1. ECB: European Central Bank John-Paul Kivlin Educational use only

2. Outline What is a Central Bank The ECB – History – Structure – Its purpose Compare and contrast with the FED

3. Central Banks Public institution – Issues currency – Regulates the money supply – Controls interest rates – Often oversees commercial banking system

4. Central Banks (cont.) – Acts as lender of last resort Lend to banking sector during time of crisis – Designed to operate free of political interference

5. History of the ECB

6. History (cont.) ECB officially took over June 1, 1998 Now 17 member states of the EU use the Euro as currency

8. Structure European System of Central Banks (ESCB) – Comprises ECB and national central banks of all EU members (euro or not) Eurosystem – ECB and national central banks that have adopted the euro Euro Area – EU countries that have adopted the euro

9. ECB Structure ECB – Decision making by Governing Council – 6 members of the executive board – Governors of the NCB’s of the 17 euro area countries Governing Council Responsibilities – Adopt guidelines and ensure performance of tasks – Formulate monetary policy for euro area – Meet twice a month

10. ECB Executive Board Non-renewable term of 8 years Removal only by incapacity or serious misconduct Decided by the Court of Justice of the European Communities ECB nor NCB allowed to take instructions from any government of an EU state

11. Purpose of the ECB Manage Europe‘s central currency the Euro Maintain the euro’s purchasing power – Done to ensure price stability

12. ECB’s Main Tasks Implementation of monetary policies Foreign exchange operations Holding and management of official reserves Promotion of smooth payment system

13. Monetary Policy Price stability using Harmonised Index of Consumer Prices (HICP) Inflation rate at or below 2% http://www.ecb.int/ecb/educational/pricestab/html/ index.en.html http://www.ecb.int/ecb/educational/pricestab/html/ index.en.html

14. Monetary Policy (cont.) Decisions made by Governing Council Implemented through: – Open market operations – Standing Facilities – Minimum reserve requirements ECB exclusive right to authorize banknotes – Member states can issue euro coins, amount must be authorized by ECB 1 st

15. Foreign Exchange Operations Foreign exchange interventions Sale of foreign currency income Commercial transactions

16. Reserves Management Foreign reserves portfolio – Ensure ECB has sufficient liquidity to conduct foreign exchange operations with non-EU currencies Own funds portfolio – Provides ECB with income covering operating costs and possible losses

17. ECB and the FED The FED has many primary tasks The main purpose of the ECB is to maintain price stability. Other objectives are secondary

18. ECB and the FED U.S. obtains liquidity through sale of treasury bonds (also uses repo) European system does not have system-wide bonds, no system wide taxation authority Instead, member banks (1,000’s) bid for short- term repo contracts – Contracts: 2 weeks to 3 months

19. ECB and the FED Repo contract or repurchase agreement – Sale of securities with agreement that seller will by back at later date – Repurchase price will be higher than the selling price – This difference or interest sometimes referred to as the repo rate

20. ECB and the FED Why would the ECB chose such a short term for the repo contracts?

21. ECB and the FED Short duration allows the continually adjustment of interest rates When repos come due, banks bid again – An increase of notes at auction increases liquidity in economy – Decrease has opposite effect – Contracts are carried on asset side of ECB – Money is considered the liability of the ECB

22. Auctions Banks have to prove collateral in form of loans to other entities – Public debt of member states – Private banking securities EU has stringent membership requirements – Sovereign debt % of GDP – Done to ensure assets offered by member bank are protected from inflation

23. ECB and the FED Crisis in 2008 revealed some weak sovereign debt – Greece, Portugal, Spain, Ireland This has impaired the borrowing ability Not only in 4 members listed – Some securities issued from 4 members held by other members Hurting liquidity of economy

24. ECB and the FED ECB has temporarily moved bad debt from weak members balance sheets to ECB’s This monetization could threaten inflation – Strong member countries endure monetary expansion to save weak members ECB also has intervened to help market collapse in U.S. in cooperation with FED

25. ECB Today Considering collective European bond issue – Similar to U.S. Treasury Bills Would need collective guarantee of member states solvency Germany has resisted the idea Other analysis shows “Sickness of euro” due to link between sovereign debt and NBS

26. References Eurpean Central Bank. ECB: European Central Bank Home Page. Wikipedia. "Federal Reserve System." Wikipedia, the Free Encyclopedia. http://www.new-ecb- premises.com/home_frame.html