Chapter 16 Money, Banking, and Financial Markets: The Structure of Central Banks: The Bank of Canada, the Federal Reserve, and the European Central Bank Tim Berry, Humber College ©2010 McGraw-Hill Ryerson Ltd.

Structure of Central Banks: The Big Questions How is the Bank of Canada structured and what are its key objectives? How is the Federal Reserve organized to meet its objectives? How is the European Central Bank organized? What are the differences and similarities between these three central banks? 16-2 ©2010 McGraw-Hill Ryerson Ltd.

The Bank of Canada: History Prior to the creation of the B.O.C., bank notes were issued by chartered banks and the Dept. of Finance Under the gold standard there was no real power in setting monetary policy Relatively no bank panics in Canada as compared to the U.S. where Fed. Reserve was created to reduce incidence of panics 16-4 ©2010 McGraw-Hill Ryerson Ltd.

The Bank of Canada: History When a Canadian bank ran into financial trouble another bank took it over Canadian banks also tended to keep larger reserves as a buffer in case needed Canadian banks continue to have a top world reputation for stability The B.O.C. was established during the Great Depression in 1934 , as a precautionary move 16-5 ©2010 McGraw-Hill Ryerson Ltd.

The Bank of Canada: Structure Created under the Bank Act of 1934 CEO of the bank is the governor - appointed by a board of directors and approved by the Minister of Finance and federal cabinet Bank governor is appointed for a seven-year term and acts with independence from the elected government 16-6 ©2010 McGraw-Hill Ryerson Ltd.

The Bank of Canada: Key Objectives Bank’s focus is on three key areas: Currency Monetary policy Financial system stability 16-7 ©2010 McGraw-Hill Ryerson Ltd.

Assessing the Bank of Canada’s Structure Independence from political influence Decision-making by committee Accountability and transparency Clear statement of intentions 16-11 ©2010 McGraw-Hill Ryerson Ltd.

The Federal Reserve System: Origins 1870 to 1907: - US had 21 financial panics Anatomy of 19th century bank panics: Crop Failure  Loan Default Loan default damaged rural bank Rural bank withdrew deposits from city bank Financial difficulties spread 16-12 ©2010 McGraw-Hill Ryerson Ltd.

The Federal Reserve System: Origins Panic of 1907 – must be a better way. Federal Reserve Created in 1914 Europe: Post WWII: unstable inflation and exchange rates Consensus moved toward monetary union 1999: Created European Central Bank 16-13 ©2010 McGraw-Hill Ryerson Ltd.

The Federal Reserve System: Structure Federal Reserve Banks Board of Governors Federal Open Market Committee 16-14 ©2010 McGraw-Hill Ryerson Ltd.

The Federal Reserve System: Federal Reserve Banks 12 Districts – much more complicated organization and system compared to B.O.C. Each is a Private Non-Profit Organizations and Chartered Banks Owned by commercial bank “members” Overseen by both Board of Directors Board of Governors in Washington 16-15 ©2010 McGraw-Hill Ryerson Ltd.

The Federal Reserve System: The Twelve Districts 16-16 ©2010 McGraw-Hill Ryerson Ltd.

The Federal Reserve System: What the Reserve Banks Do Perform same functions as Bank of Canada Government’s Bank Issue currency Maintain the Treasury’s account Manage the Treasury debt Bankers’ Bank Hold reserve deposits Operate the payments system Make discount loans at the discount rate Supervise and regulate financial institutions Collect data 16-17 ©2010 McGraw-Hill Ryerson Ltd.

Federal Reserve System: Structure and Policy Organization 16-18 ©2010 McGraw-Hill Ryerson Ltd.

New York Fed Only: Auction Treasury Securities Foreign Government Services Monetary Policy Operations Fedwire: Large Value Interbank Funds Transfer System 16-19 ©2010 McGraw-Hill Ryerson Ltd.

Federal Reserve Bank of NY: The Gold Vault 250 million ounces Over $85 billion at current market prices 10% of all the gold that has ever been taken out of the ground One bar weights about 400 ounces 16-20 ©2010 McGraw-Hill Ryerson Ltd.

The Federal Reserve System: The Board of Governors Structure Seven governors including a chairman and vice-chairman Serve 14-year terms 16-21 ©2010 McGraw-Hill Ryerson Ltd.

©2010 McGraw-Hill Ryerson Ltd. 16-25 ©2010 McGraw-Hill Ryerson Ltd.

European Central Bank European Monetary Union began January 1, 1999 Euro notes and coins began circulation January 1, 2002 As of January 1, 2008, 15 of 27 countries in the European Union 16-30 ©2010 McGraw-Hill Ryerson Ltd.

The European System of Central Banks On Jan 1, 2008 Cyprus and Malta joined the Eurosystem. Has any other country joined since? 16-31 ©2010 McGraw-Hill Ryerson Ltd.

European Central Bank: Key Players 16-32 ©2010 McGraw-Hill Ryerson Ltd.

European Central Bank: Organizational Structure Executive Board and European Central Bank in Frankfurt similar to the Board of Governors National Central Banks similar to the Federal Reserve Banks Governing Council formulates policy similar to the FOMC 16-33 ©2010 McGraw-Hill Ryerson Ltd.

Comparing ECB to B.O.C. and The Federal Reserve ECB does not regulate financial institutions – similar to B.O.C. ECB’s monetary intervention is accomplished by all the National Central Banks. ECB’s budget is controlled by the National Central Banks 16-34 ©2010 McGraw-Hill Ryerson Ltd.

The ECB’s Objective and Strategy The Treaty establishing the ECB state: “The primary objective of the European System of Central Banks shall be to maintain price stability.” Seems clear! 16-35 ©2010 McGraw-Hill Ryerson Ltd.

The ECB’s Objective and Strategy Price stability is currently defined as inflation of close to two percent but not more than in a euro-area measure called the Harmonized Index of Consumer Prices, over the medium term. 16-36 ©2010 McGraw-Hill Ryerson Ltd.

Assessing the ECB’s Structure Independence from political influence Decision making by committee Accountability and transparency 16-37 ©2010 McGraw-Hill Ryerson Ltd.

In the 1990s the Japanese economy languished The Ministry of Finance (MoF) was blamed Until 1998, the MoF controlled the monetary policy of the Bank of Japan Since 1998 the Bank of Japan has been independent and Has an eight-member policy board Has the primary goal of price stability Communicates regularly to keep the public informed 16-38 ©2010 McGraw-Hill Ryerson Ltd.

Chapter 16 Money, Banking, and Financial Markets: The Structure of Central Banks: The Bank of Canada, the Federal Reserve, and the European Central Bank End of Chapter Tim Berry, Humber College ©2010 McGraw-Hill Ryerson Ltd.