment, Allotment Number Marginal Weighted Running EUR million EUR million to of rate, average for Finnish participants % rate (...) credit days institutions, EUR million

12345 67 1999 14.1 79,846 15,000 231 466 3.13 3.13 42 14.1 39,343 15,000 210 311 3.10 3.10 70 14.1 46,152 15,000 170 329 3.08 3.08 105 25.2 77,300 15,000 72 417 3.04 3.04 91 25.3 53,659 15,000 0 269 2.96 2.97 98 29.4 66,911 15,000 22 313 2.53 2.54 91 27.5 72,294 15,000 12 319 2.53 2.54 91 1.7 76,284 15,000 107 298 2.63 2.64 91 29.7 64,973 15,000 0 281 2.65 2.66 91 26.8 52,416 15,000 33 256 2.65 2.66 91 30.9 41,443 15,000 0 198 2.66 2.67 84 28.10 74,430 25,000 150 313 3.19 3.42 91 25.11 74,988 25,000 80 321 3.18 3.27 98 23.12 91,088 25,000 0 301 3.26 3.29 98

Source: European Central Bank.

Annual Report 1999 107 Table 5. Euro area banking system’s liquidity position, averages of daily positions, EUR billion

Maintenance Liquidity-providing factors Liquidity-absorbing factors Credit Base period insti- money ending in1) Monetary policy operations of the Eurosystem tutions’ current Euro- Main Longer- Other Marginal Deposit Banknotes Central Other accounts system’s re- term operations lending facility in govern- factors, net assets financing re- facility circulation ment net in gold operations financing deposits and operations with foreign the Euro- currency system

1 2 3 4 5 6 7 8 9 10 11

1999 January ...... February 328.2 104.6 34.2 30.6 3.8 1.3 329.3 41.1 29.5 100.2 430.8 March 323.6 136.4 45.0 0.0 0.4 1.4 326.9 49.8 25.0 102.2 430.5 April 338.4 130.1 45.0 0.0 0.7 0.3 331.0 42.9 39.0 101.1 432.3 May 342.5 121.6 45.0 0.0 0.8 0.4 333.9 36.3 38.0 101.2 435.5 June 339.8 132.0 45.0 0.0 0.4 0.6 337.0 40.4 37.2 101.9 439.6 July 342.4 143.1 45.0 0.0 0.4 0.5 342.1 45.7 39.5 102.9 445.6 August 343.2 150.1 45.0 0.0 0.5 1.0 344.8 47.3 42.1 103.6 449.4 September 343.5 150.4 45.0 0.0 0.2 0.7 342.1 51.4 41.6 103.2 446.0 October 349.7 143.0 45.0 0.0 0.3 0.6 342.5 45.4 45.9 103.5 446.7 November 351.8 140.5 53.7 0.0 0.3 0.4 343.1 51.5 47.3 104.1 447.5 December 351.7 150.4 65.0 0.0 0.3 1.0 354.3 59.0 47.5 105.6 460.6

Source: European Central Bank.

1) Maintenance periods start on the 24th of the month and run to the 23rd of the following month.

108 BANK OF FINLAND Liquidity position of the Finnish banking system, averages of daily positions, EUR million

Maintenance Liquidity-providing factors Liquidity-absorbing factors Credit Base period insti- money, ending in1) Monetary policy operations of the Eurosystem tutions’ 6+7+10 RTGS- Euro- Main Longer- Other Marginal Deposit Banknotes Central Other accounts system’s re- term operations lending facility in govern- factors, net assets financing re- facility circulation ment net in gold operations financing deposits and operations with foreign the Euro- currency system

1 2 3456 7891011 1999 January ...... February 7,536.6 601.2 491.4 0.0 24.9 21.4 2,494.6 – 4,542.4 1,530.0 4,046.0 March 7,392.5 1,098.4 457.5 0.0 9.9 44.3 2,458.5 – 4,908.1 1,550.4 4,053.1 April 7,760.1 524.8 248.6 0.0 4.0 13.8 2,499.5 – 4,484.7 1,539.5 4,052.8 May 7,763.9 627.4 118.5 0.0 7.4 1.5 2,523.5 – 4,497.3 1,470.1 3,995.1 June 7,848.4 708.7 39.9 0.0 9.0 16.1 2,573.7 – 4,510.0 1,506.3 4,096.1 July 7,900.7 966.0 116.3 0.0 41.6 27.5 2,644.8 – 4,820.0 1,532.3 4,204.6 August 7,961.5 692.1 122.8 0.0 0.0 13.3 2,627.2 – 4,658.6 1,476.4 4,116.9 September 7,932.4 273.0 139.1 0.0 1.2 27.3 2,591.9 – 4,157.5 1,569.0 4,188.2 October 7,849.5 533.1 54.7 0.0 2.3 85.6 2,594.0 – 4,174.5 1,558.8 4,238.4 November 7,888.7 599.8 163.9 0.0 1.3 5.9 2,597.2 – 4,508.6 1,503.8 4,106.9 December 7,957.7 227.8 228.4 0.0 0.0 20.7 2,793.5 – 3,994.3 1,605.5 4,419.8

Source: Bank of Finland.

1) Maintenance periods start on the 24th of the month and run to the 23rd of the following month.

Annual Report 1999 109 Table 6. Reserve base of euro area credit institutions subject to reserve requirements, EUR billion

Reserve base as at: Total Liabilities to which a 2% Liabilities to which a 0% reserve coefficient is applied reserve coefficient is applied Deposits Debt Money Deposits Repos Debt (overnight, securities market (over 2 years’ securities up to 2 years’ up to 2 years’ paper agreed maturity over 2 years’ agreed maturity agreed and notice agreed and notice maturity period) maturity period)

1 2 345 6 7

1998 December ......

1999 January 8,607.7 4,838.6 83.1 146.0 1,105.5 510.6 1,923.9 February 8,638.8 4,801.1 86.9 148.9 1,111.6 543.9 1,946.5 March 8,684.9 4,803.1 88.8 151.2 1,125.6 549.8 1,966.4 April 8,741.1 4,827.6 93.3 160.3 1,129.3 542.0 1,988.6 May 8,797.6 4,867.1 101.1 158.7 1,130.8 541.0 1,999.0 June 8,857.3 4,916.6 106.3 152.0 1,145.5 517.6 2,019.3 July 8,848.9 4,895.7 109.2 155.5 1,153.5 513.8 2,021.2 August 8,856.3 4,893.0 113.2 165.4 1,164.9 484.8 2,035.0 September 8,969.1 4,912.7 120.6 170.0 1,166.5 537.2 2,062.1 October 9,083.7 4,967.3 129.0 178.5 1,180.3 554.2 2,074.5 November 9,295.2 5,079.6 135.9 202.9 1,193.3 562.6 2,121.0 December 9,188.1 5,121.7 113.6 169.4 1,204.9 507.0 2,071.6

Source: European Central Bank.

Table 7. Reserve maintenance of euro area credit institutions subject to reserve requirements, EUR billion

Maintenance period Required Actual Excess Deficiencies Interest rate on reserves reserves reserves minimum reserves, %

12345 1999 1.1–23.2 98.3 99.3 1.1 0.1 3.00 24.2–23.3 100.6 101.5 0.9 0.1 3.00 24.3–23.4 100.1 100.7 0.6 0.0 2.84 24.4–23.5 100.2 101.0 0.8 0.0 2.50 24.5–23.6 100.9 101.5 0.6 0.0 2.50 24.6–23.7 102.0 102.7 0.8 0.0 2.50 24.7–23.8 102.8 103.5 0.6 0.0 2.50 24.8–23.9 102.6 103.0 0.5 0.0 2.50 24.9–23.10 102.8 103.3 0.6 0.0 2.50 24.10–23.11 103.4 104.0 0.5 0.0 2.73 24.11–23.12 104.9 105.4 0.5 0.0 3.00

2000 24.12–23.1 107.7 108.5 0.8 0.0 3.00

Source: European Central Bank.

110 BANK OF FINLAND Reserve base of Finnish credit institutions subject to reserve requirements, EUR million

Reserve base as at: Total Liabilities to which a 2% Liabilities to which a 0% reserve coefficient is applied reserve coefficient is applied Deposits Debt Money Deposits Repos Debt (overnight, securities market (over 2 years’ securities up to 2 years’ up to 2 years’ paper agreed maturity over 2 years’ agreed maturity agreed and notice agreed and notice maturity period) maturity period)

12345 67

1998 December 87,323 63,810 389 15,827 2,183 278 4,837

1999 January 86,008 63,101 474 15,242 2,199 224 4,768 February 86,043 62,855 474 15,320 2,241 288 4,864 March 84,431 62,121 331 13,800 2,965 166 5,049 April 85,717 61,912 272 14,830 3,021 466 5,216 May 87,111 63,564 274 14,472 3,013 550 5,238 June 86,212 64,629 451 12,281 3,277 436 5,138 July 88,913 64,462 445 14,499 3,248 637 5,622 August 89,379 65,972 769 13,577 3,443 630 4,989 September 87,430 64,428 1,365 12,995 3,255 442 4,946 October 90,967 64,912 1,191 15,876 3,568 455 4,965 November 93,610 66,149 1,445 17,029 3,665 335 4,986 December 91,469 68,463 870 13,107 3,769 276 4,984

Source: Bank of Finland.

Reserve maintenance of Finnish credit institutions subject to reserve requirements, EUR million

Maintenance period Required Actual Excess Deficiencies Interest rate on reserves reserves reserves minimum reserves, %

12345 1999 1.1–23.2 1,566 1,566 0.0 0.0 3.00 24.2–23.3 1,542 1,546 4.0 0.0 3.00 24.3–23.4 1,539 1,539 0.4 0.0 2.84 24.4–23.5 1,491 1,511 20.7 0.0 2.50 24.5–23.6 1,506 1,507 1.0 0.2 2.50 24.6–23.7 1,532 1,532 0.3 0.0 2.50 24.7–23.8 1,513 1,517 4.3 0.0 2.50 24.8–23.9 1,554 1,569 15.1 0.0 2.50 24.9–23.10 1,563 1,578 14.5 0.0 2.50 24.10–23.11 1,542 1,542 0.4 0.0 2.73 24.11–23.12 1,605 1,606 0.2 0.0 3.00

2000 24.12–23.1 1,658 1,750 91.4 0.0 3.00

Source: Bank of Finland.

Annual Report 1999 111 Table 8. Euro area monetary aggregate M3 and corresponding items of Finnish monetary financial institutions

Euro area monetary aggregate M3 Deposits of Finnish monetary financial institutions included in M31)

Stock, 12-month 3-month Stock, 12-month 3-month EUR billion change, moving EUR billion change, moving % average % average of 12-month of 12-month change, % change, %

1 2 34 56 1995 ...... 1996 4,079.8 4.0 .. 64.7 .. .. 1997 4,254.8 4.3 .. 69.3 7.2 .. 1998 4,455.1 4.7 .. 71.1 2.5 .. 1999 4,778.6 6.2 .. 75.3 6.0 ..

1999 January 4,499.2 5.8 5.3 71.3 4.0 3.9 February 4,486.4 5.2 5.5 70.5 5.2 4.4 March 4,502.2 5.4 5.3 69.6 4.0 5.5 April 4,540.5 5.2 5.4 71.1 7.5 5.6 May 4,573.2 5.4 5.4 72.4 5.3 5.8 June 4,596.8 5.5 5.6 71.3 4.5 5.3 July 4,606.7 5.8 5.7 72.6 5.9 4.0 August 4,587.8 5.7 5.8 70.8 1.5 3.4 September 4,613.4 5.9 5.8 71.4 2.9 3.6 October 4,635.5 5.6 5.9 73.9 6.4 5.1 November 4,685.2 6.1 6.0 74.8 6.1 6.2 December 4,778.6 6.2 5.7 75.3 6.0 5.4

Sources: European Central Bank and Bank of Finland.

1) Excl. notes and coin.

Table 9. Harmonized Index of Consumer Prices for the euro area and Finland, annual percentage changes

Euro area Finland

12 1996 2.2 1.1 1997 1.6 1.2 1998 1.1 1.4 1999 1.1 1.3

1999 January 0.8 0.5 February 0.8 0.9 March 1.0 0.9 April 1.1 1.3 May 1.0 1.4 June 0.9 1.2 July 1.1 1.4 August 1.2 1.3 September 1.2 1.4 October 1.3 1.6 November 1.5 1.9 December 1.7 2.2

Sources: Eurostat and Statistics Finland.

112 BANK OF FINLAND Table 10. Key market interest rates

Eonia Euribor rates (actual/360) Yields on rate Finnish government bonds 1-month 2-month 3-month 6-month 9-month 12-month 5-year 10-year

1 2 345 6789 1999 2.74 2.862 2.913 2.961 3.054 3.114 3.183 4.07 4.74

1999 January 3.14 3.158 3.146 3.132 3.092 3.071 3.062 3.40 3.91 February 3.12 3.126 3.109 3.095 3.040 3.026 3.030 3.51 4.04 March 2.93 3.055 3.051 3.047 3.025 3.022 3.046 3.63 4.26 April 2.71 2.695 2.696 2.696 2.704 2.748 2.756 3.37 4.07 May 2.55 2.566 2.573 2.579 2.598 2.663 2.683 3.42 4.24 June 2.56 2.605 2.615 2.627 2.680 2.781 2.836 3.78 4.58 July 2.52 2.635 2.655 2.676 2.898 2.946 3.030 4.15 4.92 August 2.44 2.614 2.657 2.695 3.053 3.130 3.237 4.45 5.15 September 2.43 2.584 2.643 2.727 3.107 3.193 3.301 4.60 5.32 October 2.50 2.763 2.933 3.376 3.457 3.550 3.684 4.93 5.56 November 2.94 3.061 3.466 3.468 3.484 3.578 3.689 4.72 5.27 December 3.04 3.509 3.437 3.446 3.512 3.656 3.826 4.79 5.37

Sources: European Central Bank, Reuters and Bloomberg.

Table 11. Table 12. Effective exchange rate of the euro and Irrevocable euro conversion rates competitiveness indicator for Finland as from 1 January 1999

Effective Competitiveness Country Currency Units of Markkaa exchange rate indicator currency per units for the euro1), for Finland2),3), per euro of currency 1999 Q1 = 100 1982 = 100

12 Austria schilling 13.7603 0.432093 1995 107.8 111.6 Belgium franc 40.3399 0.147391 1996 107.9 115.3 Germany mark 1.95583 3.04000 1997 99.1 118.4 Spain peseta 166.386 0.0357346 1998 101.5 119.0 Finland markka 5.94573 1999 95.7 121.2 France franc 6.55957 0.906421 Ireland pound 0.787564 7.54952 1999 Italy lira 1936.27 0.00307071 January 102.0 118.0 40.3399 0.147391 February 99.9 119.0 Netherlands guilder 2.20371 2.69805 March 98.3 119.8 Portugal escudo 200.482 0.0296572 April 97.1 120.5 May 96.6 120.5 June 94.7 121.6 July 94.8 121.8 August 95.4 121.4 Source: European Union. September 93.6 122.5 October 94.4 121.8 November 92.0 123.1 December 90.1 124.2

Sources: European Central Bank and Bank of Finland.

1) An upward movement of the index represents an appreciation of the euro. 2) Formerly the Bank of Finland currency index. 3) The index falls when the euro (before 1999 the markka) appreciates.

Annual Report 1999 113 Table 13a. Key euro exchange rates

US dollar Japanese yen

Low Average High Low Average High

12 34 5 6

1999 1.0015 1.0658 1.1790 102.48 121.32 134.40

1999 January 1.1384 1.1608 1.1790 126.33 131.35 133.73 February 1.0969 1.1208 1.1342 126.86 130.78 134.40 March 1.0692 1.0883 1.1012 127.81 130.20 133.92 April 1.0581 1.0704 1.0867 125.48 128.16 131.27 May 1.0456 1.0628 1.0799 126.70 129.71 132.40 June 1.0280 1.0378 1.0474 123.97 125.32 126.80 July 1.0124 1.0353 1.0698 121.60 123.71 125.18 August 1.0433 1.0604 1.0791 115.53 120.10 123.39 September 1.0342 1.0501 1.0682 107.94 112.39 117.49 October 1.0453 1.0706 1.0869 109.59 113.52 116.24 November 1.0077 1.0338 1.0572 102.82 108.25 110.36 December 1.0015 1.0110 1.0239 102.48 103.72 105.32

Source: European Central Bank.

Table 13b. Other euro exchange rates, averages

Swiss Danish Norwegian Greek Australian New Canadian Cyprus franc krone krone drachma dollar Zealand dollar pound dollar

1234 567 8

1999 1.6003 7.4355 8.3104 325.7625 1.6523 2.0145 1.5840 0.57884

1999 January 1.6055 7.4412 8.6512 323.5600 1.8387 2.1588 1.7646 0.58174 February 1.5979 7.4352 8.6497 321.9815 1.7515 2.0623 1.6786 0.58057 March 1.5954 7.4325 8.5065 322.4957 1.7260 2.0451 1.6510 0.57959 April 1.6015 7.4327 8.3186 325.5277 1.6684 1.9723 1.5944 0.57924 May 1.6025 7.4333 8.2348 325.2086 1.6046 1.9249 1.5527 0.57877 June 1.5951 7.4314 8.1676 324.1555 1.5805 1.9479 1.5244 0.57792 July 1.6040 7.4388 8.1811 324.9500 1.5757 1.9664 1.5403 0.57778 August 1.6004 7.4376 8.2602 326.4095 1.6451 2.0154 1.5833 0.57871 September 1.6015 7.4337 8.2270 327.0014 1.6186 2.0097 1.5518 0.57830 October 1.5943 7.4334 8.2885 329.2019 1.6414 2.0798 1.5808 0.57903 November 1.6051 7.4366 8.1907 328.7186 1.6179 2.0178 1.5160 0.57782 December 1.6012 7.4403 8.0977 329.6759 1.5798 1.9891 1.4906 0.57699

Source: European Central Bank and Bank of Finland.

114 BANK OF FINLAND Swedish krona

Low Average High Low Average High

78 9101112

1999 0.62150 0.65874 0.71220 8.5500 8.8075 9.4696

1999 January 0.69100 0.70291 0.71220 8.8650 9.0826 9.4696 February 0.67890 0.68851 0.69750 8.8530 8.9077 9.0025 March 0.66150 0.67127 0.68290 8.8310 8.9403 9.0070 April 0.65690 0.66502 0.67720 8.8705 8.9140 9.0200 May 0.65240 0.65825 0.66340 8.9185 8.9722 9.0280 June 0.64120 0.65025 0.65780 8.6655 8.8284 8.9830 July 0.64910 0.65779 0.67310 8.6905 8.7446 8.8200 August 0.65560 0.66014 0.66700 8.6830 8.7519 8.8110 September 0.63270 0.64683 0.66340 8.5770 8.6337 8.7235 October 0.63920 0.64587 0.65190 8.6350 8.7272 8.8645 November 0.62970 0.63702 0.64160 8.5560 8.6330 8.7215 December 0.62150 0.62651 0.63100 8.5500 8.5865 8.6185

Czech Estonian Hungarian Polish Slovenian Icelandic South Special drawing koruna kroon forint zloty tolar krona Korean rights of won the International Monetary Fund

9 10111213141516

1999 36.8862 15.6466 252.7672 4.2274 194.4737 77.177 1,267.24 0.779666

1999 January 35.7411 15.6466 250.7920 4.1047 189.0726 80.617 1,362.52 0.826357 February 37.8004 15.6466 250.3005 4.2483 190.2392 79.574 1,330.14 0.811726 March 37.9934 15.6466 253.6448 4.2962 190.4445 78.574 1,336.36 0.798653 April 37.9823 15.6466 252.3741 4.2796 192.0508 78.239 1,290.73 0.790208 May 37.6847 15.6466 250.2105 4.1805 193.7697 78.440 1,271.96 0.788462 June 37.0939 15.6466 249.3536 4.0939 195.4837 77.165 1,212.47 0.774410 July 36.5031 15.6466 250.4305 4.0172 196.8874 77.123 1,229.43 0.773255 August 36.4359 15.6466 253.5227 4.1966 196.9873 77.286 1,271.21 0.777291 September 36.3130 15.6466 255.2759 4.2908 196.3492 76.216 1,260.13 0.762617 October 36.6199 15.6466 257.6329 4.4014 196.7690 75.810 1,289.85 0.770679 November 36.3722 15.6466 254.9645 4.3970 196.8145 74.268 1,215.49 0.752185 December 36.0477 15.6466 254.3655 4.2160 198.1957 73.275 1,149.08 0.736446

Annual Report 1999 115 Table 14a. Key markka exchange rates

US dollar Japanese yen

Low Average High Low Average High

12 34 5 6 1990 3.5320 3.8233 4.0890 0.0247 0.0265 0.0287 1991 3.5390 4.0457 4.5550 0.0268 0.0301 0.0351 1992 3.8400 4.4835 5.2750 0.0310 0.0355 0.0423 1993 5.2940 5.7189 6.0614 0.0426 0.0517 0.0583 1994 4.5345 5.2184 5.7999 0.0467 0.0511 0.0544 1995 4.1839 4.3658 4.8071 0.0411 0.0466 0.0522 1996 4.3311 4.5905 4.8487 0.0396 0.0423 0.0464 1997 4.6290 5.1944 5.6120 0.0396 0.0430 0.0480 1998 4.8383 5.3415 5.6275 0.0368 0.0409 0.0448 1999 5.0430 5.5787 5.9368 0.0442 0.0490 0.0580

Source: Bank of Finland.

Table 14b. Other markka exchange rates

Swiss Danish Norwegian Greek Australian New Canadian Cyprus franc krone krone drachma dollar Zealand dollar pound dollar

1234 567 8

1990 2.7576 0.6181 0.6110 .. 2.9881 .. 3.2773 .. 1991 2.8208 0.6322 0.6236 .. 3.1520 .. 3.5335 .. 1992 3.2000 0.7444 0.7222 0.0235 3.2891 .. 3.7057 .. 1993 3.8706 0.8822 0.8059 0.0250 3.8854 .. 4.4340 .. 1994 3.8179 0.8207 0.7393 0.0215 3.8142 .. 3.8235 .. 1995 3.6941 0.7790 0.6889 0.0189 3.2379 2.8742 3.1809 .. 1996 3.7211 0.7921 0.7111 0.0191 3.5930 3.1659 3.3666 .. 1997 3.5785 0.7859 0.7339 0.0190 3.8590 3.4366 3.7528 .. 1998 3.6880 0.7977 0.7078 0.0181 3.3629 2.8659 3.6075 .. 1999 3.7154 0.7996 0.7155 0.0183 3.5985 2.9515 3.7536 10.2718

Source: Bank of Finland.

116 BANK OF FINLAND Pound sterling Swedish krona

Low Average High Low Average High

78 9101112

1990 6.4310 6.8083 7.2000 0.6369 0.6459 0.6545 1991 6.8630 7.1308 8.0730 0.6430 0.6684 0.7623 1992 7.5720 7.8748 9.0230 0.7369 0.7714 0.8845 1993 8.0390 8.5819 8.9630 0.6826 0.7350 0.8106 1994 7.3630 7.9821 8.5960 0.6339 0.6758 0.7076 1995 6.5150 6.8907 7.5560 0.5713 0.6123 0.6576 1996 6.7110 7.1642 7.8690 0.6483 0.6847 0.7154 1997 7.7950 8.5058 9.0930 0.6533 0.6799 0.7016 1998 8.3100 8.8470 9.4010 0.6188 0.6721 0.7096 1999 8.3484 9.0259 9.5667 0.6279 0.6751 0.6954

Czech Estonian Hungarian Polish Slovenian Icelandic South Special drawing koruna kroon forint zloty tolar krona Korean rights of won the International Monetary Fund

9 10111213141516

1990 ...... 0.0656 .. 5.18322 1991 ...... 0.0684 .. 5.52733 1992 ...... 0.0778 .. 6.31546 1993 .. 0.4323 ...... 0.0846 .. 7.98671 1994 .. 0.4021 ...... 0.0745 .. 7.46629 1995 .. 0.3809 ...... 0.0674 .. 6.61879 1996 .. 0.3816 ...... 0.0689 .. 6.66357 1997 .. 0.3742 .. 1.5845 .. 0.0732 .. 7.14420 1998 .. 0.3798 .. 1.5307 .. 0.0751 0.00385 7.24306 1999 0.1612 0.3800 0.0235 1.4065 0.0306 0.0770 0.00469 7.62600

Annual Report 1999 117 Table 15. Notes and coin in circulation, at year-end, FIM million

1995 1996 1997 1998 1999

Notes 1000 markka 4,440.1 5,153.3 5,579.9 5,635.7 6,544.9 500 ” 2,505.0 2,562.0 2,596.9 2,541.8 2,937.8 100 ” 5,540.6 6,007.8 6,430.2 6,256.2 7,194.3 50 ” 692.5 654.2 615.7 608.9 626.3 20 ” 396.2 413.4 423.1 428.2 449.0 10 ” 50.1 45.4 42.9 41.2 40.4

Redeemed1) -132.3

Total 13,624.5 14,836.1 15,688.7 15,512.0 17,660.4

Ceased to be legal tender on 1 January 1994 252.8 249.5 243.5 237.4 232.6

Coins Ordinary coins 10 markka 365.2 392.4 415.3 439.5 475.5 5 ” 428.6 435.5 440.1 367.9 377.5 1 ” 390.4 413.6 428.7 322.8 343.9 50 penni 85.9 91.5 97.1 100.5 107.0 10 ” 96.3 105.5 112.7 119.1 127.4

Total 1,366.4 1,438.5 1,493.9 1,349.8 1,431.3

Commemorative coins 2000 markka 13.8 13.8 13.8 13.8 13.8 1000 ” 35.0 35.0 55.0 55.0 55.0 100 ” 104.0 106.0 110.2 117.0 119.7 50 ” 70.7 70.4 69.7 - - 25 ” 19.7 19.6 22.0 2.5 2.5 10 ” 38.1 38.1 38.0 0.0 0.0

Total 281.3 282.9 308.7 188.3 191.0

Total coins 1,647.7 1,721.4 1,802.6 1,538.1 1,622.3

Ceased to be legal tender on 1 January 1994 and 1 January 1998 111.1 109.0 107.2 426.8 420.7

Source: Bank of Finland.

1) Markka value of the banknotes that have been credited by the Bank of Finland and remain in the possession of other euro area central banks. The euro area central banks have agreed that the redeeming central bank will be credited by the issuing central bank for the notes redeemed upon notification of the total amount of notes redeemed, without a breakdown by denomination. The breakdown by denomination is forwarded to the issuing central bank only when the notes are delivered.

118 BANK OF FINLAND Table 16. Deliveries of notes and coin, FIM million

1995 1996 1997 1998 1999

Notes delivered by Setec 1000 markka – – – – – 500 ” ––– –– 100 ” 5,000.0 2,180.0 1,625.0 65.0 – 50 ” – 765.0 – – 510.0 20 ” 400.0 5.0 736.0 1,191.0 69.0

Total 5,400.0 2,950.0 2,361.0 1,256.0 579.0 in millions of notes 70.0 37.4 53.1 60.2 13.7

Notes destroyed. in millions of notes 57.7 42.1 79.9 30.2 35.4

Coins delivered by the Mint Ordinary coins 10 markka 45.1 9.3 33.0 8.0 41.0 5 ” 45.1 5.9 29.0 4.0 2.5 1 ” 40.0 15.0 24.1 34.0 6.0 50 penni 0.5 8.5 4.0 6.0 2.5 10 ” 8.5 10.5 7.0 9.5 4.0

Commemorative coins 2000 markka 13.8 – – – – 1000 ” – – 20.0 – 8.0 100 ” 8.6 3.3 5.2 8.1 3.3 25 ” – – 2.5 – – 10 ” 0.0 0.0 – – 0.0

Total 161.6 52.5 124.8 69.6 67.3

Coins destroyed. in millions of coins Ordinary coins 91.5 27.3 22.8 16.7 12.2 Commemorative coins 0.0 0.0 0.0 0.0 0.0

Source: Bank of Finland.

Table 17. Notes sorted at the Bank of Finland, in millions

1995 1996 1997 1998 1999

1000 markka 4.9 4.6 4.7 3.8 3.8 500 ” 10.5 9.4 9.5 8.2 10.6 100 ” 396.0 454.8 488.8 401.2 545.6 50 ” 68.6 67.1 54.8 59.5 50.7 20 ” 73.0 48.3 58.7 59.3 57.5 10 ” 1.0 – – – –

Total 554.0 584.2 616.5 532.0 668.2

Source: Bank of Finland.

Annual Report 1999 119 Table 18. Bank of Finland interbank funds transfer system (BoF-RTGS) Transactions Account holders, Domestic Value, Outgoing Value, Incoming Value, TARGET TARGET Trans- Trans- number payments, EUR TARGET EUR TARGET EUR payments, payments, actions, actions, number billion payments, billion payments, billion total total total total in number number number value, number value, thousands in in in EUR in EUR thousands thousands thousands billion thousands billion

12345678 91011

1995 18 110.0 1,430.8 110.0 1,430.8 1996 17 98.9 1,340.4 98.9 1,340.4 1997 19 100.9 1,515.9 100.9 1,515.9 1998 18 181.3 1,935.5 181.3 1,935.5 1999 14 223.4 1,308.7 87.3 1,502.9 105.8 1,504.0 193.0 3,006.9 416.4 4,315.6

1999 January 14 19.3 133.6 6.6 143.8 8.1 140.6 14.7 284.4 34.0 417.9 February 14 18.9 113.1 7.3 127.6 10.0 128.2 17.3 255.8 36.2 368.9 March 14 22.4 130.3 8.9 136.3 12.0 137.5 20.9 273.8 43.2 404.1 April 14 19.2 120.2 7.5 126.4 9.6 124.9 17.1 251.3 36.3 371.5 May 14 16.8 90.3 5.8 103.8 8.0 105.1 13.8 208.9 30.6 299.3 June 14 18.6 110.0 6.8 121.1 8.7 120.2 15.5 241.3 34.0 351.3 July 14 17.8 95.5 6.8 113.8 8.5 113.8 15.3 227.6 33.1 323.2 August 14 16.6 89.2 6.3 120.1 8.0 120.5 14.3 240.6 30.9 329.8 September 14 18.2 105.6 7.6 122.4 8.0 122.9 15.6 245.2 33.8 350.8 October 14 18.0 109.0 7.8 115.5 8.1 115.2 15.9 230.7 33.9 339.7 November 14 19.1 107.4 8.1 139.3 8.5 140.2 16.6 279.5 35.7 386.9 December 14 18.5 104.5 7.8 132.8 8.3 134.9 16.1 267.7 34.7 372.2

Source: Bank of Finland.

120 BANK OF FINLAND Table 19. Banks’ intraday credit limits

End of period Total Maximum usage rate Average usage rate End-of-day limits, of limits1), of limits2), balances3), EUR million % % EUR million

1234 1995 2,078 .. 11 .. 1996 1,942 .. 10 .. 1997 2,793 89 10 944 1998 3,227 44 6 951 1999 6,500 52 4 1,588

1999 January 5,216 33 2 1,748 February 5,413 38 4 1,429 March 4,954 36 4 1,664 April 5,304 52 5 1,443 May 4,987 35 4 1,598 June 4,397 32 5 1,461 July 5,087 45 5 1,524 August 5,037 30 3 1,545 September 4,495 25 2 1,597 October 4,895 25 2 1,671 November 4,724 38 3 1,490 December 6,500 23 1 1,887

Source: Bank of Finland. 1) The maximum usage rate is the ratio of the maximum value of the combined sum of banks’ debit balances on settlement accounts with the Bank of Finland to total limits during the relevant period (calculated since the beginning of 1997). 2) The average usage rate of limits is the ratio of banks’ average debit balances on settlement accounts with the Bank of Finland to total limits during the relevant period. 3) Average value for period.

Table 20. Domestic clearing operations

Debit entries Credit entries Total entries

Number, Value, Number, Value, Number, Value, millions EUR billion millions EUR billion millions EUR billion

12 34 56 1995 199.6 195.2 156.2 136.6 355.8 331.8 1996 128.0 150.9 139.2 243.2 267.2 394.1 1997 131.2 123.7 146.2 243.6 277.4 367.2 1998 158.2 47.4 163.6 154.8 321.8 202.2 1999 164.9 8.1 167.8 124.5 332.0 132.6

1999 January 11.2 0.7 12.8 9.0 24.0 9.7 February 11.3 0.5 14.7 9.7 26.0 10.2 March 13.9 0.6 15.0 9.7 28.2 10.3 April 13.3 0.7 13.4 9.8 26.7 10.5 May 12.5 0.6 13.7 10.6 26.2 11.2 June 14.2 1.0 14.7 10.5 28.9 11.5 July 15.3 0.6 13.2 10.3 28.5 10.9 August 15.0 0.6 13.0 9.8 28.0 10.4 September 13.6 0.6 14.0 10.6 27.6 11.2 October 13.4 0.7 13.9 10.9 27.3 11.6 November 15.1 0.7 14.4 11.4 29.5 12.1 December 16.1 0.8 15.0 12.2 31.1 13.0

Source: Bank of Finland.

Annual Report 1999 121 Bank of Finland publications in1999

Euro & talous Finnish-language quarterly. Bank of Finland Bulletin English-language quarterly. Bank of Finland Published separately in Finnish, Swedish and English. Annual Report

Studies Series E, E:15 LIISA HALME Pankkisääntely ja valvonta. Oikeuspoliittinen tutkimus doctoral theses and säästöpankkien riskinotosta (Banking regulation and supervision: analytical studies a legal policy study of risk taking by savings banks), doctoral thesis E:16 JUHA KASANEN Ilmoitusvelvollisten osakeomistus ja -kaupat Helsingin Pörssissä (Corporate insiders’ shareholdings and trading on the HEX Helsinki Exchange) E:17 MIKKO SPOLANDER Measuring Exchange Market Pressure and Central Bank Intervention.

Discussion Papers 23 research reports by various departments of the Bank of Finland appeared in the Bank of Finland Discussion Papers series. Statistical publications Financial markets; published monthly (trilingual edition in Finnish, Swedish and English). Finland’s balance of payments – Statistical bulletin; published monthly (trilingual edition in Finnish, Swedish and English). Finland’s balance of payments – Annual statistics; (trilingual edition in Finnish, Swedish and English). Balance of payments and international investment position – Statistical bulletin; published quarterly (trilingual edition in Finnish, Swedish and English). Direct investment in Finland’s balance of payments; published annually (trilingual edition in Finnish, Swedish and English). Finnish Bond Issues; published annually (trilingual edition in Finnish, Swedish and English).

Publications of 1 issue (in Finnish) appeared in the series Review of Economies in Transition. the Institute for Economies 8 studies (in English) appeared in the series BOFIT Discussion Papers. in Transition 12 issues (in English or Finnish) appeared in the online series BOFIT Online. Russian and Baltic Economies – The Week in Review; published weekly (in Finnish and English). Russian Economy – The Month in Review; published monthly (in English). Baltic Economies – The Quarter in Review; published quarterly (in English).

Orders and subscriptions The Bank of Finland’s Annual Report and research publications are available at bookshops. Publications required for official use and research purposes may be obtained directly from the Bank of Finland at the following address: Bank of Finland, Address register, P.O.Box 160, 00101 Helsinki; tel. +358 9 1831; fax + 358 9 174 872; Internet: [email protected]. The Bank of Finland Bulletin, Euro & talous, Discussion Papers, publications of the Institute for Economies in Transition, the statistical publications (most of the last-mentioned are chargeable) and a list of the Bank of Finland’s publications are also available from the same address.

122 BANK OF FINLAND The Bank of Finland’s organization at end-1999

Parliamentary Supervisory Council

Ilkka Kanerva (Chairman), Virpa Puisto (Vice-chairman), Olavi Ala-Nissilä, , Antero Kekkonen, Anneli Jäätteenmäki, Kari Uotila,

Secretary to the Parliamentary Supervisory Council Anton Mäkelä

Financial Supervision Authority Kaarlo Jännäri Director General

Board

Matti Vanhala Esko Ollila Matti Louekoski Matti Korhonen Governor Deputy Governor Member of the Board Member of the Board

Secretary to the Board Heikki T. Hämäläinen

Pentti Koivikko Director First Deputy Member of the Board, Codetermination and pay negotiations, Matters related to the Bank’s pension scheme, Development project related to the Bank’s real estate

Overall responsibility for International (Chairman of Currency Supply ESCB affairs organizations the Board of the Financial Supervision Authority) Research Economics International Secretariat Financial Markets Institute for Market Operations Economies in Transition Information Payments and Settlement Communications Technology Statistics Legal Affairs Internal Audit Security Administration Personnel Management Secretarial Publication and Staff Development and Budget Language Services

Annual Report 1999 123 Departments, Divisions, Regional Offices and Branches Administration Department Accounts Division Administrative Services Technical Division Esa Ojanen Tuula Colliander Division Harri Brandt Anna Posti Vantaa Real Estate Division Taisto Lehtinen Economics Department Economic Developments Economic Policy Division Forecasting Division Pentti Pikkarainen Division Anne Brunila Jarmo Kontulainen Kari Puumanen* Veli-Matti Mattila Antti Suvanto* Information Management Division Ilkka Lyytikäinen Financial Markets Market Structuring Division Payment Systems Division Department Kimmo Virolainen Marianne Palva Heikki Koskenkylä Harry Leinonen* Ralf Pauli* Information Technology Banking Services Data Centre Monitoring Services Department Seija Lomma Kari Helander Matti Ahrenberg Raimo Parviainen, ad int. Support Team Workstation and Tele- Kari T. Sipilä** communications Services Kari T. Sipilä Market Operations Intervention Division Investment Division Planning Division Department Harri Lahdenperä Risto Peltokangas Anneli Isopuro Markus Fogelholm Payment Instruments Cash Handling Technology Currency Supply Systems Main Vault Department Kyösti Norhomaa Seppo Eriksson Kenneth Sainio Urpo Levo Regional Offices and Helsinki-Vantaa Kuopio Oulu Branches Kari Lottanen Pekka Konttinen Renne Kurth Tampere Turku Martti Hagman Timo Tervakko Payments and Settlement Correspondent Banking Financial Services Division Systems Division Department Division Mauri Lehtinen Hannu Wiksten Raimo Hyvärinen Jyrki Varstala Personnel Department Personnel Affairs Division Aura Laento Sirpa Ahrenberg Anton Mäkelä* Publication and Language Language Services Publications Division Services Department Carita Gabrán Antero Arimo** Antero Arimo Research Department Library Juha Tarkka Merja Alakulppi David Mayes* Statistics Department Balance of Payments Financial Statistics Division Information Management Martti Lehtonen Division Laura Vajanne Division Harri Kuussaari Jorma Hilpinen Special Units

Communications Internal Audit International Secretariat Legal Affairs Antti Juusela Taina Kivelä Kjell Peter Söderlund Arno Lindgren Management Secretarial Organization and Security Staff Management Development Jyrki Ahvonen Heikki T. Hämäläinen Terhi Kivilahti Institute for Economies in Transition Pekka Sutela

* Adviser to the Board ** in addition to own duties

124 BANK OF FINLAND