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2014 Annual Accounts Summary

Core Content

The European Central Bank (ECB) published its Annual Accounts for the year ending 31 December 2014. This report is an integral part of the ECB's annual financial reporting and provides contextual information about the ECB's operations, governance, and financial outcomes. It includes financial statements, accounting policies, notes, and reports from the Audit Committee and external auditors.

Main Objectives and Tasks

• Primary Objective: Maintain price stability in the Eurozone.
• Key Tasks:
  • Implementation of the monetary policy of the European Union.
  • Conduct of foreign exchange operations.
  • Management of official foreign reserves of the euro area countries.
  • Promotion of the smooth operation of payment systems.
  • Banking supervision, effective from 4 November 2014, with the aim of protecting the safety and soundness of credit institutions and ensuring the stability of the financial system.

Key Resources and Processes

3.1 Governance of the ECB

• Decision-Making Bodies:
  • Executive Board
  • Governing Council
  • General Council
• Corporate Governance:
  • Audit Committee:
    • Composed of Erkki Liikanen (Chair), Vítor Constâncio, Christian Noyer, Hans Tietmeyer, and Jean-Claude Trichet.
    • Reviews the Annual Accounts and ensures they provide a true and fair view.
  • External Control Layers:
    • External auditors (e.g., Ernst & Young until 2017).
    • European Court of Auditors.
  • Internal Control Layers:
    • Three-tier system: Management controls, risk and compliance oversight functions, and independent audit assurance.
    • Budget, Controlling and Organisation Division (BCO):
      • Responsible for strategic planning, operational budget, and resource controlling.
      • Provides cost-benefit analysis and investment analysis.
      • Supports the Executive Board and Governing Council in budget oversight.
    • Operational Risk Committee:
      • Defines and maintains the Operational Risk Management (ORM) framework.
      • Supports the Executive Board in operational risk oversight.
    • Organisational Development Committee:
      • Provides a second layer of control in operational risk management at the Eurosystem level.
  • Independent Assurance:
    • Internal Audit:
      • Conducted under the Executive Board's responsibility.
      • Follows the Institute of Internal Auditors standards.
    • Internal Auditors Committee:
      • Composed of experts from the ECB, NCBs, and national competent authorities.
      • Provides independent assurance and consulting services to improve the Eurosystem/ESCB and SSM.
  • Anti-Fraud Measures:
    • OLAF (European Anti-Fraud Office) investigates suspected fraud within ECB.
    • Legal framework for investigations was endorsed by the Governing Council in 2004.
  • Anti-Money Laundering/Counter-Terrorist Financing (AML/CTF) Programme:
    • Established in 2007.
    • A compliance function identifies, analyses, and addresses AML/CTF risks.
    • Internal reporting system ensures systematic collection and communication of relevant information.

3.2 Employees

• The launch of the Single Supervisory Mechanism (SSM) on 4 November 2014 significantly increased staffing.
• Average number of staff (full-time equivalents) increased from 1,683 in 2013 to 2,155 in 2014.
• Total staff at the end of 2014: 2,577.
• The two-year career transition support programme concluded successfully, with 45 staff members pursuing careers outside the ECB.

3.3 Portfolio Management

• The ECB holds two types of investment portfolios:
  • Foreign reserves investment portfolio (US dollars and Japanese yen).
  • Own funds investment portfolio (euro).
• Additionally, pension plan funds are invested in an externally managed portfolio.
• Securities for monetary policy:
  • Acquired under CBPPs, SMP, and ABSPP.
  • Valued at amortised cost and subject to impairment testing.

3.4 Production of Financial Accounts

• The Annual Accounts are prepared by the Executive Board in accordance with the Governing Council's accounting policies.
• The Financial Reporting and Policy Division is responsible for producing the Annual Accounts in cooperation with other business areas.
• The Assets and Liabilities Committee reviews and endorses the Balance Sheet and Profit and Loss Account.
• Internal audits are conducted and reported to the Executive Board.
• External auditors are recommended by the Governing Council and approved by the EU Council.
• The Annual Accounts are approved by the Governing Council in February and published immediately.
• From 2015, the Annual Accounts will be published together with the management report and the consolidated balance sheet of the Eurosystem.

Risk Management

4.1 Financial Risks

• The ECB is exposed to credit, market, and liquidity risks.
• Credit Risk:
  • Managed through asset allocation policies, eligibility criteria, due diligence, exposure limits, and collateralisation.
  • Foreign reserves and gold are subject to credit risk, but it is minimal due to high credit quality.
  • Euro-denominated investment portfolios are subject to moderate credit risk, with return considerations playing a larger role than risk mitigation.
• Market Risk:
  • Includes currency, commodity (gold price), and interest rate risk.
  • Currency and commodity risks dominate due to the size of exposures and volatility.
  • Gold and US dollar revaluation accounts (€12.1 billion and €6.2 billion respectively) serve as financial buffers.
• Liquidity Risk:
  • Mainly stems from the need to liquidate foreign reserves quickly for foreign exchange interventions.
  • Managed through asset allocation and limits ensuring quick liquidity with negligible price impact.
  • Liquidity risk profile remained stable in 2014.

4.2 Operational Risk

• Defined as the risk of negative financial, business, or reputational impact due to:
  • People.
  • Inadequate implementation or failure of internal processes.
  • System failures.
  • External events (e.g., natural disasters, attacks).
• ORM/BCM function:
  • Maintains ORM and BCM frameworks.
  • Provides methodological support and annual/ad-hoc reports to the Operational Risk Committee and Executive Board.
  • Coordinates BCM programme and supports the Crisis Management Team.

Financial Resources

5.1 Capital

• Paid-up capital on 31 December 2014: €7,697 million.
• Increased due to Latvia's adoption of the euro (€29.4 million) and adjustment of NCBs' weightings.
• Detailed information in note 16.1, "Capital".

5.2 Risk Provision

• A provision for financial risks (foreign exchange, interest rate, credit, and gold price) is maintained.
• As at 31 December 2014, the risk provision was €7,575 million, reflecting the capital paid up by NCBs.
• Latvijas Banka contributed €30.5 million effective from 1 January 2014.
• The provision is reviewed annually, based on VaR calculations, risk assessments, and projected results.

5.3 Revaluation Accounts

• Unrealised gains on gold, foreign currencies, and securities (excluding amortised cost) are transferred to revaluation accounts.
• These accounts act as a financial buffer to absorb future unfavourable movements.
• Total revaluation accounts as at 31 December 2014: €20.2 billion.
• Further details in note 15, "Revaluation accounts".

Impact of Key Activities on Financial Statements

Conclusion

The ECB's Annual Accounts for 2014 provide a comprehensive overview of its financial position, risk management, and operational activities. The report highlights the ECB's commitment to transparency, governance, and financial stability, while detailing the impact of its key functions on its financial statements. The ECB continues to manage financial and operational risks effectively through a multi-layered control framework and independent audits.