ecb: european central bank john-paul kivlin educational use only
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ECB: European Central BankJohn-Paul Kivlin
Educational use only
Where do Euros Come From?
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Outline
• What is a Central Bank• The ECB – History– Structure– Its purpose
• Compare and contrast with the FED
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Central Banks
• Public institution – Issues currency– Regulates the money supply– Controls interest rates– Often oversees commercial banking system
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Central Banks (cont.)
– Acts as lender of last resort• Lend to banking sector during time of crisis
– Designed to operate free of political interference
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History of the ECB
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History (cont.)
• ECB officially took over June 1, 1998 • Now 17 member states of the EU use the Euro
as currency
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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
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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
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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
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Purpose of the ECB
• Manage Europe‘s central currency the Euro
• Maintain the euro’s purchasing power– Done to ensure price stability
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ECB’s Main Tasks
• Implementation of monetary policies• Foreign exchange operations• Holding and management of official reserves• Promotion of smooth payment system
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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
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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 1st
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Foreign Exchange Operations
• Foreign exchange interventions• Sale of foreign currency income• Commercial transactions
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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
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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
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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
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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
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ECB and the FED
• Why would the ECB chose such a short term for the repo contracts?
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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
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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
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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
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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
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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
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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
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