The European Central Bank is the central bank for Europe's single currency, the euro. It was founded on June 1, 1998. The headquarters is located in the German city of Frankfurt-on the Main. Its staff includes representatives of all EU member countries. The bank is entirely independent from other EU agencies.
ECB main tasks:
- Developing and implementation of the monetary policy in the euro area;
- Maintaining official exchange reserves of the euro area countries and their management;
- Euro banknotes issuance;
- Setting of base rates of interest;
- Maintaining of euro area monetary stability i.e. supporting the inflation level not higher than 2%.
Monetary policy instruments
ECB supports the price stability in euro area by means of monetary policy implementation.
Influenced by the financial crises, which broke out in September of 2008, ECB introduced a set of measures of monetary policy, unprecedented by their nature, and were implemented to protect the primary goals of price stability and provide relevant monetary policy.
The main instruments of monetary policy are:
Open market operations represent one of the most important instruments of monetary policy. This definition is applied to the operations that are initialized by the central bank, usually on the currency market.
Open market operations play an important role in managing interest rates, defining the position of ECB within the framework of the performed policy and regulating the liquidity level on the currency market. ECB has the right to buy and sell stock securities and debt obligations as well as precious metals on the market. The open market operations are related to the purpose of interest rate policy and market liquidity regulation. Due to the open market operations, the banking system achieves liquidity injections. From the point of view of setting the goal regarding the frequency and relative operating procedures on the open market can be divided into 4 categories:
a. Major refunding operations
Major refunding operations are the main operations on the open market. Such operations play an important role in management of interest rates for the level of liquidity regulation. Additionally, they represent the main sources of the banking system liquidity.
Major refunding operations are implemented in a decentralized pattern by national central banks. These are the operations of loaning liquidity on a weekly basis. Major refunding operations are implemented by means of standard auctions. Considering specifics of operation mechanisms, the title “standard auctions” is referred to the auctions held according to the preliminary announced schedule, when the duration of the standard auction from the moment of its announcement till the auction summary is 24 hours. All counterparts that satisfy the qualifying requirements can participate in such operations. All credit institutions located on the euro area are the potential counterparts of the Euro system of central banks. By means of major refunding operations, euro area presents loan capital to its counterparts. Loans are always secured by the pledge of collateral, in order to protect Euro system against financial risks.
b. long-term refunding operations
Besides weekly refunding operations, refunding operations in the framework of Euro system are performed every month for 3 month terms, these are long-term refunding operations. Such operations are designed to provide banking system liquidity during longer periods.
The idea of such operations on one hand is to eliminate the need to support the general level of liquidity on the monetary market every week or every two weeks and on the other to provide the counterparts access to long-term refunding. This type of operation is also performed by way of tender. Along with major refunding operations, these long-term refunding operations are implemented in decentralized manner by way of standard auctions, for participation of all counterparts who satisfy the required qualification criteria.
c. Fine tuning operations or adjustment operations
Within the Euro area framework it is also possible to conduct open market operations on a temporary basis such as adjustment operations or fine tuning operations. Such operation’s duration and intervals between them are set on a case-by-case basis. Fine tuning operations or adjustment operations act both as liquidity injections and withdrawal of excessive liquidity. As a rule, they are conducted by national central banks by way of tender. Adjustment operations can be performed as reverse transactions, standard transactions, currency swaps and attraction of fixed deposits. They are usually conducted as so called “rapid” auctions.
The duration of such auctions from the moment of their announcement until the summary lasts for one hour. Adjustments operations can also be conducted by way of bilateral procedures when the deal is completed one or several counterparts without auction company.
d. Structural operations
Structural operations are designed to adjust the structural position of Euro system in the way of liquidity concerning the banks, i.e. liquidity volumes on the long-term perspective. Such (omit kind of) operations are allowed as reverse transactions, standard transactions or distribution of debt certificates. Structural operations can be conducted for the “injecting” additional or “absorbing” excessive liquidity.
According to the ECB requirements, credit institutions are supposed to hold deposits on ECB accounts on a mandatory basis; they are called (omit as) minimal or required reserves.
The amount of required reserves of each credit institution is defined by its basis for reserve calculation.
The basis for credit institutions reserves calculation is regulated by the positions of the corresponding financial statement articles. In order to expand the volume of financial institutions’ required reserves, the base value is multiplied by the reserve ratio. ECB approves a unified standard concerning (omit to) the majority of indexes that are included in the reserve calculation base.
Compensation of the required reserves allowances is provided to the credit institutions. They have the right to get the nonrecurrent discount at the expense of required reserves volume reduction for the well-defined and unified for all sums. It is designed to cover the administrative expenses caused by the required reserves control.
One of the main functions of the minimal reserves system includes the maintenance of stable interest rate on the monetary market. The next important function of the system of minimal reserves is the increase of the structural liquidity deficit in banking system. The fact that a credit institution is supposed to hold its reserves on the accounts of national central banks, stimulates the increasing demand for funding, offered by the central bank, therefore assisting ECB in controlling market rates by means of conducting regular operations of market saturation with liquidity.
In order to manage the short-term interest rates on the monetary market and in particular limiting their fluctuations, the counterparts have 2 constant mechanisms: reserve mechanism of overnight crediting and deposit mechanism. Both mechanisms work in a strictly limited period of time, until the following working day with access for the counterparts by their wish. The interest rate set for the reserve mechanism of secure crediting is as a rule much higher than the corresponding market interest rate and for the deposit mechanism it is much lower than market interest rate. As a result, a credit institution normally applies for the constantly functioning mechanism only as last resource. As there are no limitations to these mechanisms (excluding the demand of the loan in case of utilizing secure crediting mechanism) their interest rates usually represent higher and lower rate limits for overnight deposits on the monetary market.
In the course of determining the level of interest rates for constantly functioning mechanisms the Executive Board arranges a corridor with fluctuating interest rate for overnight credits on the open market within its bounds.
As opposed to open market operations, the initiative of utilizing constantly functioning mechanisms belongs to credit institutions. They are reinforced by national central banks.
Organization structure and management
Governing Council is the main decision-making authority of ECB. It consists of:
- Six members of the Executive board:
- Governors of national banks from 19 countries of euro area:
Governing Council duties:
- Decision making and management principles which are necessary for completing the tasks imposed on the Euro system;
- Euro area monetary policy formulation. It includes the decisions about monetary-and-credit targets, key interest rate and development of management principles of such decisions realization.
Meetings and decisions
Executive board normally meets twice a month at Eurotower in Franfurt-on-Main, Germany. At its first sitting every month, the Executive board evaluates economic and money-and-credit sphere and announces its monthly decision concerning money-and credit policy.
ECB Executive board also sets up the key interest rates.
The key interest rates in euro area are:
- Interest rate for the main refunding operations (MROs), which usually ensures the main part of banking system liquidity. Eurosystem may use at for fixed rate tenders or at auctions with floating rate;
- Rate on deposit facilities, which can be used by banks for “overnight” deposit investment;
- Rate on lombard crediting, used by Eurosystem to credit banks “overnight”;
At its second sitting the board mainly deals with the issues related to other tasks and obligations of ECB and Eurosystem. While the minutes of proceedings are not published, monetary resolutions are explained in details at the press conference hold after the first monthly meeting. The chairman assisted by the vice-president speaks at the press conference.
Executive board consists of:
- Four other members
All the members are appointed by the higher majority of European Council.
The Executive Council duties:
- Preparation of the Executive board meetings;
- Implementation of monetary policy in Euro area in terms of principles, directions and decisions approved by the Executive council;
- ECB working days management;
- Exercise of certain authorities, delegated by the Executive council.
The general council consists of:
- ECB president;
- ECB vice-president;
- National central bank governors (NCB) of 28 EU member-states.
In other words, General Council includes 17 countries of euro area and 11 states outside the euro area. The complete staff of the General council is published on the official site of ECB. General council can be considered as a transitional department. It executes the tasks acquired from the European Monetary Institute, which are supposed to be completed by ECB at the 3rd stage of economic and monetary union because not all the EU member-states adopted the Euro.
The General council provides:
- ECB advisory functions;
- Collection of statistical information;
- ECB annual report;
- Arranging necessary rules for accounting standardization and financial reporting concerning the NCB operations;
- Taking measures in regards to the ECB capital subscription key except for those listed in the Agreement;
- Assigning of conditions for ECN members of staff employment as well as necessary preparation to irretrievable fixation of EU member-states exchange rates to the Euro.
According to the European Charter of central banks and the European central bank system, General council will be dissolved as soon as all EU member-states adopt common currency.
- January 23
- March 12
- April 30
- June 4
- July 16
- September 10
- October 29
- December 10