Criteria for Central Bank Assets: Lessons from Pre-ECB France
Nelson, William R., New England Economic Review
The Banque de France was founded in 1800 to discount bills and issue currency. (1) Initially, it was a private institution run by its stockholders. The Banque was nationalized in 1936 and its governing council was staffed by officials with a mandate to represent various interests in society The Banque's autonomy was largely restored in 1973, and the Banque became officially independent in 1994. Whereas the Banque had originally lent appreciable sums to the Treasury, such lending was scheduled to be eliminated beginning in 1993 as part of the move toward monetary union. (2) At that time the monetary policy operations of the Banque were revised substantially. The Banque also operates as a commercial bank, including taking deposits and holding an investment portfolio, although such activities are secondary to its responsibilities as the central bank. While secondary these activities influence the composition of the Banque de France's assets, shown below.
The Banque's final monetary policy objective was price stability with growth of a broad monetary aggregate and a stable exchange rate as intermediate objectives. The Banque achieved its near-term interest rate objectives through two types of repurchase agreement arrangements: the seven-day repo and the five- to ten-day repo. The difference between the demand for reserves and the Banque de France's holdings of Treasury bills was largely made up by twice-weekly seven-day repos, at a rate that was usually the market floor. (3) Bids were all serviced at the official rate, but that rate was not always announced, so the tenders could be equal to or greater than the official rate. The repos were conducted with principal market operators that tended to be larger and more sophisticated credit institutions. (4) The principal market operators transmitted bids for all other participating credit institutions. The five- to ten-day repos were similar, but they were offered under a standing facility at an elevated rate that was typically 75 to 150 basis points above the intervention rate and generally acted as the market ceiling. Because of the elevated rate, only a relatively small volume of five- to ten-day repos were usually outstanding. Following reforms to the French monetary and financial system in the mid-1980s, the Banque de France also engaged in fine-tuning operations in the form of the sale or purchase of Treasury bills, in 24- to 48-hour repos or withdrawals of liquidity. (5)
Fine-tuning operations were conducted virtually every day after 1992, for several reasons. First, in that year the Banque significantly lowered reserve requirements, leaving required reserves closer to settlement requirements and therefore reducing the ability of banks to substitute reserves across days within the settlement period. (6) Second, capital mobility increased, necessitating more frequent intervention to keep the intervention rate near its target. And third, the deregulation and modernization of money markets facilitated more frequent intervention.
Securities Owned Outright (7)
The Banque de France had the right to buy and sell Treasury bills and all negotiable debt instruments (certificates of deposit, bills issued by finance companies, commercial paper, medium-term notes). However, the market for such instruments needed to be of sufficient depth, and, as of 1994, the Banque did not operate in certificates of deposit or commercial paper; at that time it only owned Treasury bills. Rediscounting ceased in 1971 except for some preferential financing procedures (such as for medium-term export credits. …