International macroeconomics

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Friday, February 19, 2021

Financial services, Economy, Money, Eurozone, International macroeconomics, European System of Central Banks, Real-time gross settlement, TARGET2, European Central Bank, Euro, Asset and liability management, Balance sheet

The financial statements of the ECB have been drawn up in accordance with the following accounting policies,[23] which the Governing Council of the ECB considers to achieve a fair presentation of the financial statements, reflecting at the same time the nature of central bank activities.Accounting principles The following accounting principles have been applied: economic reality and transparency, prudence, recognition of post-balance sheet events, materiality, going concern, the accruals principle, consistency and comparability.Recognition of assets and liabilities An asset or liability is only recognised in the Balance Sheet when it is probable that any associated future economic benefit will flow to or from the ECB, substantially all of the associated risks and rewards have been transferred to the ECB, and the cost or value of the asset or the amount of the obligation can be measured reliably.Basis of accountingTransactions in financial assets and liabilities are reflected in the accounts on the basis of the date on which they were settled.

Key Points:

The financial statements of the ECB have been drawn up in accordance with the following accounting policies,[23] which the Governing Council of the ECB considers to achieve a fair presentation of the financial statements, reflecting at the same time the nature of central bank activities.

Accounting principles

Recognition of assets and liabilities

Basis of accounting

Transactions in financial assets and liabilities are reflected in the accounts on the basis of the date on which they were settled.
With the exception of spot transactions in securities, transactions in financial instruments denominated in foreign currency are recorded in off-balance-sheet accounts on the trade date.
Purchases and sales of foreign currency affect the net foreign currency position on the trade date, and realised results arising from sales are also calculated on that date.

Gold and foreign currency assets and liabilities

Assets and liabilities denominated in foreign currency are converted into euro at the exchange rate prevailing on the balance sheet date.
The revaluation of foreign exchange assets and liabilities, including on-balance-sheet and off-balance-sheet instruments, is performed on a currency-by-currency basis.
Revaluation to the market price for assets and liabilities denominated in foreign currency is treated separately from the exchange rate revaluation.
No distinction is made between the price and currency revaluation differences for gold.

Securities

Securities held for monetary policy purposesSecurities currently held for monetary policy purposes are accounted for at amortised cost subject to impairment.
Other securitiesMarketable securities (other than securities currently held for monetary policy purposes) and similar assets are valued either at the mid-market prices or on the basis of the relevant yield curve prevailing on the balance sheet date, on a security-by-security basis.
Options embedded in securities are not separated for valuation purposes.

Income recognition

Income and expenses are recognised in the period in which they are earned or incurred.
[24] Realised gains and losses resulting from the sale of foreign currency, gold and securities are recorded in the Profit and Loss Account.
Unrealised gains are not recognised as income and are transferred directly to a revaluation account.
Unrealised losses are recorded in the Profit and Loss Account if, at the year-end, they exceed previous revaluation gains accumulated in the corresponding revaluation account.

Reverse transactions

Reverse transactions are operations whereby the ECB buys or sells assets under a repurchase agreement or conducts credit operations against collateral.
Under a reverse repurchase agreement, securities are bought for cash with a simultaneous agreement to sell them back to the counterparty at an agreed price on a set future date.
Reverse repurchase agreements are recorded as collateralised loans on the asset side of the Balance Sheet, but are not included in the ECBs security holdings.
Reverse transactions (including securities lending transactions) conducted under a programme offered by a specialised institution are recorded on the Balance Sheet only where collateral has been provided in the form of cash and this cash remains uninvested.

Off-balance-sheet instruments

Currency instruments, namely foreign exchange forward transactions, forward legs of foreign exchange swaps and other currency instruments involving an exchange of one currency for another at a future date, are included in the net foreign currency position for the purpose of calculating foreign exchange gains and losses.
Interest rate instruments are revalued on an item-by-item basis.
Daily changes in the variation margin of open interest rate futures contracts, as well as interest rate swaps that are cleared via a central counterparty, are recorded in the Profit and Loss Account.

Post-balance sheet events

Intra-ESCB balances/intra-Eurosystem balances

Intra-ESCB balances result primarily from cross-border payments in the European Union (EU) that are settled in central bank money in euro.
They are settled in TARGET2 the Trans-European Automated Real-time Gross settlement Express Transfer system and give rise to bilateral balances in the TARGET2 accounts of EU central banks.
These bilateral balances are netted and then assigned to the ECB on a daily basis, leaving each national central bank (NCB) with a single net bilateral position vis--vis the ECB only.
Intra-ESCB balances of non-euro area NCBs vis--vis the ECB, arising from their participation in TARGET2,[25] are disclosed under Liabilities to non-euro area residents denominated in euro.
Intra-Eurosystem balances arising from the transfer of foreign reserve assets to the ECB by NCBs joining the Eurosystem are denominated in euro and reported under Liabilities equivalent to the transfer of foreign reserves.

Fixed assets

Fixed assets, including intangible assets, but excluding land and works of art, are valued at cost less depreciation.
The ECB performs an annual impairment test of its main building and right-of-use assets relating to office buildings (see Leases below).
Fixed assets costing less than 10,000 are written off in the year of acquisition.
Fixed assets that comply with the capitalisation criteria, but are still under construction or development, are recorded under the heading Assets under construction.
The related costs are transferred to the relevant fixed asset headings once the assets are available for use.

Leases

For all leases involving a tangible asset, the related right-of-use asset and lease liability are recognised on the Balance Sheet at the lease commencement date and included under Tangible and intangible fixed assets and Sundry (liabilities), respectively.
Where leases comply with the capitalisation criteria, but the asset involved is still under construction or adaptation, the incurred costs before the lease commencement date are recorded under the heading Assets under construction.
The related right-of-use asset and lease liability are recognised under the relevant fixed asset headings once the asset is available for use (lease commencement date).
In addition, right-of-use assets relating to office buildings are subject to impairment (regarding annual impairment test, see Fixed assets above).
Short-term leases with a duration of 12 months or less and leases of low-value assets below 10,000 (consistent with the threshold used for the recognition of fixed assets) are recorded as an expense in the Profit and Loss Account.

The ECB’s post-employment benefits, other long-term benefits and termination benefits

The net amount charged to the Profit and Loss Account comprises:
1. the current service cost of the defined benefits accruing for the year;
2. the past service cost of the defined benefits resulting from a plan amendment;
3. net interest at the discount rate on the net defined benefit liability;
4. remeasurements in respect of other long-term benefits and termination benefits of a long-term nature, if any, in their entirety.
The net amount shown under “Revaluation accounts” comprises the following items:
1. actuarial gains and losses on the defined benefit obligation;
2. the actual return on plan assets, excluding amounts included in the net interest on the net defined benefit liability;
3. any change in the effect of the asset ceiling, excluding amounts included in the net interest on the net defined benefit liability.
- The compulsory contributions made by the ECB and the staff are reflected in the defined benefit pillar of the plan.
- Staff can make additional contributions on a voluntary basis in a defined contribution pillar that can be used to provide additional benefits.
- [26] These additional benefits are determined by the amount of voluntary contributions together with the investment returns arising from those contributions.
- For staff, unfunded arrangements are in place for post-employment benefits other than pensions and for other long-term benefits and termination benefits.
- These amounts are valued annually by independent actuaries to establish the appropriate liability in the financial statements.

Banknotes in circulation

[27] The total value of euro banknotes in circulation is allocated to the Eurosystem central banks on the last working day of each month in accordance with the banknote allocation key.
[28] The ECB has been allocated a share of 8% of the total value of euro banknotes in circulation, which is disclosed in the Balance Sheet under the liability item Banknotes in circulation.
These claims, which bear interest,[29] are disclosed under the sub-item Intra-Eurosystem claims: claims related to the allocation of euro banknotes within the Eurosystem (see Intra-ESCB balances/intra-Eurosystem balances above).

Interim profit distribution

An amount that is equal to the sum of the ECBs income on euro banknotes in circulation and income arising from the securities held for monetary policy purposes purchased under (a)the Securities Markets Programme, (b)the third covered bond purchase programme, (c)the asset-backed securities purchase programme, (d)the public sector purchase programme, and (e) the pandemic emergency purchase programme is distributed in January of the following year by means of an interim profit distribution, unless otherwise decided by the Governing Council.
[30] It is distributed in full unless it is higher than the ECBs net profit for the year and subject to any decisions by the Governing Council to make transfers to the provision for financial risks.

Reclassifications

In this context the ECB accepts deposits from the European Financial Stability Facility (EFSF) and the European Stability Mechanism (ESM), which in the 2019 Annual Accounts were presented under the heading Other liabilities.
With effect from 1 July 2020 Eurostat revised the statistical classification of these institutions from other financial intermediaries to the general government sector.
[31] As a result, as of that date the related amounts are presented under the heading General government.

Changes to accounting policies

Other issues

In accordance with Article27 of the Statute of the ESCB, and on the basis of a recommendation of the Governing Council, the EU Council has approved the appointment of Baker Tilly GmbH & Co. KG Wirtschaftsprfungsgesellschaft, Dsseldorf (Federal Republic of Germany) as the external auditors of the ECB for a five-year period up to the end of the financial year 2022.
This five-year period can be extended for up to two additional financial years.

2.4 Notes on the Balance Sheet

Note 1 - Gold and gold receivables

As at 31 December 2020 the ECB held 16,229,522 ounces[32] of fine gold, the market value of which amounted to 25,056million (2019: 21,976million).
No gold operations took place in 2020 and the ECBs holdings therefore remained unchanged compared with their level as at 31December2019.
The increase in the euro equivalent value of these holdings was due to the rise in the market price of gold in euro terms (see Gold and foreign currency assets and liabilities in Section 2.3 Accounting policies and note15 Revaluation accounts).

Note 2 - Claims on non-euro area and euro area residents denominated in foreign currency

Note 2.1 - Receivables from the IMF

This asset represents the ECBs holdings of SDRs and amounted to 680million as at 31 December 2020 (2019: 710million).
It arises as the result of a two-way SDR buying and selling arrangement with the International Monetary Fund (IMF), whereby the IMF is authorised to arrange sales or purchases of SDRs against euro, on behalf of the ECB, within minimum and maximum holding levels.
For accounting purposes, SDRs are treated as a foreign currency (see Gold and foreign currency assets and liabilities in Section 2.3 Accounting policies).

Note 2.2 - Balances with banks and security investments, external loans and other external assets; and claims on euro area residents denominated in foreign currency

Note 3 - Claims on non-euro area residents denominated in euro

Note 3.1 - Balances with banks, security investments and loans

As at 31 December 2020 this item consisted of a claim amounting to 1,830 million in relation to liquidity facility arrangements between the Eurosystem and non-euro area central banks.
Under these arrangements, the Eurosystem provides euro liquidity to non-euro area central banks in exchange for eligible collateral[34] to address euro liquidity needs in their jurisdictions in case of market dysfunction and thereby minimise the risk of adverse spillover effects on euro area financial markets and economies.

Note 4 - Other claims on euro area credit institutions denominated in euro

Note 5 - Securities of euro area residents denominated in euro

Note 5.1 - Securities held for monetary policy purposes

Purchases include all the asset categories eligible under the APP[37] and were initially envisaged to continue until the end of 2020.
Furthermore, the Governing Council intends to reinvest the principal payments from maturing securities purchased under the PEPP until at least the end of 2023.
The future roll-off of the PEPP portfolio will be managed to avoid interference with the appropriate monetary policy stance.
The securities purchased under these programmes are valued on an amortised cost basis subject to impairment (see Securities in Section 2.3 Accounting policies).
The Governing Council assesses on a regular basis the financial risks associated with the securities held under these programmes.
Based on the results of this years impairment tests, no losses have been recorded by the ECB for the securities held in its monetary policy portfolios in 2020.

Note 6 - Intra-Eurosystem claims

Note 6.1 - Claims related to the allocation of euro banknotes within the Eurosystem

This item consists of the claims of the ECB vis--vis the euro area NCBs relating to the allocation of euro banknotes within the Eurosystem (see Banknotes in circulation in Section 2.3 Accounting policies) and as at 31 December 2020 amounted to 114,761million (2019: 103,420million).
The remuneration of these claims is calculated daily at the latest available marginal interest rate used by the Eurosystem in its tenders for main refinancing operations[39] (see note23.2 Interest income arising from the allocation of euro banknotes within the Eurosystem).

Note 7 - Other assets

Note 7.1 - Tangible and intangible fixed assets

Note 7.2 - Other financial assets

This item consists mainly of the ECBs own funds portfolio, which predominantly consists of investments of the ECBs financial resources, namely the paid-up capital and amounts held in the reserves and the provision for financial risks.
It also includes 3,211shares in the Bank for International Settlements (BIS) at the acquisition cost of 42million and other current accounts denominated in euro.

Note 7.3 - Off-balance-sheet instruments revaluation differences

This item is composed of valuation changes in swap and forward transactions in foreign currency that were outstanding on 31 December 2020 (see note20 Foreign exchange swap and forward transactions).
These valuation changes amounted to 388million (2019:619million) and are the result of the conversion of such transactions into their euro equivalents at the exchange rates prevailing on the balance sheet date, compared with the euro values resulting from the conversion of the transactions at the average cost of the respective foreign currency on that date (see Off-balance-sheet instruments and Gold and foreign currency assets and liabilities in Section 2.3 Accounting policies).

Note 7.4 - Accruals and prepaid expenses

This item also included an amount of 514 million corresponding to the supervisory fees to be received for the fee period 2020.
This amount will be collected in the second quarter of 2021.
From 2020 onwards, fees will be levied ex post on the basis of actual costs.
This item also includes (a)accrued income from common Eurosystem projects (see note28 Other income); (b)miscellaneous prepayments; and (c)accrued interest income on other financial assets and liabilities.

Note 7.5 - Sundry

On 31 December 2020 this item amounted to 1,970million (2019: 2,221million) and mainly comprised the accrued amount of the ECBs interim profit distribution of 1,260million (2019: 1,431million) (see Interim profit distribution in Section 2.3 Accounting policies and note 12.2 Other liabilities within the Eurosystem (net)).
It also included balances with a value of 692million (2019: 757million) related to swap and forward transactions in foreign currency outstanding on 31December 2020 that arose from the conversion of such transactions into their euro equivalents at the respective currencys average cost on the balance sheet date, compared with the euro values at which the transactions were initially recorded (see Off-balance-sheet instruments in Section 2.3 Accounting policies).

Note 8 - Banknotes in circulation

Note 9 - Other liabilities to euro area credit institutions denominated in euro

The Eurosystem central banks have the possibility of accepting cash as collateral in their PSPP securities lending facilities without having to reinvest it.
In the case of the ECB, these operations are conducted via a specialised institution.
As at 31 December 2020 the outstanding value of such lending transactions against cash collateral conducted with euro area credit institutions was 2,559million (2019:1,325million).
As the cash remained uninvested at the year-end, these transactions were recorded on the Balance Sheet (see Reverse transactions in Section 2.3 Accounting policies).

Note 10 - Liabilities to other euro area residents denominated in euro

Note 10.1 - General government

Note 10.2 – Other liabilities

Note 11 - Liabilities to non-euro area residents denominated in euro

The largest component was an amount of 4,685million (2019:3,271million) consisting of TARGET2 balances of non-euro area NCBs vis--vis the ECB (see Intra-ESCB balances/intra-Eurosystem balances in Section 2.3 Accounting policies).
The increase in these balances in 2020 corresponds to the net payments flow from account holders in euro area countries to account holders in non-euro area countries which are settled via TARGET2.
Furthermore, the swap transactions conducted with the Federal Reserve System and the euro area NCBs result in forward claims and liabilities that are recorded in off-balance-sheet accounts (see note20 Foreign exchange swap and forward transactions).
The remainder of this item consists of an amount of 3,425million (2019: 625million) arising from outstanding PSPP and public sector PEPP securities lending transactions conducted with non-euro area residents in which cash was received as collateral and transferred to TARGET2 accounts (see note9 Other liabilities to euro area credit institutions denominated in euro).

Note 12 - Intra-Eurosystem liabilities

Note 12.1 - Liabilities equivalent to the transfer of foreign reserves

These represent the liabilities to euro area NCBs that arose from the transfer of foreign reserve assets to the ECB when they joined the Eurosystem.
Pursuant to Article30.2 of the Statute of the ESCB, these contributions are fixed in proportion to the NCBs shares in the subscribed capital of the ECB.
This resulted in a small decrease of 0.2million on 1 February 2020, which was repaid to the euro area NCBs.
The remuneration of these liabilities is calculated daily at the latest available marginal interest rate used by the Eurosystem in its tenders for main refinancing operations, adjusted to reflect a zero return on the gold component (see note23.3 Remuneration of NCBs claims in respect of foreign reserves transferred).

Note 12.2 - Other liabilities within the Eurosystem (net)

The increase in the net TARGET2 liability resulted mainly from the net purchases of securities under the PEPP and the APP, which were settled via TARGET2 accounts (see note 5 Securities of euro area residents denominated in euro).
In addition, the decrease in the deposits accepted by the ECB in its role as fiscal agent (see note 10.1 General government) and the payment of the ECBs profit distribution for 2019 also contributed to the increase in the liability in 2020.
This increase was partially offset by the interest income received from securities held for monetary policy purposes and the increase in cash received as collateral against the lending of PSPP and public sector PEPP securities (see note 9 Other liabilities to euro area credit institutions denominated in euro and note 11 Liabilities to non-euro area residents denominated in euro).
The remuneration of TARGET2 positions, with the exception of balances arising from back-to-back swap transactions in connection with US dollar liquidity-providing operations, is calculated daily at the latest available marginal interest rate used by the Eurosystem in its tenders for main refinancing operations.

Note 13 - Other liabilities

Note 13.1 - Off-balance-sheet instruments revaluation differences

This item is composed of valuation changes in swap and forward transactions in foreign currency that were outstanding on 31 December 2020 (see note20 Foreign exchange swap and forward transactions).
These valuation changes amounted to 636million (2019: 709million) and are the result of the conversion of such transactions into their euro equivalents at the exchange rates prevailing on the balance sheet date, compared with the euro values resulting from the conversion of the transactions at the average cost of the respective foreign currency on that date (see Off-balance-sheet instruments and Gold and foreign currency assets and liabilities in Section 2.3 Accounting policies).

Note 13.2 - Accruals and income collected in advance

Note 13.3 - Sundry

On 31 December 2020 this item stood at 2,419million (2019:2,188million).
It included balances amounting to 507million (2019: 662million) related to swap and forward transactions in foreign currency that were outstanding on 31December 2020 (see note20 Foreign exchange swap and forward transactions).
The item also includes a lease liability of 199million (2019: 232 million) (see Leases in Section 2.3 Accounting policies).
The termination benefits of ECB staff are also included.

The ECB’s post-employment benefits, other long-term benefits and termination benefits

In 2020 the present value of the defined benefit obligation vis--vis staff of 3,034million (2019:2,497million) included unfunded benefits amounting to 364million (2019:323million) relating to post-employment benefits other than pensions, to other long-term benefits and to staff termination benefits.
Remeasurements of the ECBs net defined benefit liability in respect of post-employment benefits are recognised in the Balance Sheet under liability item Revaluation accounts.
Changes in the defined benefit obligation, plan assets and remeasurement resultsChanges in the present value of the defined benefit obligation were as follows:

The total remeasurement losses of 363million on the defined benefit obligation in 2020 arose primarily as a result of the rise in the future pension increase rate from 1.0% in 2019 to 1.7% in 2020.
In addition, the discount rate used for the valuation further decreased from 1.2% in 2019 to 1.1% in 2020.
Changes in 2020 in the fair value of plan assets in the defined benefit pillar relating to staff were as follows: The remeasurement gain on plan assets in 2020 reflected the fact that the actual return on the fund units was higher than the assumed interest income on plan assets, which was based on the discount rate assumption.
Changes in 2020 in the remeasurement results were as follows: Profit and Loss AccountThe amounts recognised in the Profit and Loss Account in 2020 were as follows:

The current service cost increased in 2020 to 142million (2019: 92million), mainly owing to a decline in the discount rate from 2.3% in 2018 to 1.2% in 2019.
[44] Key assumptionsIn preparing the valuations referred to in this note, the independent actuaries have used assumptions which the Executive Board has accepted for the purposes of accounting and disclosure.
The principal assumptions used for the purposes of calculating the liability for post-employment benefits and other long-term benefits are as follows: 1) These assumptions were used for calculating the part of the ECBs defined benefit obligation which is funded by assets with an underlying capital guarantee.2) In addition, allowance is made for prospective individual salary increases of up to 1.8% per annum, depending on the age of the plan participants.

Note 14 - Provisions

The size of and continuing requirement for this provision is reviewed annually, based on the ECBs assessment of its exposure to these risks and taking a range of factors into account.
Its size, together with any amount held in the general reserve fund, may not exceed the value of the ECBs capital paid up by the euro area NCBs.
This item also includes administrative provisions amounting to 57 million (2019: 50 million).

Note 15 - Revaluation accounts

It also includes remeasurements of the ECBs net defined benefit liability in respect of post-employment benefits (see The ECBs post-employment benefits, other long-term benefits and termination benefits in Section 2.3 Accounting policies and note13.3 Sundry).
The decrease in the size of the revaluation accounts is predominately due to the depreciation of the US dollar and Japanese yen against the euro in 2020.
This decline was partially offset by an increase in the size of the gold revaluation accounts owing to the rise in the market price of gold in 2020.
The foreign exchange rates used for the year-end revaluation were as follows:

Note 16 - Capital and reserves

Note 16.1 - Capital

[45] These weights are adjusted every five years and whenever there is a change in the composition of the NCBs that contribute to the ECBs capital, i.e.
The ECB kept its subscribed capital unchanged after the Bank of Englands withdrawal from the ESCB.
The share of the Bank of England in the ECBs subscribed capital, which stood at 14.3%, was reallocated among both the euro area NCBs and the remaining non-euro area NCBs.
The ECBs paid-up capital also remained unchanged at 7,659 million in 2020, as the remaining NCBs covered the withdrawn Bank of Englands paid-up capital of 58 million.
This will increase the ECBs paid-up capital from 7,659 million in 2020 to 8,270 million in 2021 and 8,880 million in 2022.

2.5 Off-balance-sheet instruments

Note 17 - Securities lending programmes

As part of the management of the ECBs own funds, the ECB has a securities lending programme agreement in place under which a specialised institution enters into securities lending transactions on behalf of the ECB.
[46] Unless these securities lending operations are conducted against cash collateral that remains uninvested at the end of the year, they are recorded in off-balance-sheet accounts.
[47] Such securities lending operations with a value of 17,214million (2019: 10,076million) were outstanding as at 31 December 2020.

Note 18 - Interest rate futures

Note 19 - Interest rate swaps

Note 20 - Foreign exchange swap and forward transactions

Management of foreign reservesForeign exchange swap and forward transactions were conducted in 2020 in the context of the management of the ECBs foreign reserves.
Furthermore, swap agreements are also in place with the Bulgarian National Bank, Hrvatska narodna banka, Danmarks Nationalbank and Sveriges Riksbank for the provision of euro liquidity to financial institutions in their jurisdictions.
The above arrangements are aimed at addressing possible liquidity needs to counter potential market dysfunction.

Note 21 - Administration of borrowing and lending operations

In 2020 the ECB continued to be responsible for the administration of the borrowing and lending operations of the EU under the medium-term financial assistance facility and the European Financial Stabilisation Mechanism, for the loan facility agreement for Greece, and for the administration of payments relating to two EFSF loans.
The ECB and the NCBs of the borrowing EU Member States supported the European Commission in the administration of these loans.
In 2020 the ECB processed payments related to all the above-mentioned operations.

Note 22 - Contingent liabilities from pending lawsuits

Several lawsuits have been filed against the ECB and other EU institutions by a number of depositors, shareholders and bondholders of Cypriot credit institutions.
Two of these cases, designated as test cases, were dismissed on substance by the General Court of the EU in 2018, and appeals against these judgments were lodged by the applicants and the Council.
All other similar cases, which had been suspended, are expected to be decided in accordance with the final outcome of the test cases, and thus the ECB should also win these cases.
It is therefore considered that no losses will be incurred by the ECB as a result of these cases, particularly in view of the Court of Justices judgment in the above-mentioned test cases.

2.6 Notes on the Profit and Loss Account

Note 23 - Net interest income

Note 23.1 - Interest income on foreign reserve assets

Note 23.2 - Interest income arising from the allocation of euro banknotes within the Eurosystem

This item consists of the interest income relating to the ECBs 8% share of the total euro banknote issue (see Banknotes in circulation in Section 2.3 Accounting policies and note6.1 Claims related to the allocation of euro banknotes within the Eurosystem).
For2020 this interest income was zero, owing to the fact that the rate on the main refinancing operations remained at 0% during the entire year.

Note 23.3 - Remuneration of NCBs’ claims in respect of foreign reserves transferred

Note 23.4 - Other interest income; and other interest expense

Note 24 - Realised gains/losses arising from financial operations

Note 25 - Write-downs on financial assets and positions

Note 26 - Net income/expense from fees and commissions

Income and expenses related to supervisory tasksThe ECB levies annual fees on supervised entities in order to recover expenditure incurred in the performance of its supervisory tasks.
[49] In 2020, for the last time, the amount levied will be affected by the surplus carried forward from the previous fee period.
The individual supervisory fees are invoiced in the second quarter following the respective year-end.
The related income is not considered in the calculation of the annual supervisory fees.
For2020 the total actual expenses related to the ECBs supervisory tasks, which are recovered via the annual supervisory fees, amounted to 535million (2019: 537million).
These lower expenses were largely offset by higher staff costs following the growth in the average number of staff working for ECB Banking Supervision.

Note 27 - Income from equity shares and participating interests

Note 28 - Other income

Note 29 - Staff costs

The average number of employees, expressed in full-time equivalents (FTEs)[52], amounted to 3,923 (2019: 3,770), of which 356were managerial staff (2019: 349).
Staff costs increased in 2020, mainly owing to the higher average number of staff employed by the ECB and higher costs, particularly in relation to post-employment benefits, resulting from the use of a lower discount rate for the actuarial valuation at the end of 2020 (see note13.3 Sundry).
Remuneration of the Executive and Supervisory BoardsMembers of the Executive Board and the members of the Supervisory Board employed by the ECB receive a basic salary and a residence allowance.
Members of the Executive Board and the Chair of the Supervisory Board also receive a representation allowance.
Subject to the Conditions of Employment for Staff of the European Central Bank, members of both boards may be entitled to household, child and education allowances, depending on their individual circumstances.

Transitional payments may be made to former members of both boards for a limited period after the end of their terms of office.
The increase in these payments is mainly due to the number of board members leaving the ECB in 2019 and 2020.
Pension payments, including post-employment allowances, and contributions to the medical, long-term care and accident insurance schemes for former board members and their dependants amounted to 928,149 (2019:1,848,157).

Note 30 - Administrative expenses

Note 31 - Banknote production services

3 Independent auditor’s report

Report on the Audit of the ECB’s Financial Statements 2020

Opinion

Basis for Opinion

We conducted our audit in accordance with International Standards on Auditing (ISAs).
Our responsibilities under those standards are further described in the Auditors Responsibilities for the Audit of the Financial Statements section of our report.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

Other Information

The ECBs Executive Board (Executive Board) is responsible for the other information included in the ECBs Annual Accounts.
The other information comprises all the information included in the ECBs Annual Accounts except the Financial Statements of the ECB and our auditors report.
In connection with our audit of the Financial Statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the Financial Statements or our knowledge obtained in the audit or otherwise appears to be materially misstated.

Responsibilities of the Executive Board and those charged with Governance for the Financial Statements

In preparing the Financial Statements, the Executive Board is responsible for assessing the ECBs ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting.
Those charged with governance are responsible for overseeing the ECBs financial reporting process.

Auditor’s Responsibilities for the Audit of the Financial Statements

As part of an audit in accordance with ISAs, we exercise professional judgment and maintain professional scepticism throughout the planning and performance of the audit. We also:
- Identify and assess the risks of material misstatement of the Financial Statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.
- Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the ECB’s internal control.
- Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management.
- Conclude on the appropriateness of management’s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the ECB’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the Financial Statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report.
- Evaluate the overall presentation, structure and content of the Financial Statements, including the disclosures, and whether the Financial Statements represent the underlying transactions and events in a manner that achieves fair presentation.
- Our objectives are to obtain reasonable assurance about whether the Financial Statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditors report that includes our opinion.
- Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs will always detect a material misstatement when it exists.
- We are required to communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit.

4 Note on profit distribution/allocation of losses

Pursuant to Article 33 of the Statute of the ESCB, the net profit of the ECB shall be transferred in the following order:
1. an amount to be determined by the Governing Council, which may not exceed 20% of the net profit, shall be transferred to the general reserve fund, subject to a limit equal to 100% of the capital; and
2. the remaining net profit shall be distributed to the shareholders of the ECB in proportion to their paid-up shares.[55]
- This note is not part of the financial statements of the ECB for the year 2020.
- [56] The ECBs net profit for 2020 was 1,643 million.
- Following a decision by the Governing Council, an interim profit distribution, amounting to 1,260 million, was paid out to the euro area NCBs on 29 January 2021.
- Furthermore, the Governing Council decided to distribute the remaining profit of 383 million to the euro area NCBs.
- European Central Bank, 2021 Postal address 60640 Frankfurt am Main, GermanyTelephone +49 69 1344 0 Website www.ecb.europa.eu All rights reserved.