What will happen to the reserves backing the Estonian kroon?

In order for the Estonian kroon to function successfully and be reliable, our currency is backed by foreign exchange reserves (reserves backing the kroon). What is going to happen to these reserves when we adopt the euro?

As a member of the Eurosystem, Eesti Pank is still obliged to ensure the functioning of the monetary system (in this case, the euro) and the banking system. The same principle applies also in all other Eurosystem member states.

The euro must be fully backed by the assets of the national central bank. Thus in this respect, the only aspect that will change due to the transition to the euro is the name of the currency. Eesti Pank will be responsible for ensuring the circulation of the euro in the same way it is currently in charge of the circulation of the kroon.

With the authorisation of the ECB, Eesti Pank will be the issuer of the euro. Consequently, joining the euro area means the assets of Eesti Pank will still be needed in order to ensure the the circulation of currency and the functioning of the banking system.

It is important to stress that the changeover to the euro will retain the need to back the Estonian circulation currency by the assets of Eesti Pank, not of the ECB. The same applies to the funds and reserve requirements of commercial banks held with Eesti Pank, although the reserve ratio will be reduced - the funds deposited with Eesti Pank must be covered by the assets of Eesti Pank. However, as the reserve requirement will be lowered, Eesti Pank will return to commercial banks the part of the funds that they no longer have to deposit there.