European Central Bank

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European Central Bank
ECB.gif
Founded 1998
Headquarters Frankfurt, Germany
Key People Mario Draghi, President
Employees approx. 1,400
Website ECB Homepage

The European Central Bank (ECB) conducts monetary policy for the euro, the common currency for 16 of the member states of the European Union (EU). The ECB, second only to the U.S. Federal Reserve in the ranks of global central banks, works with the euro-area's national central banks in the Eurosystem partnership that enacts ECB policy.

The ECB's primary function is to maintain price stability and safeguard the value of the euro. The ECB has a monopoly on the issue of bank notes in the euro area. It influences the amount of money in the market by controlling money available to central and commercial banks in EU member states. The ECB makes weekly announcements on the amount of money it wishes to supply and the minimum acceptable interest rate. Eligible banks that have given collateral place their bids for the ECB funds through an auction, and once they have the funds, they use them to advance loans to individuals and businesses.[1]

The ECB is responsible for banking supervision in all the EU member states.

History

The ECB was established by statute in 1998 following the Treaty of Amsterdam that amended the Treaty on the European Union. It succeeded the European Monetary Institute.[2] The European System of Central Banks (ESCB), which combines all national central banks in the EU, was established at the same time and began conducting monetary policy on behalf of the newly-introduced single currency, the euro, in January 1999.[3] The euro area first consisted of 11 countries, joined by Greece in 2001, Slovenia in 2007, and Malta and Cyprus in 2008.

The ECB and the EC celebrated the launch of the Single Euro Payments Area (SEPA) by euro-area financial institutions that would make all euro-area payments across borders as seamless as domestic payments.[4] The pair believed SEPA will accelerate the completion of a single euro-area market and help make euro-area businesses more competitive. A study by the ECB found SEPA would significantly reduce euro-area bank costs but would also increase competition in their market.

Governance

The ECB has full independence from the European Union and its executive arm, the European Commission, and its member states. However, the bank must by statute publish a consolidated weekly financial statement, monthly bulletins and an annual report - the latter of which is addressed to the European Parliament, the EU Council, the European Commission and the European Council.[5] The ECB is also subject to external audit from the European Court of Auditors, the EU's official external auditor.[6]

Challenges

In Feb. 2013, French President Francois Hollande called for government leaders to steer the euro’s exchange rate, becoming the most powerful European official to warn that the rising euro may lead to further recession. In doing so he broke with Germany’s hands-off policy on exchange rates and set up a potential clash with the European Central Bank by saying the euro zone has to use the currency as an export-promoting tool, as do the U.S. and China. [7] The rising of the euro against the dollar and the Japanese yen has been making it hard for European exporters to compete internationally in the middle of the debt crisis.

Under former President Nicolas Sarkozy, the French wanted the ECB to allow member states to express opinions on ECB monetary policy and publish minutes of secret meetings of the ECB's governing council, its equivalent of the Federal Open Market Committee (FOMC) in the U.S. France also wanted to establish a form of economic government for the EU's euro area, challenging the ECB's current over-arching role.

In May of 2010, the ECB's monetary council withheld its strongest weapon for stopping the Greek debt crisis from spreading to weaker eurozone financial markets. Called the ECB's "nuclear option" in the markets, the procedure would involve the purchase of government bonds in the secondary market.[8]

Key People

Coordinated Action With Federal Reserve

The Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, the Federal Reserve, and the Swiss National Bank in November of 2011 announced coordinated actions to enhance their capacity to provide liquidity support to the global financial system. The purpose of these actions was to ease strains in financial markets and thereby mitigate the effects of such strains on the supply of credit to households and businesses and so help foster economic activity.

The central banks agreed to lower the pricing on the existing temporary U.S. dollar liquidity swap arrangements by 50 basis points so that the new rate would be the U.S. dollar overnight index swap (OIS) rate plus 50 basis points. This pricing would be applied to all operations conducted from December 5, 2011. The authorization of these swap arrangements was extended to Feb. 1, 2013. In addition, the Bank of England, the Bank of Japan, the European Central Bank, and the Swiss National Bank would continue to offer three-month tenders until further notice.

As a contingency measure, the central banks agreed to establish temporary bilateral liquidity swap arrangements so that liquidity could be provided in each jurisdiction in any of their currencies should market conditions warrant the situation.[9]

Other Actions

In July of 2012, the ECB cut its main interest rate by a 1/4 point to a record low 0.75 percent and reduced the rate it pays on overnight deposits to zero.[10]

On January 22, 2015 ECB President Mario Draghi announced the launch of an open-ended, expanded monthly 60 billion euro ($70 billion) private and public bond-buying program, joining the U.S. Federal Reserve, Bank of England and Bank of Japan in launching quantitative easing (QE). The program will start in March 2015 and last at least until September 2016, totaling about 1.1 trillion euros.[11] The bank made the move in the hope of boosting the region's seriously low inflation rate, which was at an annual minus 0.2 percent in December. [12]

References

  1. European Central Bank. Corporate Finance Institute.
  2. European Central Bank. Corporate Finance Institute.
  3. ECB, ESCB and the Eurosystem. European Central Bank.
  4. Joint Statement By The European Commission And The European Central Bank Welcoming The Formal Launch Of SEPA Payment Instruments By EU Banks. European Union.
  5. Accountability. European Central Bank.
  6. The European Court of Auditors: the European Union's external auditor. European Court of Auditors.
  7. Hollande Urges Euro Rate Target, Sparring With Germany, ECB. Bloomberg.
  8. ECB Withholds 'Nuclear Option'. WSJ.
  9. Press Release. FRB.
  10. Low on policy options, ECB may face stark choice. Reuters.
  11. European Central Bank announces huge stimulus program. USA Today.
  12. Open-ended European QE starts 'with a bang'. CNBC.