Criteria for Central Bank Assets: Lessons from Pre-ECB Germany

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The Deutsche Bundesbank was formed in July 1957, when the two-tier central bank system set up following World War II was consolidated. (1) That previous system had been established by the Allies in imitation of the Federal Reserve System and consisted of independent regional banks (the Land Central Banks) and a governing body. Under the new system, the Land Central Banks became offices of the Bundesbank. As was true under the previous system, the Bundesbank was made independent of the federal cabinet by law and was particularly proscribed from lending to the public sector except for short terms. Acquisitions of public debt occurred exclusively in the open market. (2)

Before the establishment of the European Central Bank, the operating procedures of the Bundesbank included two lending facilities: the rediscount facility, which provided loans at the discount rate, and Lombard loans, at the Lombard rate, which generally was about 1.5 percentage points above the discount rate. The discount rate was maintained below market rates and discount credit was limited to a "rediscount quota." The discount rate acted as an approximate floor on market interest rates, because banks could reduce their use of the discount facility when market interest rates fell below the discount rate; however, the extent of substitution was limited by the amount of rediscounted bills coming due. The Lombard rate, which was generally above market rates, acted as a ceiling on market rates.

Beginning in 1979-81, and with a marked increase in 1985, the Bundesbank also engaged in repurchase agreements to adjust the level of bank reserves. The frequency with which these repurchase agreements were offered rose over the years, while the maturity of the agreements fell; by the late 1990s, they were offered once a week with a two-week maturity. (3) The Bundesbank engaged in both variable-rate and fixed-rate repos. The variable-rate tender allowed for a …