The tasks of the Bundesbank

The Deutsche Bundesbank is the central bank of the Federal Republic of Germany and, thus, the “bankers’ bank”. Since 1999, it has been part of the Eurosystem, sharing responsibility with the other national central banks and the European Central Bank for the single currency, the euro. The Executive Board of the Bundesbank currently comprises eight members (from 2009, there will be six). Half of the Board members are nominated by the Federal Government and half by the Bundesrat, the upper house of the German parliament, with all members being appointed by the President of the Federal Republic. The Bundesbank is independent of instructions from the Federal Government. In this respect, its status is comparable to that of the Federal Constitutional Court. Almost 11,000 people are employed at the Bundesbank Central Office in Frankfurt am Main, the nine regional offices and the remaining 47 branches throughout Germany. The Bundesbank uses this nationwide network to perform its operations in the areas of refinancing, cash supply, cashless payments and banking supervision. Owing to progress in technology, the consolidation in the German banking industry and the Bundesbank’s integration into the Eurosystem, it has undergone and will continue to undergo considerable streamlining.

The overriding aim behind all of the Bundesbank’s activities is to safeguard the stability of the general price level and the financial system. For this, in-depth analyses, a long-term stance and impartiality towards individual interests are essential. It goes without saying that the Bundesbank’s stability policy also relies on the support of economic, fiscal and wage policies.

The Bundesbank’s participation in the Eurosystem, the integration of the international financial markets and innovations in the fields of payments and finance are creating new challenges for the stability policy of the Bundesbank. In order to better meet these challenges, the Bundesbank has identified five core business areas and is aiming to sharpen its profile in these areas in the future.

• Monetary policy

• The main core business area is Eurosystem monetary policy. Its primary task, as laid down in the EC Treaty, is to maintain price stability in the euro area. Stable prices promote public welfare; they encourage growth and employment in the medium term and protect savers and people in receipt of a fixed income against losses arising from monetary erosion. The Bundesbank President is a voting member of the Governing Council of the ECB and takes part in the monthly monetary policy decision-making process. In doing so, he draws on the expertise of the Bundesbank’s economists, statisticians and monetary experts.

• Monetary policy decisions affect, among other things, the amount of currency in circulation and, thus, the general price level. This is achieved by the central bank amending the key interest rates, leading to a change in the costs at which the credit institutions can obtain cash and balances from it. This ultimately affects the borrowing costs of enterprises and individuals. The Bundesbank implements the monetary policy decisions of the Governing Council of the ECB in Germany. More than 50% of the total volume of short-term borrowing by euro-area banks from the central banks is attributable to the Bundesbank. The Bundesbank also explains the workings of Eurosystem monetary policy and other core business areas to the German public. This takes the form of appearances by top-level management, publications and a money museum which places a strong emphasis on central banking. This communication serves a dual purpose. By accounting for its actions, the Bundesbank establishes an additional democratic pillar supporting its legal autonomy. What is more, its public relations activities strengthen stability awareness among the general public and create a good deal of the trust which is necessary for the stability policy to succeed.

• Financial and monetary system

• The Bundesbank’s work in the core business area of the financial and monetary system is aimed at helping to prevent national and international financial crises – international crises not least because they could also have knock-on effects in Germany. Financial crises, such as the large-scale insolvency of banks, cause growth and employment to slump. Furthermore, they obstruct monetary policy because it is then likely to be no longer possible for the banks to transmit interest rate policy decisions. Ultimately, they also shake confidence in price stability. The threat of financial crises can occur in a multitude of places when there is too great a build-up of high-risk and insufficiently secured loans. The Bundesbank’s wide ranging analyses and its financial market observation help to identify sources of such risk at an early stage.

• Banking supervision

• Banking supervision is another core business area. Here, the Bundesbank performs a key component operational task aimed at securing a financially sound banking industry and, ultimately, the stability of the financial system. This supervisory activity and the other central bank functions generate valuable insights, for example, in performing the task of safeguarding the stability of the financial markets (Article 105 (5) of the EC Treaty), in terms of the Bundesbank’s presence in the money, capital and forex markets, and the refinancing of the credit institutions. In its cooperation with the Federal Financial Supervisory Authority (BaFin), the Bundesbank is responsible for the continuous oversight of the solvency, liquidity and risk management systems of the roughly 2,300 credit institutions in Germany. This also encompasses on-site inspections pursuant to the Basel II framework, for example, prudential discussions and the ongoing analysis of statistical and audit reports. It is also involved at a national and international level in the ongoing development of prudential regulations. One example of this is its many and varied contributions to the discussions preceding the adoption of the New framework agreement of the Basel Committee on Banking Supervision (“Basel II”) in 2004. Among other things, Basel II requires that the own funds used by banks to hedge the loans they grant should match the actual, individual risks more precisely than in the past.

• Cashless payments

• In cashless payments, the Bundesbank fulfils its statutory mandate to provide for the smooth settlement of payments in Germany and abroad. To this end, it also operates its own payment systems. Urgent individual intrabank payments and the monetary policy operations of the central banks require fast and secure payment systems. The Bundesbank has set the standard in this area. Its RTGSplus system not only allows banks to make payments in real time but also helps them to save liquidity, for example, by enabling them to use counter-payments as additional cover. In cooperation with other central banks, the Bundesbank has developed and expanded this system to meet the needs of a pan-European system. On 19 November 2007, Target 2 will replace the current European association of various real-time central bank settlement systems (Target 1), in which RTGSplus has been a participant since 1999. Target 2 is a single shared system with uniform performance features – many of which reflect elements of RTGSplus – in which payments are settled via a common technical platform.

• For the most part, banks execute non-time-critical payments from their customers to other credit institutions on a bilateral basis or via systems operated by banking groups. The Bundesbank also offers all banks – and thus on a competitively neutral basis – the use of an additional system for cross-bank payments in the shape of its Retail Payment System (RPS).

• On 1 January 2008, the Single Euro Payments Area (SEPA) will come into being in Europe. This will make it possible to settle all euro payments using the new pan-European instruments – SEPA credit transfers, direct debits and card payments – as easily, efficiently and securely as domestic payments today. The Bundesbank supports SEPA, acts as the link between the German banking industry and the Eurosystem and is planning to adjust its own payment systems to meet the requirements of the SEPA.

• Cash management

• In order to maintain confidence in the euro, our currency, it is also important that there is an adequate supply of high-quality cash. To achieve this, counterfeit money as well as damaged or worn coins and banknotes have to be removed from circulation. These are sovereign Bundesbank tasks in the core business area of cash management. While the Bundesbank aims to achieve increased privatisation in the field of cash handling, in order to ensure the long-term quality and security of the cash supply in emergencies and crises – for example, in the event that larger cash handling firms fail owing to strikes or insolvency – the Bundesbank must retain a sufficient level of involvement in the cash cycle and in banknote processing.

In addition to these core business areas, the Bundesbank is also responsible for the management of the reserve assets and various tasks in the field of statistics and as the Government’s fiscal agent. It also advises the Federal Government on matters of monetary policy.

Two aspects common to all the core business areas are active participation in international organisations and research. In all its business areas, the Bundesbank is represented – at all levels – in the relevant European or global international organisations. Consequently, it is involved in most consultations and agreements concerning the monetary and financial system. The international nature of the debate in this area has intensified as Europe has become increasingly integrated and global financial flows have grown. This is also why the Bundesbank is expanding its research in all its core business areas. The Bundesbank will have a role to play in the Eurosystem’s monetary policy decision-making process and in the international debate about the stability of the financial system only as long as it is recognised as a voice of intellectual authority among its peers. And this can be achieved only through research and analysis. The Bundesbank Research Centre, which was established in 2002, focuses primarily on research into the potential impact of monetary policy and the requirements and effects of a stable financial system.