ECB – European Central Bank
The European Central Bank (ECB) is one of the world’s most important central banks, responsible for monetary policy covering the 16 member States of the Eurozone. It was established by the European Union (EU) in 1998 with its headquarters in Frankfurt, Germany. The ECB is the central organ of the Eurosystem and the European System of Central Banks.
The Eurosystem is the monetary authority of the Eurozone, the collective of European Union member states that have adopted the euro as their sole official currency. The Eurosystem consists of the European Central Bank (it decides the monetary policy) and the central banks of the member states that belong to the Eurozone (their function is to apply the monetary policy decided by the ECB). The primary objective of the Eurosystem is price stability. Secondary objectives are financial stability and financial integration. The mission statement of the Eurosystem says that the ECB and the national central banks jointly contribute to achieving the objectives.
With a number of the member states outside the Eurozone, the European System of Central Banks is the system of central banks consisting of the ECB and the central banks of all member states, inside and outside the Eurozone. The ESCB’s objective is price stability throughout the European Union. Secondarily, the ESCB’s goal is to improve monetary and financial cooperation between the Eurosystem and the member states outside the Eurozone.
The ECB is designed to be independent of political interference. It also has financial independence by virtue of its having its own budget, separate from the EU’s budget, sourced from national central banks. Its political independence was an attribute taken from the bank it was modelled after, the German Bundesbank, due to a consensus amongst economists that an independent central bank was the best way to avoid manipulation of the macroeconomy for political purposes.Furthermore, not only must the bank not seek influence, but EU institutions and national governments are bound by the treaties to respect the ECB’s independence by not seeking to influence its decision-making bodies.
The design of the ECB was modelled on the German Bundesbank, in particular on its political independence. It is governed by a Governing Council and the Executive Board. There is also a General Council. The bank is independent from any European or national institution and also holds financial independence by means of a separate budget drawn from national central banks. These bodies also govern the European System of Central Banks (ESCB), which is the ECB plus all the national central banks in the Eurozone.
The European Central Bank is composed of the Governing council (President, Vice President and 4 qualified persons). These 6 people are appointed by the European Council which is the highest organ that currently is in the European Union. It is through the appointment by the European Council of 6 members of Governing council that the central bank derives its legitimacy and its credibility.
The Governing Council is the supreme decision making body of the ECB. It is composed of the members of the executive board and the governors of the national central banks which have adopted the euro. The Council is responsible for taking decisions on monetary policy, interest rates and the reserves of the ESCB. It is also responsible in other matters, such as authorising of the issue of banknotes and advising other EU institutions on draft legislation. It meets twice a month and meetings can only be attended by members and the Council President and Commission President. Each member has one vote (the Council and Commission presidents do not vote) and decisions are taken by a simple majority. Governing Council members are not meant to represent their countries, but rather the interests of the Eurozone as a whole.
The Executive Board is responsible for the implementation of monetary policy defined by the Governing Council and the day-to-day running of the bank. In this it can issue decisions national central banks and may also exercise powers delegated to it by the Governing Council. It is composed of the President of the Bank (currently Jean-Claude Trichet), a vice president and four other members. They are all appointed by common accord of the eurozone member states for non-renewable terms of eight year.
The General Council is a body dealing with transitional issues of euro adoption, for example fixing the exchange rates of currencies being replaced by the euro, (continuing the tasks of the former EMI). It will continue to exist until all EU Member States adopt the euro, at which point it will be dissolved. It is composed of the President and Vice President together with the governors of all of the EU’s national central banks.
The primary objective of the ECB is to maintain price stability within the Eurozone, or in other words to keep inflation low. The Governing Council defined price stability as inflation (Harmonised Index of Consumer Prices) of below, but close to, 2%. Unlike for example the United States Federal Reserve Bank, the ECB has only one primary objective with other objectives subordinate to it.
The key tasks of the ECB are to define and implement the monetary policy for the Eurozone, to conduct foreign exchange operations, to take care of the foreign reserves of the European System of Central Banks and promote smooth operation of the money market infrastructure under the Target payments system.
Furthermore, it has the exclusive right to authorise the issuance of euro banknotes. Member states can issue euro coins but the amount must be authorised by the ECB beforehand (upon the introduction of the euro, the ECB also had exclusive right to issue coins). The bank must also co-operate within the EU and internationally with third bodies and entities. Finally it contributes to maintaining a stable financial system and monitoring the banking sector. The latter can be seen, for example, in the bank’s intervention during the 2007 credit crisis when it loaned billions of euros to banks to stabilise the financial system. In December 2007 the ECB decided in conjunction with the Federal Reserve under a program called Term auction facility to improve dollar liquidity in the eurozone and to stabilise the money market.
Every second Thursday of the month, the national central bank governors of the euro area meet us in Frankfurt to take monetary policy decisions. The day before, all governors have been meeting informally.
Main objective: the fight against inflation by keeping annual inflation within the euro area below 2%
FED – Federal Reserve System
The Federal Reserve System (also the Federal Reserve; informally The Fed) is the central banking system of the United States. Created in 1913 by the enactment of the Federal Reserve Act, it is a quasi-public (government entity with private components) banking system that comprises (1) the presidentially appointed Board of Governors of the Federal Reserve System in Washington, D.C.; (2) the Federal Open Market Committee; (3) twelve regional privately-owned Federal Reserve Banks located in major cities throughout the nation acting as fiscal agents for the U.S. Treasury, each with its own nine-member board of directors; (4) numerous other private U.S. member banks, which subscribe to required amounts of non-transferable stock in their regional Federal Reserve Banks; and (5) various advisory councils. As of February 2006, Ben Bernanke serves as the Chairman of the Board of Governors of the Federal Reserve System. Donald Kohn is the current Vice Chairman.
Current functions of the Federal Reserve System include:
– To address the problem of banking panics
– To serve as the central bank for the United States
– To strike a balance between private interests of banks and the centralized responsibility of government
– To supervise and regulate banking institutions
– To protect the credit rights of consumers
– To manage the nation’s money supply through monetary policy to achieve the sometimes conflicting goals of
– maximum employment
– stable prices, including prevention of either inflation or deflation
– moderate long-term interest rates
– To maintain the stability of the financial system and contain systemic risk in financial markets
– To provide financial services to depository institutions, the U.S. government, and foreign official institutions, including playing a major role in operating the nation’s payments system
– To facilitate the exchange of payments among regions
– To respond to local liquidity needs
– To strengthen U.S. standing in the world economy
Critics of the Federal Reserve System state that it is not able to accomplish these goals
The Federal Reserve System is an independent government institution that has private aspects. The System is not a private organization and does not operate for the purpose of making a profit. The stocks of the regional federal reserve banks are owned by the banks operating within that region and which are part of the system. The System derives its authority and public purpose from the Federal Reserve Act passed by Congress in 1913. As an independent institution, the Federal Reserve System has the authority to act on its own without prior approval from Congress or the President. The members of its Board of Governors are appointed for long, staggered terms, limiting the influence of day-to-day political considerations. The Federal Reserve System’s unique structure also provides internal checks and balances, ensuring that its decisions and operations are not dominated by any one part of the system. It also generates revenue independently without need for Congressional funding. Congressional oversight and statutes, which can alter the Fed’s responsibilities and control, allow the government to keep the Federal Reserve System in check. Since the System was designed to be independent whilst also remaining within the government of the United States, it is often said to be “independent within the government.”
The 12 Federal Reserve banks provide the financial means to operate the Federal Reserve System. Each reserve bank is organized much like a private corporation so that it can provide the necessary revenue to cover operational expenses and implement the demands of the board. Member banks are privately owned banks that must buy a certain amount of stock in the Reserve Bank within its region to be a member of the Federal Reserve System. This stock “may not be sold, traded, or pledged as security for a loan” and all member banks receive a 6% annual dividend. No stock in any Federal Reserve Bank has ever been sold to the public, to foreigners, or to any non-bank U.S. firm. These member banks must maintain fractional reserves either as vault cash or on account at its Reserve Bank; member banks earn no interest on either of these. The dividends paid by the Federal Reserve Banks to member banks are considered partial compensation for the lack of interest paid on the required reserves. All profit after expenses is returned to the U.S. Treasury or contributed to the surplus capital of the Federal Reserve Banks (and since shares in ownership of the Federal Reserve Banks are redeemable only at par, the nominal “owners” do not benefit from this surplus capital); the Federal Reserve system contributed over $29 billion to the Treasury in 2006.
Main objective: Support of U.S. economic activity.
BoE – Bank of England
The Bank of England (formally the Governor and Company of the Bank of England) is the central bank of the United Kingdom and is the model on which most modern, large central banks have been based. Since 1946 it has been a state-owned institution. It was established in 1694 to act as the English Government’s banker, and to this day it still acts as the banker for the UK Government. The Bank has a monopoly on the issue of banknotes in England and Wales, although not in Scotland or Northern Ireland. The Bank’s Monetary Policy Committee has been given devolved responsibility (sometimes called independence) for managing the monetary policy of the country. The Treasury has reserve powers to give orders to the committee “if they are required in the public interest and by extreme economic circumstances” but such orders must be endorsed by parliament within 28 days
The Bank’s headquarters has been located in London’s main financial district, the City of London, on Threadneedle Street, since 1734. It is sometimes known by the metonym The Old Lady of Threadneedle Street or simply The Old Lady. The current Governor of the Bank of England is Mervyn King, who took over on 30 June 2003 from Sir Edward George. As well as the London offices, the Bank of England also has secondary offices on King Street in Leeds.
The Bank of England performs all the functions of a central bank. The most important of these is supposed to be maintaining price stability and supporting the economic policies of the British Government, thus promoting economic growth. There are two main areas which are tackled by the Bank to ensure it carries out these functions efficiently:
Stable prices and confidence in the currency are the two main criteria for monetary stability. Stable prices are maintained by making sure price increases meet the Government’s inflation target. The Bank aims to meet this target by adjusting the base interest rate, which is decided by the Monetary Policy Committee, and through its communications strategy.
Maintaining financial stability involves protecting against threats to the whole financial system. Threats are detected by the Bank’s surveillance and market intelligence functions. The threats are then dealt with through financial and other operations, both at home and abroad. In exceptional circumstances, the Bank may act as the lender of last resort by extending credit when no other institution will.
The Bank works together with several other institutions to secure both monetary and financial stability, including:
HM Treasury, the Government department responsible for financial and economic policy.
The Financial Services Authority, an independent body that regulates the financial services industry.
Other central banks and international organisations, with the aim of improving the international financial system.
The 1997 Memorandum of Understanding describes the terms under which the Bank, the Treasury and the FSA work toward the common aim of increased financial stability.
The Bank of England acts as the Government’s banker, and as such it maintains the Government’s Consolidated Fund account. It also manages the country’s foreign exchange and gold reserves. The Bank also acts as the bankers’ bank, especially in its capacity as a lender of last resort.
The Bank of England has a monopoly on the issue of banknotes in England and Wales. Scottish and Northern Irish banks retain the right to issue their own banknotes, but they must be backed one to one with deposits in the Bank of England, excepting a few million pounds representing the value of notes they had in circulation in 1845. The Bank decided to sell its bank note printing operations to De La Rue in December 2002, under the advice of Close Brothers Corporate Finance Ltd.
Since 1997 the Monetary Policy Committee has had the responsibility for setting the official interest rate. However, with the decision to grant the Bank operational independence, responsibility for government debt management was transferred to the new UK Debt Management Office in 1998, which also took over government cash management in 2000. Computershare took over as the registrar for UK Government bonds (known as gilts) from the Bank at the end of 2004.
The Bank used to be responsible for the regulation and supervision of the banking industry, although this responsibility was transferred to the Financial Services Authority in June 1998.
In order to help maintain economic stability, the Bank attempts to broaden understanding of its role, both through regular speeches and publications by senior Bank figures, and through a wider education strategy aimed at the general public. It maintains a free museum and runs the Target Two Point Zero competition for A-level students.
Main objective: Support of United Kingdom economic activity.
BoJ – Bank of Japan
Like most modern Japanese institutions, the Bank of Japan was born after the Meiji Restoration. Prior to the Restoration, Japan’s feudal fiefs all issued their own money, hansatsu, in an array of incompatible denominations, but the New Currency Act of Meiji 4 (1871) did away with these and established the yen as the new decimal currency. The former han (fiefs) became prefectures and their mints became private chartered banks which, however, initially retained the right to print money. For a time both the central government and these so-called “national” banks issued money; to end this, the Bank of Japan was founded in Meiji 15 (1882) and given a monopoly on controlling the money supply.
According to its charter, the missions of the Bank of Japan are :
– Issuance and management of banknotes
– Implementation of monetary policy
– Providing settlement services and ensuring the stability of the financial system
– Treasury and government securities-related operations
– International activities
– Compilation of data, economic analyses and research activities
Main objective: to make disappear completely deflation and supporting economic activity in Japan.