Annual Report 1999

Table of contents

  1. Economic and financial report
  2. The Luxembourg Financial Sector
  3. BCL operations
  4. Developments in the statistical field
  5. Payment and security settlement systems
  6. Banknotes and money in circulation
  7. Financial stability and supervision
  8. Annual accounts

The second Annual Report of the Banque centrale du Luxembourg (BCL) was published on 14 April 2000, and is divided into 7 chapters.

The president Yves Mersch evokes in his foreword that the BCL, established in June 1998, became operative only with the transfer of the decision power in monetary matters to the European Central Bank (ECB) on 1 January 1999. After the start-up phase the new objectives consist of missions following up from monetary policy, such as the supervision and the development of the payment and security settlement systems, a cooperation arrangement with prudential supervision authorities, the resumption of the "Institut Belgo-Luxembourgeois du Change" (IBLC) activities with regard to the balance of payments, the distribution of the statistical tasks, the development of an analytical tool from a macro-economic as well as from an internal accounting point of view, and the elucidation of the staff's working terms and conditions.

The first chapter of the annual report includes a description of the general environment, an economic and financial report and an analysis of the Luxembourg financial sector. Chapters II, III and IV deal with the Bank, its organisation and its activities over the preceding year. Similar to last year's annual report, one chapter is dedicated to economic and financial statistics. The other chapters consist of the annual listing of economic and financial legislation as well as of a presentation of the code of conduct of the International Monetary Fund (IMF).

1.   Economic and financial report

Activity on the international level

After a decent start, annual economic growth in Europe exceeds 2% in 1999. Employment figures have improved as well and the economic perspectives are positive.

The Harmonised Index of Consumer Prices (HICP) of the euro zone increased by 1.1% in 1998 and 1999, thus meeting the objective of price stability as defined by the Governing Council of the ECB, i.e. a medium-term increase in HICP below 2% for the euro zone as a whole. The strong increase in the world market price of petrol highly influenced the evolution of the HICP over the last year. The liberalisation of the telecommunications industry and more recently that of the energy industry, in particular electricity, has set out to put downward pressure on consumer prices. The index of producer prices, as measured by the PPI, declined too, whereas labour costs remained relatively stable.

After the Asian and Russian financial crises, the markets developed favorably. Economic growth was robust in the United States where GDP grew by around 4% while inflation was but moderate. This evolution illustrates the "New Economy" phenomenon associating technological progress and productivity gains with low unemployment in the absence of inflationary pressure. The Federal Reserve tightened monetary policy by raising its prime rate 3 times. By 2001, the European economy is likely to achieve the persistent growth rates experienced across the Atlantic.

Stock markets of the major European financial centres had excellent results.

As the euro weakened against the dollar and the yen, the single currency nevertheless gained the confidence of bond market investors. During 1999 the euro became the main currency for international bond issuance.

Activity on the national level

In 1999 a new national account system was introduced by the Member States of the European Union (EU), (namely the European System of Accounts, version 1995 (ESA 95)). The year 1999 was the third year in a row of strong economic growth. According to first estimates real GDP is expected to grow by 4.9% for the year under review, but will probably be revised upwards. Comparisons of the GDP per capita ratio between Luxembourg and other countries, published occasionally, can be misleading as cross-border commuters contribute strongly to the GDP.

Final household consumption increased more rapidly in 1999 and reached an estimated growth rate of +3.0% (1998: +2.3%).

The most important relative growth was attained by the gross creation of fixed capital. After a moderate move in 1998 (+1.5% only), its growth rate reached +9% in 1999.

Exports grew by 5.2%, which constitutes a slowdown.

The service sector contributes 90% to the increase of gross added value in 1999. Leading branches of the Luxembourg economy were the financial sector and the sector comprising real estate, rental and business services. All sectors, apart from trade, progressed at a rate of above 5% in terms of volume.

Non-commercial services also experienced a considerable increase. Their contribution amounts to 0.7 percentage points of growth. The most important upturn in volume was registered for health and social services.

Inflation, as measured by the annual variations of the harmonised index of consumer prices (HICP), stood at 1% in 1999 and at 2.37% for December 1999.

As of January 2000, the national statistical institute STATEC also established a national consumer price index, which contrary to the HICP, does not take into account consumption of non-residents on the Luxembourg territory.

The industrial production price index (PPI) weakened throughout 1999 and finally declined by 3.84% on average over the past year.

Whereas labour costs per month and per capita across the entire economy remained moderate throughout 1998, progressing by a mere 1.75%, they climbed in 1999. During the first 8 months of 1999, they rose by 2.09% and reached 4.2% on a year-on-year basis in August.

Salary indexation was without a doubt the most striking element for the year 1999 in terms of the evolution of costs. Salaries, pensions, etc. were raised by 2.5% with effect of 1 August 1999.

Throughout the year under review job creation displayed an annual growth rate of 5% thereby attaining the strongest expansion of the 1990s. At the end of 1999 total employment stood at 252'000 persons. Out of 100 new jobs created in Luxembourg, 66 were taken up by cross-border commuters. Perspectives for the year 2000 are positive.

The unemployment rate remains the lowest figure registered by all EU Member States. It continued to fall in 1999 and was 2.9% on average for the year.

As a result of a higher growth in imports than in exports, the trade balance deteriorated strongly during the course of 1999. Imports of transport material reached EUR 1.9 billion, i.e. a growth rate of 48.1%. The rise in energy costs contributed another EUR 50 million to the record deficit of the trade balance. 85% of exports went to EU Member States, of which a majority (58% of total exports) took place with the three border countries.

As was the case for the previous 4 years, the current accounts – at EUR 1.40 billion – exhibits a large surplus for the first 9 months in 1999. This situation is largely due to the favorable development of the service sector which has grown by more than 10% annually since 1996. Compared to the first 9 months of 1998, the service balance increased by 9.1% throughout the same period in 1999. Within services, financial services alone contributed 73% of the total surplus and 47% of total service exports.

Insurance services declined slightly during the year under review and represent around EUR 100 million.

Public finances

Despite certain fiscal reforms, the revenue structure of the central government remained fairly unchanged during the last 5 years. General income tax constitutes around 47% of ordinary revenues, by far the most important income source of the central government revenues.

Despite income tax alone paid by the banking sector accounts for around 18.4% of total ordinary government revenues.

With expenditure on consumption continuing to decline as part of total budgetary expenditures and investments staying at a level of close to 10%, it is primarily the transfers inside the public sector that gain in importance.

The current situation of the Luxembourg public finances owes much to the healthy state of the Luxembourg economy.

2.   The Luxembourg Financial Sector

Financial institutions

The financial institutions sector experienced a positive development in 1999. Made up of 210 credit institutions and 439 mutual funds as at 31 December 1999, this sector grew by 20 units during the year under review.

During 1999, the total balance of Luxembourg financial institutions (not including the Banque centrale) also substantially rose to reach EUR 648,9 billion at 31 December 1999, i.e. an increase of 12.3% compared to 31 December 1998.

Credit Institutions

With 5 bank mergers in Luxembourg, the process of concentration within the banking sector continued during the year 1999.

On 31 December 1999, the number of credit institutions located in Luxembourg was 210; of these 142 credit institutions are subject to Luxembourg law and 68 are subject to foreign law with a branch in Luxembourg.

Balance sheet development

On 31 December 1999 total assets of the banks established in Luxembourg amounted to EUR 598.5 billion, against EUR 540.9 billion on 31 December 1998, representing a rise of 10.6%.

Nevertheless this high growth rate has to be seen in light of a strong balance sheet reduction during the month of December 1998. The level of the balance reached at the end of November 1998 fell strongly in December 1998 and remained at an inferior level until the end of August 1999.

The balance sheet structure of the Luxembourg credit institutions manifested a certain stability during the last years. Faced with the decline of interbank investments and the rise of security portfolios as well as bill of exchange on the asset side, a decline of client deposits accompanied by a rise in interbank lending appeared on the liability side. Client debts, expanding by 19.4% since 31 December 1998, amounted to around EUR 117.2 billion on 31 December 1999 and represent 19.6% of the total balance sheet.

The setting up of prime quality security portfolios and bills of exchange was facilitated by the introduction of the euro, used as issue currency for more than 42% of bonds admitted for official quotation at the Luxembourg Stock Exchange. Thus, as was the case for the last three years, the share of security portfolios and bills of exchange in the structure of the balance sheets has become more important at the expense of interbank investments. The portfolios have in fact grown by EUR 23.7 billion, which represents an increase of 18.4%, raising their relative weight in the balance sheet to 25.5% from 23.8% in December 1998.

Interbank refinancing, gaining a gross EUR 39.1 billion, i.e. 15.2% from 31 December 1998, saw its relative importance in the balance sheet of the Luxembourg banks grow by 1.9%.

Client deposits, rising by EUR 2.4 billion between 31 December 1998 and 31 December 1999 to reach EUR 193.8 billion, see their relative share of the balance sheet fall to 32.4% versus 35.4% the year before. In this context it should be noted that net capital investment in Luxembourg mutual funds was EUR 140.1 billion during 1999, which certainly had a major impact on the retrieval of funds deposited with banks.

The use of different financial derivative instruments

The derivatives market in the Luxembourg financial centre (after having taken a breather in 1998) consolidated in 1999. Interest rate swaps remain by far the most important instrument with a total notional amount of EUR 386.0 billion, representing a growth rate of 16.8% as compared to the volume of EUR 330.4 billion on 31 December 1998.

The activity of Luxembourg banks in exchange-traded derivatives, although growing by 43.9% since 31 December 1998, remains relatively weak with a total of EUR 29.6 billion on 31 December 1999.

Profit and Loss accounts

Following the years 1995 and 1996, a stabilisation of results achieved by the Luxembourg credit institutions seems to emerge for the years 1998 and 1999 as well.

Whereas net interest income grew by 5.7% since 31 December 1998, non-interest income fell by 15.8%. Among this income category, one should especially note the income from fees and commissions which continues to constitute the principal source of non-interest income with a growth rate slightly below that observed during 1998.

Staff costs show a growth of 11% year-on-year. The increase in operating costs is mostly due to information technology investments.

The satisfactory development of the result after provisions in 1999 is also reflected in taxes, which grew by 22.2% relative to 1998.

The net result fell by 15.7% from 1998.

Financial sector workforce

During 1999 employment in the financial sector grew by 1559 units, representing a growth rate of 7% relative to 31 December 1998. On 31 December 1999, employment in the financial sector amounted to 23'985 units, which represents an increase rate of 367 units (+1.6%) as compared to 30 September 1999. Employment in the financial sector currently corresponds to 9.5% of total domestic employment in Luxembourg versus 9.3% on 31 December 1998.

The domestic financial market

Stock market activity in 1999

The Luxembourg stock market encountered some important events in 1999.

Two new issues – the Banque Degroof Luxembourg and Utopia S.A. – were listed, the BIL shares were withdrawn after the public exchange offer by the Dexia group for the BIL shares and important mergers and alliances in the field of clearing systems were announced, specifically the creation of "Clearstream International". The number of securities quoted on the Luxembourg Stock exchange grew by 10.8% in 1999 versus 6.3% in 1998. This higher growth rate is mostly due to the bond area, which grew by 14.3% in 1999 compared to 9.8% the year before.

The Luxembourg stock index LuxX finished the year 1999 at a level of 1397.25 points, achieving a rise of 40% over the year. Thus, the Luxembourg stock exchange was among the best performers for the year 1999, taking 3 rd place within the euro area (behind the stock exchanges of Helsinki and Paris).

3.   BCL operations

Monetary policy

The ECB quantified, as early as 13 October 1998, the main objective of article 105 of the Treaty establishing the European Community, which is the maintenance of price stability. Accordingly price stability is defined as the annual progression of the harmonised index of consumer prices below or equal to 2%. This definition applies to the euro zone as a whole, thus excluding any national or regional imbalances.

The strategy of the monetary policy, elaborated with a medium-term perspective, rests on two pillars. Although a predominant role is given to money, specifically M3, a large range of economic and financial indicators is considered, too.

In December 1998, the Governing Council decided to define a reference value for M3. On the basis of key indicators, this value was fixed at an annual 4.5%. In December 1999, the Governing Council decided to retain this value of 4.5% for another period of twelve months.

During the first month of the year 2000, the ECB decided to proceed with the first fine-tuning operation in order to absorb, via a liquidity-absorbing reverse transaction, excess liquidity from the end of the year 1999. The excess of liquidity in the market was due to the ECB policy preempting any bottleneck due to the passage to the year 2000 as well as to autonomous factors at the beginning of the year.

Strategy implementation

During the year 1999, the ECB modified the main refinancing operation rate twice.

At the Governing Council of 8 April 1999, the main refinancing rate was cut by 50 basis points, taking it to 2.5%. At the same time, the rates of the marginal lending and deposit facilities were adjusted downward by 1% and 0.5% respectively, fixing them at 3.5% and 1.5% respectively. On 4 November, the main refinancing rate was raised by 50 basis points, thus reverting to its initial level at the beginning of the year, i.e. 3%. As compared to April, the rates applicable to the marginal lending and deposit facilities were raised by 0.5% from their existing levels to 4% and 2% respectively.

During the first three months of the year 2000, the ECB proceeded to tighten monetary policy twice. On 3 February the Governing Council decided to raise the main refinancing rate by 25 basis points to 3.25%. Furthermore, the rates of the standing facilities were adjusted. Thus, the rate of the marginal lending facility went from 4% to 4.25% and the remuneration of the deposit facility from 2% to 2.25%. The ECB reiterated the modification of the main refinancing rate to 3.5% on 16 March. At the same time, the rates on the standing facilities were raised by another 25 basis points.

Open market operations

In principle, all credit institutions are eligible to become counterparts of the Eurosystem. In Luxembourg, 39 out of 210 eligible counterparts participated more or less regularly in the main (MRO) and longer-term (LTRO) refinancing operations during 1999.

In 1999 the ECB conducted a total of 52 MROs.

The average allotment ratio was in the region of 6.5%. The smallest amount of bids, EUR 5.1 billion, was recorded in the operation of 7 April, as the market expected a lowering of the interest rate within the same maintenance period. All bids were filled by the ECB on that occasion, implying an allotment ratio of 100%. The highest bids, EUR 101.8 billion, were observed on 3 November when higher rates were expected and the allotment ratio of 2.82% was the lowest experienced until then.

The LTROs are liquidity providing, reverse transactions, with a monthly frequency and a maturity of three months. They are usually conducted in the form of variable rate tenders with pre-announced allotment volumes. This was indeed the case in all 14 LTROs in 1999. The first three LTROs of the year were conducted on 14 January with two of them having a shorter maturity.

The total average amount of minimum reserves held by credit institutions in Luxembourg was relatively stable, close to 6 billion during the year.

Reserve holdings are remunerated at the rate of the ESCB's main refinancing operations.

After a short adaptation period, Luxembourg's credit institutions managed to adjust their deposits to the minimum reserves required and succeeded in eliminating excess reserves.

Foreign reserve management at the BCL

Following the rules applicable within the Eurosystem, the BCL transferred foreign reserve assets to the ECB for an equivalent amount of EUR 74.6 million, reflecting its share of the subscribed capital of the ECB.

The subscription key established the BCL's share at 0.1492%. The ECB's foreign reserves are managed in a decentralised manner by the national central banks, a responsibility assumed by BCL as of September 1999.

One objective of the ECB's foreign reserve management is to ensure that, whenever needed, the ECB has a sufficient amount of liquid resources available for its foreign exchange policy operations, which implies that security and liquidity are basic requirements for the ECB's foreign reserve management.

4.   Developments in the statistical field

Banking and monetary statistics

The data collection necessary for the establishment of a consolidated balance sheet of the monetary financial institutions (MFI's)as well as statistics on the basis and requirements of reserves of the credit institutions were carried out without a major problem and within the production delays required by the ECB.

The balance of payments

The intergovernmental agreement of 23 November 1998 on a common interpretation of the protocols governing the monetary association between Belgium and Luxembourg as of the passage to phase III of EMU, enforces that the Luxembourg organisations competent in the balance of payments take over from the "Institut belgo-luxembourgeois du change"(IBLC) in producing a complete balance of payments based on their own system of data collection as of 1 January 2002. The necessary data have to be delivered to these organisations in order to be capable to respond to the requirement of the ECB, Eurostat and the International Monetary Fund.

In accordance with a bill under discussion at the Chambre des Députés, it would be the BCL's responsibility to put into place computer systems and to manage the data collection from the credit institutions. Furthermore, the BCL would be in charge of monitoring and putting together data relating to financial operations accounts and investment revenues. In addition, the BCL will establish the global external position of Luxembourg. During the transition period, the office of the IBLC in Luxembourg is domiciled at the headquarters of the BCL. The STATEC will be responsible for the tasks associated with the current transactions account and direct investment inquiries.

5.   Payment and security settlement systems

Payments on the national level

In 1999, LIPS-Gross, the Luxembourg system of gross interbank payments, managed a total of 53'107 payments for a global value of EUR 723.6 billion among the 31 members of RTGS-L. The average value per transfer was thus EUR 13.6 million.

On a monthly average, 4'425 payments for a total value of EUR 60.3 billion passed via LIPS-Gross. On a daily basis, the average was of 205 national payments for a total of EUR 2.8 billion.

Cross-border payments

Cross-border payments constituted by far the most important part of all payments treated in LIPS-Gross. The cross-border payments represented 86.6% of the total volume versus 14.4% for the national payments.

Development of interbank compensation LIPS-Net

In 1999, the electronic compensation reached a new level with a growth rate of 11.1% relative to the year 1998. This growth rate is mostly due to institutions joining the compensation during the second half of the year 1998. A total of 11.81 million operations were compensated during the year under review, i.e. close to 1 million operations per month. The highest volume was reached in December (1.17 million), the lowest in January (0.88 million).

Security settlement system

The central banks grant loans against an "appropriate guarantee"; in order to ensure the efficiency of the collateral received in forms of securities, the Eurosystem makes sure that the security settlement system responds to high technical safety and operational efficiency standards.

Next to eligible domestic securities and settled via the national clearer, Clearstream Banking in Luxembourg, the counterparts of the Eurosystem may obtain credit from their central bank by using assets located in another member state.

In Luxembourg, domestic securities are used only marginally, 88% of eligible collateral from the counterparts are deposited via the Correspondent Central Banking Model (CCBM) (63%) and links between security settlement systems (25%).

6.   Banknotes and money in circulation


1999 was a turning point as far as the production of banknotes for BCL's need was concerned. After ending the production of Luxembourg banknotes a few years ago (the last issuance of a new Luxembourg banknote, the 5000 note, dates back to the year 1993, a re-issuance having taken place in 1996), the BCL has commissioned two specialist printers for euro notes to be put into circulation as of 1 January 2002: "Joh. Enschedé en Zonen" in the Netherlands and "Bundesdruckerei" in Germany. The commissioned quantities by the BCL amount to 46 million notes divided between the 7 different denominations (EUR 5, 10, 20, 50, 100, 200, 500), i.e. 0.35% of the total production of 13 billion notes within the euro zone.

A first measure already in place concerns the circulation of the euro zone notes in Luxembourg. According to article 52 of the statutes of the ESCB and of the ECB, the NCBs exchange at par the notes of the other states of the Eurosystem against their national currency within the established dispositions.

Another change results from the effect of the convention relative to the financial relations between the Luxembourg state and the BCL, signed on 27 May 1999, and of which one chapter specifically is devoted to the coins issued by the State.

Luxembourg money in circulation

In 1999 the global volume of Luxembourg legal tender in circulation went from LUF 5.428 billion on 1 January 1999 to 5.170 billion on 31 December 1999, i.e. a decline of 4.75%. The average volume of Luxembourg legal tender in circulation was LUF 5.116 billion during 1999, against 5.448 billion in 1998, i.e. a drop of 6.08%. These numbers do not take into account the notes issued by the Banque Internationale à Luxembourg (BIL). Indeed after the rescinding of legal tender for the notes issued by the BIL with effect of 1 January 1999, the circulation of these notes experienced a strong fall of 22.55% during the year under review, leading to a current quantity of less than LUF 25 million.

The issue of coins surfaces also within the activity of the Caisse centrale of the BCL. During the year under review, the withdrawal of Belgian and Luxembourg coins which circulate in a mixed fashion on the Belgo-Luxembourg territory, amount to 31 million coins, i.e. a total weight of around 147 tons. In addition, the deposits of coins amount to 2.930 million coins, representing a total weight of some 20 tons.

7.   Financial stability and supervision

According to the Treaty of the European Union, the ESCB shall contribute to the smooth conduct of the policies pursued by the competent authorities relating to the prudential supervision of credit institutions and contribute to the stability of the financial system as a whole. Furthermore the Treaty entrusts the ECB with consultative function in legal acts, community and national, as in its field of competence.

During the year the concrete transfer of the supervision function for the financial sector was arranged from the BCL to the CSSF, created on 1 January 1999. Detailed arrangements were concluded, in particular in the IT and statistic fields.

The BCL initiated the installation of a system of macro-prudential supervision. This supervision targets especially the risks tied to the developments of the financial place in its entirety, the behavior of its institutions and the development of the markets from a point of view of stability and efficiency.

Whereas the prudential supervision of credit institutions falls in certain countries to the central banks and in others to a separate authority, the function of system supervision goes back to the central banks themselves. Promoting the efficiency of payment and security settlement systems, protecting the transmission channels of the monetary policy operations, and consequently maintaining the systemic stability of the financial sector as a whole, are the principal objectives of the supervision function of the Eurosystem.

There are the requirements recalled by the ECB in its official opinion to the Luxembourg government on 20 January 2000 with regard to the bill aiming at transposing the European directive on the definitive character of the regulation on payment and security settlement systems.

8.   Annual accounts

See Pages in French version:

114: Balance Sheet as at 31 December 1999

116: Profit and Loss account for the year ending 31 December 1999