Answers to Frequently Asked Questions (FAQs)

• Does the Bundesbank still have a role to play, now that monetary policy is carried out by the ECB?
• Has the Bundesbank lost essential tasks as a result of the introduction of the euro?
• What does the Bundesbank's do, and who benefits?
• There has not been any serious inflation for years. Has it finally been vanquished? Does globalisation not result in a persistent dampening of prices?
• Why does the Bundesbank frequently interfere in politics, especially financial, wage and labour market policy?
• Why does the Bundesbank not actually sell any gold?
• Why does it not invest its reserve assets in such a way as to achieve a higher return?
• How successful has the euro been so far?
• Why did the Bundesbank restructure its organisation and reduce staff? Was the introduction of the euro to blame for this?
• Why does the Bundesbank not leave the sorting, examination and counting of cash exclusively to private firms, the cash-in-transit companies?
• Why is the Bundesbank responsible for the stability of financial systems?
• Must the Bundesbank be involved in banking supervision in Germany?

 

Does the Bundesbank still have a role to play, now that monetary policy is carried out by the ECB?

The ECB in Frankfurt is not solely responsible for monetary policy in the euro area. It is true that monetary policy decisions are made by the Governing Council of the ECB, on which the Bundesbank president has a seat and a vote. The central banks of the Eurosystem implement this monetary policy in their countries. This decentralised system has proven its worth since 1999. As a participant, the Bundesbank brings with it a commitment to stability and 50 years’ experience of independent monetary and central bank policy. As long as th e European Union is a union of sovereign states, which is likely to be the case for a long time yet, its national central banks, including the Bundesbank, carry out national and international tasks, in addition to implementing monetary policy.

Has the Bundesbank lost essential tasks as a result of the introduction of the euro?

Like the other central banks in the euro area, the Bundesbank has transmitted its national monetary policy competence to the Eurosystem. However, the national central banks are still responsible for implementing monetary policy measures, such as the refinancing of the commercial banks. The Bundesbank handles more than 50% of the refinancing volume in the euro area. It informs media representatives and the German public of the ECB’s Governing Council strategy and decisions.

Furthermore, the Bundesbank supplies the economy with cash. It monitors payments and manages the national reserve assets. Its domestic tasks also include involvement in banking supervision and compiling economic and financial statistics. In addition, it advises the Federal Government and the Bundestag on economic policy matters, it is involved in agreements, regulations and analyses at international level and is represented in financial institutions such as the IMF. The Bundesbank is therefore still fulfilling these tasks as before.

Furthermore, the demands on the Bundesbank and its staff have grown significantly on the whole, as a result of the introduction of the euro as a common currency. The Bundesbank has to observe its European environment more closely than before the euro was introduced in order to be able to form coherent arguments and promote its views on stability. For this reason, the Bundesbank has been extending research in all core business areas. Topics such as the integration of financial markets or of payment systems are also now mainly discussed and decided on at Eurosystem level.

What does the Bundesbank's do, and who benefits?

As a member of the Eurosystem, keeping monetary value in the euro area as stable as possible is the Bundesbank's most important objective. In the long term, ensuring price stability represents the best contribution of monetary policy to appropriate economic growth, high employment, and general welfare. Experience has shown that inflation leads to price distortions, as a result of which welfare may be reduced and social contrasts exacerbated. Savers are faced with a devaluation of their financial assets, and those receiving a fixed income, such as social security benefits or pensions, are put at a disadvantage, because these are adjusted only after a delay. The Bundesbank’s commitment to stable money therefore serves the common good.

mportant conditions for the success of central banks are: functioning payment systems, especially between banks, smooth cash supply, as well as a stable banking and financial system. The Bundesbank therefore monitors and safeguards cashless payments, including with its own systems, and, for this reason, is involved in banknote processing and permanently analyses the risks to stability in the national and international financial system.

There has not been any serious inflation for years. Has it finally been vanquished? Does globalisation not result in a persistent dampening of prices?

At just 2.05%, the average annual rate of price increase in the euro area has been very low in recent years. Global competition in the area of labour and production costs has a moderating effect on the increase in the general price level. At the same time, inflation is driven by rising commodity prices, for example. In summary, globalisation does not in any way ensure a significant reduction in inflation.

oth the European and global declines in inflation can be attributed mainly to a stronger worldwide commitment to stability, especially with regard to monetary policy. For example, there have been two central realisations in many countries over the years: low unemployment cannot be “bought” with higher inflation, and independent central banks can keep inflation in check in the long term with a clear, forward-looking stability policy. Such a stability policy will therefore remain the key challenge and task in the future.

Why does the Bundesbank frequently interfere in politics, especially financial, wage and labour market policy?

A persistently stable price level is a good basis for tension-free economic developments. So that monetary policy with a clear price stability objective can be successful, the behaviour of other players in business and politics needs to be consistent with stability, eg management and trade unions on pay agreements, or the government on financial policy. If decisions from these policy areas endanger the stability course of monetary policy, the central bank has to warn of unwelcome developments and urge behaviour that is consistent with stability.

Whereas these days central banks fight inflation with foresight, taking a long-term view, politicians are frequently subjected to short-term pressures, such as when elections are imminent. In an effort to boost economic activity, they may be tempted to inappropriately increase public spending or demand interest rate cuts from the central bank. In the medium term, both would mean that the objective of price stability would not be met. Tensions between monetary and economic policy are therefore in the nature of the beast. Precisely for this reason, far-sighted politicians have made their central banks independent of political instructions.

Why does the Bundesbank not actually sell any gold?

Gold is an important part of the reserve assets for the Bundesbank. One function of gold has always been to provide stability and confidence, representing an alternative investment instrument to foreign currency as a material asset. It is a crucial anchor for confidence for the currency. The Bundesbank is therefore intent on preserving the core of the gold reserves. Were the Bundesbank to sell gold, the proceeds would accrue to the central government budget via the Bundesbank profit, in accordance with the current accounting rules. This would dilute the substance of the reserve assets.

And why does it not invest its reserve assets in such a way as to achieve a higher return?

When investing the German foreign exchange reserves, security and liquidity are important to the Bundesbank. If necessary, the reserves can be used for interventions in the foreign exchange markets and ensure the government’s solvency vis-à-vis the rest of the world . At the beginning of monetary union, the Bundesbank – like the other euro-area central banks – had transferred part of its reserve assets to the ECB for foreign exchange intervention operations. It manages these reserves on behalf of the ECB.

The Bundesbank has invested a large proportion of the foreign exchange reserves in US government bonds, which are regarded as particularly secure and liquid, while also generating interest income. However, the gold reserves also generate a return. For instance, the price of gold has gone up again in the more recent past; these increases in value also represent a return.

How successful has the euro been so far?

The euro has remained decidedly stable in the first eight years of the single monetary policy. The average annual rate of inflation has been only marginally above the price stability norm, which the Governing Council of the ECB set at close to but below 2%.

On the whole, the euro has improved price transparency and, therefore, competition in Europe in favour of the consumer, as well as stimulating intra-European trade. The euro is also becoming more important than its legacy currencies as an international investment, reserve and trading currency, with the result that euro-area enterprises, in particular, are becoming more independent of worldwide exchange rate fluctuations.

The introduction of euro notes and coins in 2002 was used by some suppliers as an excuse to increase their prices dramatically. Many consumers therefore had the impression that the euro had caused steep price rises. At the same time, however, there were also price reductions, eg for computers, while other prices, such as those of housing rents, remained stable. Initially, however, the general public hardly perceived this. Looking at it objectively, the average increase in the general price level remained relatively small before, during and after the introduction of euro notes and coins.

Why did the Bundesbank restructure its organisation and reduce staff? Was the introduction of the euro to blame for this?

Taking part in monetary union was only one of the reasons for the Bundesbank’s structural reform. It had become urgently necessary to comprehensively reform its organisation and workings – with or without the euro. After all, technical progress and the rapid changes in the banking industry and the financial markets are also reflected in the Bundesbank’s organisational structures. Concentration in the banking sector and the automation of banknote and coin processing and payments is continuing. These are changes which have, to a considerable extent, made manual activities superfluous at the Bundesbank throughout Germany. Furthermore, they require from the Bundesbank, as the “bankers’ bank”, the ability to adapt its services thoroughly and quickly. For this reason, the previous system of federal management and organisation had to be replaced by a centralised and significantly more streamlined organisational structure.

However, monetary union also represented a move towards radical reform in which the previous system of federal leadership and organisation was replaced by a centralised organisational structure; after all, the independent monetary policy powers mean that one key reason for the federal-oriented decision-making structure of the Bundesbank no longer exists.

Politicians created the basis for the reform in 2002 by changing the Bundesbank Act. Land Central Banks which had largely worked independently became Regional Offices operating under instructions from above, while the Directorate and Central Bank Council became the Executive Board. The five-year reform plan which was adopted by the Executive Board in 2002 led to a reduction of around 40% in the former governing bodies, shorter reporting and decision-making lines, and a reduction in staff numbers of almost 30%. According to the Executive Board’s strategic objectives, the Bundesbank will have reduced staff numbers by 40% by the end of 2012 compared with ten years previously – and this without compulsory redudancies.

Why does the Bundesbank not leave the sorting, examination and counting of cash exclusively to private firms, the cash-in-transit companies?

The Bundesbank is required by law to ensure the quality of banknote supply and to maintain sufficient contingency reserves. It therefore has to be suitably involved in cash processing. The Bundesbank considers a share of approximately 50% of the banknotes to be processed to be appropriate (checking their authenticity and fitness for circulation). Together with the other central banks in the Eurosystem, the Bundesbank has agreed a framework, so that private cash handlers (credit institutions and cash-in-transit companies) can be more heavily involved in this task than before.

Why is the Bundesbank responsible for the stability of financial systems?

Central banks are reliant on stable financial systems to be able to ensure price stability.

After all, monetary policy measures, such as interest rate changes, do not have a direct effect, but are connected with the economy via the banks and the financial system. Disruptions in the financial system hinder this process. They can distort monetary policy signals. Furthermore, the internationalisation of the national financial systems is heavily advanced. Crises in individual markets or regions can rapidly spread across financial systems. Globally, therefore, the Bundesbank works with other central banks and institutions on detecting unwelcome developments. Moreover, it is necessary to identify risks to financial stability at an early stage with the help of stress tests, among other things, and develop recommendations on how to strengthen financial systems and avoid crises.

Must the Bundesbank be involved in banking supervision in Germany?

Almost all the national central banks of the Eurosystem are in some way involved in banking supervision in their countries. In Germany, the Bundesbank, together with BaFin, is responsible for banking supervision: it constantly monitors the German credit institutions with regard to solvency, liquidity and risk management. It benefits from this in several ways: it can analyse at first hand how robust the German banking and financial system is and how the stability of the banking system is to be assessed using this information. The findings resulting from banking supervision help the Bundesbank to fulfil its task as the "bankers' bank": carrying out monetary policy credit operations with the banks, managing accounts for them, and settling payments between banks.