2. 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.

3. 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?
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©2010 McGraw-Hill Ryerson Ltd.

4. 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
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5. 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
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6. 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
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7. The Bank of Canada: Key Objectives
Bank’s focus is on three key areas:
Currency
Monetary policy
Financial system stability
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8. Assessing the Bank of Canada’s Structure
Independence from political influence
Decision-making by committee
Accountability and transparency
Clear statement of intentions
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9. 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
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©2010 McGraw-Hill Ryerson Ltd.

10. 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
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11. The Federal Reserve System: Structure
Federal Reserve Banks
Board of Governors
Federal Open Market Committee
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12. 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
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13. The Federal Reserve System: The Twelve Districts
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14. 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
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15. Federal Reserve System: Structure and Policy Organization
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16. New York Fed Only: Auction Treasury Securities
Foreign Government Services
Monetary Policy Operations
Fedwire: Large Value Interbank
Funds Transfer System
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17. 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
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18. The Federal Reserve System: The Board of Governors
Structure
Seven governors including a chairman and vice-chairman
Serve 14-year terms
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19. ©2010 McGraw-Hill Ryerson Ltd.
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20. 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 countries in the European Union
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21. The European System of Central Banks
On Jan 1, 2008 Cyprus and Malta joined the Eurosystem. Has any other country joined since?
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22. European Central Bank: Key Players
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23. 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
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24. 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
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25. 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!
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26. 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.
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27. Assessing the ECB’s Structure
Independence from political influence
Decision making by committee
Accountability and transparency
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©2010 McGraw-Hill Ryerson Ltd.

28. 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
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©2010 McGraw-Hill Ryerson Ltd.

29. 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.