ECB Definition

European Central Bank

European Central Bank, abbreviation ECB according to theinternetfaqs, institution founded on 1.6.1998 which, together with the central banks of the 27 member states of the EU (national central banks), forms the European System of Central Banks (ESCB) and since 1.1.1999 (start of the third stage of the European economic and monetary union) is responsible for the uniform monetary policy in the euro area.

With the entry into force of the Treaty of Lisbon (December 1st, 2009) it became an organ of the European Union. The ECB and the ESCB are nonetheless independent.

Goals and tasks

The primary goal of the ECB is to ensure price level stability. On this premise, it supports general economic policy in the Community. The basic tasks include: defining and executing EMU monetary policy, conducting foreign exchange transactions, managing the official foreign exchange reserves of the member states and promoting the smooth running of payment systems.

In addition to the national central banks, the ECB is authorized to issue banknotes. The extensive monetary policy instruments of the ECB include various forms of open market transactions (main refinancing and longer-term refinancing transactions, fine-tuning operations such as foreign exchange swap transactions, taking in time deposits, quick tender transactions, definitive purchases and sales as well as structural operations through the issuance of bonds) the marginal funding facility (standing facility) and the deposit facility), with which an upper and lower interest rate limit can be marked on the money market, as well as the minimum reserve policy.

In addition, the ECB has a central banking supervisory authority, which started its work on November 4, 2014. The legal basis for this was created in 2013 with the Single Supervisory Mechanism (SSM) (European Banking Union). Its primary task is to restore the soundness of the European banking system and to improve financial stability and integration.

Decision-making bodies

The decision-making bodies of the ECB are the Governing Council (members of the Executive Board and presidents of the national central banks of the euro area countries), which issues the guidelines for monetary policy, and the Executive Board (President, Vice-President and four other members), which conducts day-to-day business. The General Council (President and Vice-President of the ECB as well as the central bank governors of all EU countries) is responsible for reporting on the convergence progress of the EU countries that are not part of the euro zone and for collecting statistical data. The forerunner of the ECB was the European Monetary Institute.

The role of the ECB in the »euro crisis«

In the course of the euro sovereign debt crisis, the ECB took a number of additional measures to protect the functionality of the euro area. In contrast to her previous policy, she decided to buy government bonds instead of exclusively private bank bonds. Central bank money flowed directly into the budget of the indebted countries. This was to prevent national bankruptcy and exit from the Eurosystem. The main destinations of this flow of money via government bonds were Italy, Greece and Spain.

This action by the central bank led to a fundamental conflict of opinion among the European public and also between different states, since many saw the independence of the ECB at risk. The background to this was the stipulation that the bank should not actually buy such bonds in order not to operate any hidden government financing.

As a completely new task for the ECB, banking supervision of systemically important banks in the euro area was added in 2014. This refers to financial institutions that have total assets of more than 30 billion euros or that represent at least 20 percent of the economic output of their home country. The reason for this measure was the lack of capital reserves of many commercial banks, which since then have had to regularly undergo a so-called “stress test”.

ECB Definition