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"Report and Accounts 1999"

Outline National Changeover Plan: Changeover to Euro in Case of Danish Participation – Danmarks Nationalbank [1]

Danmarks Nationalbank will require approximately 1 year after a positive referendum outcome to prepare for participation in the euro area. After Denmark's possible adoption of the euro the Nationalbank will require approximately 1 year to establish the necessary initial stock before euro banknotes and coins can be put into circulation. After a short period with double circulation of banknotes and coins the euro will be the sole legal tender.

Introduction

Danmarks Nationalbank is the central bank of Denmark. As such the Nationalbank undertakes a number of tasks which distinguish it from other banks.

The Nationalbank's responsibilities include:

The European Central Bank, ECB, is the common central bank of the euro area. It is responsible for monetary policy in the euro area which at present consists of the 11 EU member states which adopted the euro on 1 January 1999. The ECB and the 11 national central banks in the euro area together form the Eurosystem.

Even though the Nationalbank is not at present a member of the Eurosystem it still participates in the Eurosystem's work to a certain degree, e.g. in the joint payment system, TARGET, cf. p. 74.

In order for the euro to be introduced in Denmark the Nationalbank must be prepared for membership of the Eurosystem. This entails a number of adjustments to the Nationalbank's areas of responsibility and many of its systems. The Nationalbank finds that a period of 1 year – calculated from the date of a positive referendum outcome – is required for the implementation of these adjustments and the introduction of the euro as "account money".

The Nationalbank finds that an additional period of approximately 1 year will be needed for the Nationalbank to complete the preparations for the circulation of euro banknotes and coins in Denmark.

The Single Monetary Policy

If Denmark decides to adopt the euro the Nationalbank will participate in the formulation of the single monetary policy since the Governor of Danmark Nationalbank will participate in the meetings of the ECB's Governing Council where decisions related to the single monetary policy are taken, for example decisions on interest-rate adjustments.

The Governing Council of the ECB consists of the Executive Board and the central-bank governors of the member states which have adopted the euro. The Governing Council is responsible for the monetary policy of the euro area, but the practical implementation of monetary policy on behalf of the ECB is predominantly handled by the national central banks. The Nationalbank will thus become the link between the Danish financial sector and the Eurosystem.

The monetary-policy framework of the Eurosystem
The framework for the monetary policy of the Eurosystem consists of three elements:

The ECB's definition of counterparties in monetary-policy operations, i.e. credit institutions, is slightly wider than the Nationalbank's definition of counterparty, i.e. banks and mortgage-credit institutes. Furthermore, the ECB requires the counterparties to be subject to EU-harmonised supervision or supervision of equivalent standard. Finally, counterparties must fulfil a number of technical requirements.

Adjustments at the Nationalbank
The Nationalbank's participation in the single monetary policy of the Eurosystem requires adjustment to the monetary-policy framework of the Eurosystem. In the same way, the Danish credit institutions will be required to make adjustments to the framework of the Eurosystem, including the minimum reserve requirements.

The Nationalbank has in practice conducted open market operations which resemble the ECB's operations, but unlike the ECB the Nationalbank does not apply the tender principle to the allocation of liquidity. In order for the Nationalbank to participate in the Eurosystem's open market operations it is therefore necessary to establish a bid system for collection of information from the credit institutions concerning the amounts of liquidity they require. For their part, the credit institutions should prepare for using the bid system. The bids are submitted by the Nationalbank to the ECB, which will allocate the fixed amount of liquidity on a proportional basis according to the bids submitted in the entire euro area.

Today the Nationalbank employs a standing deposit facility (current account) which resembles that of the ECB, but no standing lending facility. However, the Nationalbank is familiar with a lending facility, so that the adjustments will be of a limited extent.

Today, the Nationalbank imposes no minimum reserve requirements. One major adjustment which the Nationalbank will be required to make will therefore be to prepare for the administration of these minimum reserve requirements. The Nationalbank must develop a database for compilation of the reserve requirements imposed on the individual credit institutions. Moreover, the Nationalbank's accounting system must be able to present the daily accounts of the individual credit institutions regarding cover of minimum reserve requirements. Finally, a system to monitor the minimum reserve requirements must be established.

Foreign-Exchange Reserves

If Denmark joins the euro area Danmarks Nationalbank must deposit a proportion of its foreign-exchange reserve with the ECB. The management of the joint foreign-exchange reserve is undertaken by the national central banks, so that the Nationalbank will be responsible for managing a share of the foreign-exchange reserve of the Eurosystem. The Nationalbank will continue to hold its own foreign-exchange reserve.

In order for the Nationalbank to manage the reserves of the Eurosystem it is necessary to implement the analysis and data-exchange systems used by the ECB. The ECB sets the operational targets for the foreign-exchange reserve regarding distribution by currency, interest-rate risk, credit risk and liquidity requirements. The Nationalbank's task will be to manage a specific share of the Eurosystem's reserves which currently total the equivalent of euro 39.5 billion, of which 15 per cent is gold and 85 per cent foreign exchange.

The proportion of the Nationalbank's foreign-exchange reserve which is not transferred to the ECB on Denmark's adoption of the euro is at the Nationalbank's disposal. However, it must be managed in accordance with the single monetary and foreign-exchange policy of the euro area.

Statistics

With a view to the formulation of monetary-policy for the entire euro area the ECB requires extensive knowledge of economic and financial trends in all euro area member states. To a great extent this is achieved via the statistics reported by the national central banks.

The ECB has set out a number of requirements of the statistics to be provided by the national central banks with regard to money and banking statistics, balance-of-payments statistics, financial accounts, prices and costs, government finances and a number of other macroeconomic statistics. All data is to be provided according to a harmonised structure for the compilation of aggregates for the euro area.

Adjustments at the Nationalbank
The reporting requirements continue to develop in step with the experience gained by the present euro area member states. For the Nationalbank to be prepared to introduce the euro it must comply with the ECB's current reporting requirements at a satisfactory level for all areas. The reporting scheme requires a high level of data security and confidentiality, so that to a high degree the statistical requirements also imply the strict requirement of improvement in electronic reporting systems. Extensive development work is therefore required in this area before the Nationalbank is in compliance with the ECB's requirements.

The Nationalbank is currently engaged in extensive restructuring of the monthly balance-sheet statistics for banks and mortgage-credit institutes, etc. This restructuring is expected to be completed by the beginning of 2001 and is intended to harmonise these statistics with EU standards. Another objective is to expand the other financial statistics with a view to harmonisation with EU standards during 2001. In this connection Danmarks Nationalbank and Statistics Denmark have concluded an agreement to intensify and rationalise their future cooperation on statistics.

Reporting of Accounts

The ECB has imposed requirements concerning the presentation of accounts in the Eurosystem to ensure that all national central banks use the same harmonised accounting rules in their reporting of accounts.

In a few areas the common accounting policies have not yet been finalised. However, it can be assumed that these accounting policies will be finalised by the time of Denmark's possible adoption of the euro. This will facilitate the Nationalbank's adjustment compared to that undertaken by the present euro area member states.

Adjustments at the Nationalbank
The Nationalbank has initiated an exhaustive analysis of its existing computer systems (business, accounting and reporting systems) in view of the increasing need for flexible reporting and follow-up systems both within the bank and in its external relations. This work also includes an analysis of whether the existing systems fulfil the reporting requirements in the event of Denmark's adoption of the euro. A considerable need for system adjustments can be expected.

The ECB has imposed daily reporting requirements on the national central banks with regard to e.g. data for the monetary-policy operations. This data must be submitted to the ECB by no later than 8.00 a.m. of the day following the reporting day. Furthermore, emergency procedures must be prepared in the event of a breakdown of the system which transmits data to the ECB. In view of the ECB's strict requirements concerning compliance with reporting deadlines measures to safeguard against computer breakdowns must be generally tightened.

Payment Systems

The Eurosystem's joint payment system which entered into force on 1 January 1999 is called TARGET (Trans-European Automated Real-time Gross settlement Express Transfer). Like the other non-euro area member states the Nationalbank already participates in TARGET, although not quite on the same terms as the euro area member states. For example, Denmark has less access than the euro area member states to unlimited intra-day liquidity.

TARGET is based on the national payment systems of the EU member states. TARGET facilitates the rapid and secure transfer of large-value payments in euro across the euro area. TARGET is used for monetary-policy transactions as well as commercial transactions between private banks.

Adjustments at the Nationalbank
The Nationalbank's current payment system for krone-denominated payments is the DN Inquiry and Transfer System. On 1 January 2001 the system will be replaced by a new, state-of-the-art system KRONOS. KRONOS meets the present demands made by both the Nationalbank and the credit institutions. During the 1st half of 2001 KRONOS will be adjusted so as to also be able to handle payments in euro, i.e. the system is to serve as Denmark's link to TARGET. In addition, adjustment of other settlement systems (VP, PBS and FUTOP) is required. Finally, adjustments to Danmarks Nationalbank's accounting system will require adjustments to the payment system.

IT Adjustments

With regard to the single monetary policy, the statistical requirements, the accounting requirements and the payment system the Nationalbank is required to develop or implement IT systems. The development work must take into account that several of the systems are closely interrelated. Furthermore, data communication systems to the Eurosystem must also be introduced. All systems must be ready by the time the euro is introduced as "account money".

Banknotes and Coins

The Nationalbank's Note Printing Works and The Royal Mint must be reorganised for the production of euro banknotes and coins, and the Nationalbank's Banking Services must be prepared for handling euro.

Prior to the circulation of euro banknotes and coins the Nationalbank must establish a very considerable initial stock so as to facilitate rapid replacement. During the period after the replacement only ongoing production of banknotes and coins to e.g. replace worn-out banknotes and coins will be required.

To avoid a temporary expansion of capacity during the period when the initial stock is built up the Nationalbank has considered the possibility of obtaining part of the initial stock of euro banknotes and coins via cooperation with note printing works and mints in the present euro area member states since these will have available capacity after their own initial stocks have been manufactured.

This cooperation will enable the Nationalbank to use its own capacity, supplemented with banknotes and coins produced abroad during the period in which the initial stock is built up. As a consequence the Nationalbank will be able to establish the necessary initial stock of euro banknotes and coins approximately 1 year after Denmark's adoption of the euro.

Coins
The euro coins have a national side and a common side. The common side shows the denomination and various versions of a map of Europe. Eight different euro coins are manufactured (1, 2, 5, 10, 20 and 50 eurocents and 1 and 2 euro). The coins are subject to very strict security requirements to prevent counterfeiting and to ensure that the coins of all euro area member states have the same common side.

Each euro area member state has designed its own national side. Some member states have chosen different designs for the eight coins, while others have chosen the same design for all eight coins. Naturally, Denmark will have to design one or more national sides for the eight coins. After negotiation with the Nationalbank the Minister of Economic Affairs will decide the design of the coins, including whether a design contest is to be held. All monarchies in the euro area have chosen to portray their monarchs on the national sides of their coins [2].

Today, the Danish coins are minted at The Royal Mint, while the blanks are purchased abroad. Each euro area member state may decide where the blanks are to be cast as long as all quality and security requirements are met. To comply with the requirements concerning production of euro coins The Royal Mint is required to gain ISO 9002 certification.

Any Danish euro coins which are manufactured at a mint abroad during the period in which the initial stock is built up will still be minted with the Danish national side, irrespective of the country of minting.

In addition to design and production The Royal Mint will also be required to adjust its coin inspection procedures to match those of the euro area.

Banknotes
All euro area member states have the same euro banknotes, which like the coins are subject to very strict security requirements. This is to ensure that all banknotes are identical, irrespective of country of production, and also to prevent the circulation of counterfeit banknotes. Seven different banknote denominations are manufactured (5, 10, 20, 50, 100, 200 and 500 euro) and it has been decided that the banknotes do not bear any national symbols.

All euro area member states have decided to print their own banknotes from the outset. The production of banknotes has already begun, to enable the note printing works to manufacture a suitable initial stock before the banknotes are put into circulation on 1 January 2002. The ECB expects the initial stocks to total 13 billion banknotes.

As part of the preparations for the printing of euro banknotes Danmarks Nationalbank is to carry out a number of test production runs which must comply with the ECB's requirements. In contrast to Denmark the note printing works of the UK, Greece and Sweden participated in the euro area member states' test production of euro banknotes. In addition to adjustments to the production process staff training will also be required on the introduction of the ECB's quality inspection system.

As from the introduction of actual euro banknotes and coins in the present euro area member states on 1 January 2002 the double circulation of euro and national banknotes and coins will occur for a period of maximum six months. Several member states have stated that the period of double circulation of banknotes and coins will be short.

Should Denmark decide to adopt the euro, for a certain initial period it will be introduced solely as a unit of account, as in the present euro area member states. When euro banknotes and coins are put into circulation the Nationalbank must ensure that all banks and possibly also shops, have stocks of euro banknotes and coins, to facilitate the changeover. On the circulation of euro banknotes and coins the approximately 123 million krone banknotes and approximately 1.3 billion krone coins currently in circulation will be withdrawn. After the period of double circulation krone-denominated banknotes and coins will no longer be legal tender, but for a certain period they may still be exchanged at the Nationalbank.

Furthermore, IT adjustments will be necessary in the Nationalbank's Banking Services which handles the distribution and processing of banknotes and coins.

Overview

The changeover to the euro at Danmarks Nationalbank.

Prior to joining the euro the Nationalbank must be prepared for:

Prior to the circulation of euro banknotes and coins Danmarks Nationalbank must:

In connection with circulation Danmarks Nationalbank must:

Footnotes

[1] Extract from "Report on Changeover to Euro in Case of Danish Participation", Ministry of Economic Affairs, December 1999.

[2] However, in the case of Spain the King is portrayed only on the 1 and 2 euro coins.





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Version 1.0 April 2000 Nationalbanken.
Published by Danmarks Nationalbank April 2000, http://www.nationalbanken.dk