Central European Bank (ECB). Functions of the European Central Bank

2024 Author: Howard Calhoun | [email protected]. Last modified: 2023-12-17 10:16

The European Central Bank is the central bank of the European Union and the Eurozone. It is known as the most independent bank in the world. It is this financial institution that has the full right to independently resolve any issues related to the euro. The institution was founded in 1998. The first president of the financial institution was Wim Duisenberg, who was elected for a term of 5 years. In October 2003, Jean-Claude Trichet took over as the new president. Today, Mario Draghi is in charge.

History

After the end of World War II, the unification of Europe began. Structurization was activated and the formation of a single market space began. In the period from 1947 to 1957, the period of integration of the states of the region with the parallel emergence of the European Payment Union was successfully passed. In 1957, the largest European states united into the European Economic Community. In 1979, conditional money - ECU - was introduced into the EEC for settlements that were immediately tied to the basketEuropean currencies. The memorandum on the formation of the European Monetary Area and the ECB was signed in 1988. LLC CB "Central European Bank" appeared after the signing in 1992 on the territory of Maachstricht of an international agreement on the creation of the EU, as well as after the formation of the European Monetary Institute, whose responsibilities included preparing for the transition to a single currency - the euro.

External and internal structures

The European Central Bank has a unique leadership team. It includes representatives from each of the EU Member States. Issues related to the work of a financial institution, the discount rate, bills and other points are discussed by the management of the institution and the board of governors. The management consists of 6 people, including the chairman of the bank and his deputy. The governing body is elected for an eight-year term. Candidates for a seat in the Directorate are nominated and considered by the European Parliament and the heads of states that are part of the European zone. The ECB is a member of the European System of Central Banks, which includes the national central banks of the EU countries. The international system operates according to a two-level algorithm. Any question regarding monetary policy can only be resolved if agreement is reached at each of the levels.

General information

The Central European Bank since its inception in Germany, in Frankfurt, has united under its leadership a whole system of European central banks. The composition of the structureincluded:

• Bank of Belgium.
• Bundensbank.
• Bank of Greece.
• Bank of Spain.
• Bank of France.
• Monetary Institute of Luxembourg.

Only the ECB has the status of a legal entity, all other financial institutions included in the system play the role of auxiliary units. Their tasks are secondary. The main goal of the ECB is to prevent a sharp rise in prices and stabilize the inflation rate, which should not exceed 2%. Any decisions and actions of the bank have a direct impact on the exchange rate of the European currency against other world currencies. Sharp fluctuations are caused by a change in the interest rate and the provision of credit to member states of the union.

What does the ECB do?

The Central European Bank performs several dominant functions at the same time:

• Development and implementation of monetary policy in the euro area.
• Provision, development and disposal of the exchange reserves of states from the euro area of an official nature.
• Euro emission.
• Setting interest rates.
• Ensuring price stability in the European area.

The ECB indicators are the price index for goods for consumers throughout the EU and the size of the money supply, the growth of which during the year should not be more than 4.5%.

Main bank interest rates

The functions of the European Central Bank cover the determination and setting of interest rates. Interest rates can be threetypes:

• Refinancing rate. This is the interest rate that determines the minimum value for applications to raise funds in a tender conducted by the ECB.
• Deposit rate. This is the interest rate that is the base rate when placing free cash in the institutions of the ECB. The rate acts as a lower limit in the overnight interest rate market.
• The marginal borrowing rate is the rate at which the banks of the ESB structure can obtain a loan, which is necessary to maintain short-term liquidity. The marginal rate acts as the upper limit of the range within the overnight interest rate market.

By setting these types of rates, the Central European Bank creates the demand or supply of the currency, ensures its stability and controls cash flows within the zone.

General provisions

The European Central Bank is a unique legal entity whose work is based on international agreements. The authorized capital of the institution at the time of its creation was equal to 5 billion euros. The largest banks in Europe acted as shareholders. The German Bundesbank contributed 18.9% of the capital, the Bank of France - 14.2%, the Bank of Italy - 12.5%, the Bank of Spain - 8.3%. The remaining Central Banks of the European states contributed from 0.1% to 3.9% of the initial authorized capital. The executive board, which was mentioned above, manages the activities of the financial institution - it is headed by the President of the EuropeanCentral Bank. The main feature of a financial organization is complete independence. At the same time, the institute is obliged to submit an annual report on its activities to the European Parliament, the European Commission, the Council of the European Union and the Council of Europe.

Activity Policy

To achieve its objectives, the ECB uses such instruments as stabilization loans and loans-for-shares auctions, foreign exchange transactions and open market transactions. The most powerful tool for regulating the financial market is the rate of the European Central Bank. The work of the monetary institution is based on the principles of independence from other states, as well as from the bodies of the decision of the supranational type. The work of the latter primarily provides for the absence of coercion when covering the external debt and the internal one. For a decision to be made on each specific resolution, a majority of the members of the management board must vote for it. Each of them has only one opportunity to vote. The head of the European Central Bank must follow the advice of the council. Only after a certain decision has been made, the central banks of European states can be actively involved in its implementation.

Powers of the ECB and National Central Banks

The ECB, in joint efforts with the Central Bank of the member states of the association, has the right to form relations with the Central Bank of other states, and, if necessary, with organizationsinternational type. Opportunities are open for the acquisition, sale and forward of any type of assets, including banking metals. The concept of "currency assets" includes securities in any currency and in any units of calculation. Ownership and management of assets is allowed. The ECB conducts a wide range of banking organizations of any type, for which international organizations, representatives of a third party can act as partners. Partnerships may include borrowing and lending operations. In addition to the main functions mentioned above, the European Bank, in cooperation with the Central Bank of European countries, can conduct operations with an administrative purpose, as well as act in the interests of board members. An important step in the regulation of the bank's activities can be called the formation of the European Monetary System, which began its existence in 1979.

European Monetary System within the ECB

The refinancing rate of the European Central Bank is not the only thing that affects the European Monetary System. The EBU itself has a number of specific tasks. We can talk about the following directions:

• Ensuring monetary stability within the EU.
• Maximum simplification of convergence processes with active economic development.
• In conditions of stability, the monetary system provides a growth strategy.
• Stable systematization of international currency and economic relations.

It is thanks toWith the introduction into circulation of such a monetary unit as the ECU, the states of the European Union successfully coped with the crisis of the 80s. After the victory over the process of inflation, restrictions on the conduct of current financial transactions were lifted. Since 1990, the regime of free flow of capital has been activated. Initially, the goal of the EU was to provide optimal conditions for the movement of goods and services, capital and labor. The ECB was created to encourage the introduction of a common currency, a single citizenship. His work at the planning stage was supposed to help form organizational and legal mechanisms for coordinating not only foreign policy, but also the security policy of each participating state.