gertrude tumpel - gugerell : the future of reserve currencies speech by ms gertrude tumpel - gugerell, member of the executive board of the european central bank, at the saint petersburg international economic forum, saint petersburg, 6 june 2009. * * * ladies and gentlemen : it is my pleasure to participate in this panel of distinguished experts. in particular, i am pleased by the fact that the organisers have gathered around this table both officials from international organisations, central banks and sovereign wealth funds as well as representatives from the academia and the private sector. we are here to discuss a topic which to some may appear as a technical issue for reserve managers but which is indeed broader as it may have repercussions on the global economy and the international monetary system. let me focus in my remarks on the future of reserve currencies on three aspects of the issue. first, i will describe how we assess at the ecb the use of the euro in foreign reserve portfolios. secondly, i will briefly recall the available evidence on the use of the euro in foreign exchange reserves with a focus on recent developments during the global financial crisis. finally, i would like to share with you some general reflections on the key characteristics of international reserve currencies. in general, the international use of currencies is a market - driven process which is determined by independent decisions of private agents and public entities. the ecb takes a neutral position on such matters, i. e. it neither promotes nor hinders the international use of the euro or other international currencies. in the context of reserve currencies, history has shown that the currency composition of global foreign exchange reserves has often evolved very gradually and might be subject to considerable inertia stemming for example from anchor currency and liquidity considerations by central banks reserve managers. can we underpin such considerations also with data for the ten years following the introduction of the euro? the only reliable source on the currency composition of foreign exchange reserves at the global level is imf data which cover only around two thirds of total reserves and do not include assets managed by sovereign wealth funds. let me therefore use this opportunity to encourage more central banks and sovereign wealth funds to disclose such information – on a confidential basis – to the imf. the central bank of our host country, the bank of russia, even publishes the currency composition of its reserves in its annual report and i would like to thank the colleagues for this important russian contribution to greater

council decided to maintain at its last meeting of 6th october. the financial crisis has required the ecb to go beyond the standard interest rate policy. let me now turn to the three market segments, i have mentioned earlier : the interbank market ; the covered bond market and the sovereign debt market. interbank market the sub - prime crisis made itself felt in interbank markets at the beginning of august 2007 when overnight rates started trading at unusually high spreads to the mro rate. this reflected some banks ’ perceived need to hedge against adverse liquidity risk. the collapse of lehman then transformed the money market tensions into a full - blown crisis as a vicious circle of increased liquidity and credit risk brought interbank trading to a virtual halt. money markets meanwhile became extremely segmented according to specific bank names : the uncertainty surrounding holdings and values of mortgage - related financial products shut specific counterparties out of the interbank market. in the sovereign crisis, segmentation is arguably an even more significant problem, as it occurs normally by jurisdiction. banks generally exhibit home bias in their public debt holding : as a result, counterparties ’ ability to trade cross - border in the interbank market becomes increasingly correlated with the perceived riskiness of their sovereign. in response to the segmentation of interbank markets, the ecb adopted several measures which essentially replace the missing intermediation in the interbank market by increasing intermediation through the central bank : first, the fixed - rate full allotment policy ; second, bis central bankers ’ speeches ltros with 6 - month and 12 - month maturity ; third : foreign currency operations ; fourth : a further broadening of the collateral framework. let me take them in turn. while the money market tensions in august 2007 were addressed with a few fixed - rate full allotment tenders with overnight maturity, with effect from 15 october 2008, we introduced the fixed - rate full allotment policy in all our refinancing operations for the different maturities. under fixed rate full allotment counterparties have their bids fully satisfied, against adequate collateral, and on the condition of financial soundness. the fixed rate full allotment policy has proven a very efficient way of offsetting liquidity risk in the market by ensuring banks ’ continued access to liquidity. it is also a very flexible tool, as counterparties can themselves control the amount of liquidity they demand. thus, a falling demand for liquidity can be seen as a sign of normalisation. the