Slide 1OutlineCentral BanksCentral Banks (cont.)History of the ECBHistory (cont.)Slide 7StructureECB StructureECB Executive BoardPurpose of the ECBECB’s Main TasksMonetary PolicyMonetary Policy (cont.)Foreign Exchange OperationsReserves ManagementECB and the FEDECB and the FEDECB and the FEDECB and the FEDECB and the FEDAuctionsECB and the FEDECB and the FEDECB TodayReferencesSlide 27ECB: European Central BankJohn-Paul KivlinEducational use onlyWhere do Euros Come From?Outline•What is a Central Bank•The ECB –History–Structure–Its purpose•Compare and contrast with the FEDCentral Banks•Public institution –Issues currency–Regulates the money supply–Controls interest rates–Often oversees commercial banking systemCentral Banks (cont.)–Acts as lender of last resort•Lend to banking sector during time of crisis–Designed to operate free of political interferenceHistory of the ECBHistory (cont.)•ECB officially took over June 1, 1998 •Now 17 member states of the EU use the Euro as currencyStructure•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 euroECB 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 monthECB 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 statePurpose of the ECB•Manage Europe‘s central currency the Euro•Maintain the euro’s purchasing power–Done to ensure price stabilityECB’s Main Tasks•Implementation of monetary policies•Foreign exchange operations•Holding and management of official reserves•Promotion of smooth payment systemMonetary 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.htmlMonetary 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 1stForeign Exchange Operations•Foreign exchange interventions•Sale of foreign currency income•Commercial transactionsReserves 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 lossesECB and the FED•The FED has many primary tasks•The main purpose of the ECB is to maintain price stability.•Other objectives are secondaryECB 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 monthsECB 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 rateECB and the FED•Why would the ECB chose such a short term for the repo contracts?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 ECBAuctions•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 inflationECB 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 economyECB 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 FEDECB 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 NBSReferences•Eurpean Central Bank. ECB: European Central Bank Home Page.•Wikipedia. "Federal Reserve System." Wikipedia, the Free