Opinion of the European Central Bank at the request of Banco de Portugal under Articles 109f (6) and 109l (2) of the Treaty establishing the European Community (hereinafter referred to as the "Treaty"), Article 5.3 of the Statute of the European Monetary Institute and Council Decision of 22 November 1993 (93/717/EC), concerning two drafts of regulatory provisions on (i) monetary policy instruments and procedures and on (ii) minimum reserve requirements (CON/98/47)
Date: 1998-10-01
Institutions: European Central Bank
Subjects: Portugal, foreign-exchange reserves, monetary policy, national law

OPINION OF THE EUROPEAN CENTRAL BANK

at the request of Banco de Portugal under Articles 109f (6) and 109l (2) of the Treaty

establishing the European Community (hereinafter referred to as the “Treaty”), Article 5.3 of

the Statute of the European Monetary Institute and Council Decision of 22 November 1993

(93/717/EC), concerning two drafts of regulatory provisions on (i) monetary policy instruments

and procedures and on (ii) minimum reserve requirements

(CON/98/47)

1. 

On  18  September  1998  the  European  Central  Bank  (hereinafter  referred  to  as  the  “ECB”)

received a request from Banco de Portugal for an opinion on two drafts of regulatory provisions

(hereinafter  referred  to  as  “instruções”)  (i)  replacing  the  current  “instrução”  on  “Mercado  de

Operações  de  Intervenção”  (Central  Bank’s  Intervention  Transaction  Market  —  “instrução  n.°

34/96”)  and  (ii)  amending  the  current  “instrução”  on  “disponibilidades  mínimas  de  caixa”

(minimum reserve requirements — “instrução n.° 28/96”), for the period starting on 1 October

1998 and ending on 31 December 1998. An explanatory note was also submitted to the ECB.

2. 

In accordance with Article 109l (2) of the Treaty, the ECB has taken over the advisory functions

of  the  European  Monetary  Institute  (hereinafter  referred  to  as  the  “EMI”),  that  went  into

liquidation  upon  the  establishment  of  the  ECB  on  1  June  1998.  The  ECB’s  competence  to

deliver  this  opinion  is  based  on  Article  1.1,  second  indent,  of  the  Council  Decision  of  22

November 1993 (93/717/EC), on the consultation of the EMI by the authorities of the Member

States  on  draft  legislative  provisions,  since  the  “instruções”  contain  rules  on  monetary  policy

instruments.  In  accordance  with  Articles  12.4  and  47.1,  second  indent,  of  the  Statute  of  the

European System of Central Banks and of the European Central Bank (hereinafter referred to as

the “Statute”), the Governing Council with the contribution of the General Council has adopted

this Opinion.

3. 

The  general  aim  of  both  “instruções”  is  to  prepare  the  Portuguese  financial  system  to  the

changes  that  will  take  place  from  1  January  1999  onwards,  when  Banco  de  Portugal  starts  to

carry  out  monetary  policy  operations  in  compliance  with  the  decisions  taken  within  the

European  System  of  Central  Banks  (ESCB).  In  fact,  despite  the  broad  similarity  between  the

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monetary policy instruments currently used by Banco de Portugal and the ones that will be used

in  the  execution  of  the  single  monetary  policy,  the  current  “instruções”  on  monetary  policy

instruments  and  procedures  (“instrução  n.°  34/96”)  and  on  minimum  reserve  requirements

(“instrução n.° 28/96”) will have to be changed in a large number of items to comply with the

requirements  established  for  the  implementation  of  the  single  monetary  policy  of  the  ESCB.

Notwithstanding, Banco de Portugal intends to introduce some changes in the above mentioned

“instruções” in advance, in order to “avoid possible difficulties in the transition to Stage Three,

namely, in terms of the changes in the “established practices”, among which, the most important

is the frequency of the intervention operations conducted by Banco de Portugal”.

4. 

The ECB welcomes the initiative of  Banco  de  Portugal  and assesses  positively  the  provisions

contained in both “instruções” which would prepare the counterparties of Banco de Portugal in

monetary  policy  operations  to  the  procedures  that  will  be  implemented  in  Stage  Three  of  the

EMU.

5. 

The “instrução” on “Mercado de Operações de Intervenção” that replaces “instrução n.° 34/96”
with  effects  as  from  the  1st  October  1998,  contains  provisions  concerning  open  market

operations,  standing  facilities,  eligibility  criteria  for  counterparties,  tender  and  settlement

procedures and eligible instruments for intervention in money market operations. In particular, it

changes the regular liquidity provision operations from a daily basis to a weekly basis and the

standing facility, which will be “overnight”. These changes, associated with the changes in the

types of operations, maturities, collateral, tender and settlement procedures, will require banks

to reformulate their liquidity management systems and thus will have a highly positive impact in

the preparation of the Portuguese financial institutions to the new environment that will prevail

from  January  onwards.  However,  the  ECB  notes  that  risk  control  measures  and  valuation

principles,  as  well  as  events  of  default,  were  not  included  in  the  aforementioned  “instrução”

intended to replace “instrução n.° 34/96”, but will be contained in the “instrução” which will be

in place as from the beginning of Stage Three of the EMU.

6. 

The  ECB  also  welcomes  and  assesses  positively  the  amendments  to  the  “instrução”  on

“disponibilidades mínimas de caixa” (minimum reserve requirements — “instrução n.° 28/96”),

which are in line with the changes implemented the “instrução” on “Mercado de Operações de

Intervenção”, since the present reserve maintenance periods would be excessively short having

regard to the changes thereby introduced in the open market operations and standing facilities.

Therefore,  the  minimum  reserve  system  introduced through  amendments  to  the  “instrução  n.°

28/96”  as  the  merit  of  anticipating,  for  the  institutions  subject  to  reserve  requirements,  the

minimum reserve system that will prevail as from 1 January 1999. In particular, it is provided

that the calculation of the reserve base is made on the basis of the data referring to the last day

of  each  month.  Furthermore,  the  maintenance  period  of  minimum  reserves  is  checked  on  the

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basis of the average of the balances on the deposit accounts with the Banco de Portugal, starting

on the 24th calendar day of the month following the one to which the reserve base refers and

ending on the 23rd calendar day of the following month.

7. 

The ECB confirms that it has no objection to this Opinion being made public by the competent

Portuguese authorities at their discretion.

Done at Frankfurt am Main on 1 October 1998.

The Vice-President of the ECB

[signed]

___________________

Christian Noyer