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European Central Bank

Emblem
Seat
Headquarters	Frankfurt, Germany
Coordinates	50.1089°N 8.7034°E / 50.1089; 8.7034
Established	1 June 1998
President	Mario Draghi
Central bank of	Euro area Austria Belgium Cyprus Estonia France Finland Germany Greece Ireland Italy Latvia Lithuania Luxembourg Malta Netherlands Portugal Slovakia Slovenia Spain
Currency	Euro (€) EUR (ISO 4217)
Reserves	0.526 trillion euro in total 0.04 trillion euro directly 0.34 trillion euro (Eurosystem incl. gold) 0.15 trillion euro (forex reserves)
Bank rate	0.00% (Main refinancing operations) 0.25% (Marginal lending facility)
Interest on reserves	-0.40% (Deposit facility)
Preceded by	19 central banks Oesterreichische Nationalbank National Bank of Belgium Central Bank of Cyprus Bank of Estonia Bank of Finland Banque de France Deutsche Bundesbank Bank of Greece Central Bank of Ireland Banca d'Italia Latvijas Banka Bank of Lithuania Central Bank of Luxembourg Central Bank of Malta De Nederlandsche Bank Banco de Portugal Banka Slovenije Národná banka Slovenska Banco de España
Website	www.ecb.europa.eu

Frankfurt am Main, the European Central Bank from Alte Mainbrücke

Seat of the European Central Bank

The European Central Bank (ECB) is the central bank for the euro and administers monetary policy of the euro area, which consists of 19 EU member states and is one of the largest currency areas in the world. It is one of the world's most important central banks and is one of the seven institutions of the European Union (EU) listed in the Treaty on European Union (TEU). The capital stock of the bank is owned by the central banks of all 28 EU member states. The Treaty of Amsterdam established the bank in 1998, and it is headquartered in Frankfurt, Germany. As of 2015 the President of the ECB is Mario Draghi, former governor of the Bank of Italy, former member of the World Bank, and former managing director of the Goldman Sachs international division (2002–2005). The bank primarily occupied the Eurotower prior to, and during, the construction of the new headquarters.

The primary objective of the ECB, mandated in Article 2 of the Statute of the ECB, is to maintain price stability within the Eurozone. Its basic tasks, set out in Article 3 of the Statute, are to set 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 operation of the financial market infrastructure under the TARGET2 payments system and the technical platform (currently being developed) for settlement of securities in Europe (TARGET2 Securities). The ECB has, under Article 16 of its Statute, 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.

The ECB is governed by European law directly, but its set-up resembles that of a corporation in the sense that the ECB has shareholders and stock capital. Its capital is €11 billion held by the national central banks of the member states as shareholders. The initial capital allocation key was determined in 1998 on the basis of the states' population and GDP, but the capital key has been adjusted. Shares in the ECB are not transferable and cannot be used as collateral.

History

Further information: History of the euro

Wim Duisenberg, first President of the ECB

The European Central Bank is the de facto successor of the European Monetary Institute (EMI). The EMI was established at the start of the second stage of the EU's Economic and Monetary Union (EMU) to handle the transitional issues of states adopting the euro and prepare for the creation of the ECB and European System of Central Banks (ESCB). The EMI itself took over from the earlier European Monetary Co-operation Fund (EMCF).

The ECB formally replaced the EMI on 1 June 1998 by virtue of the Treaty on European Union (TEU, Treaty of Maastricht), however it did not exercise its full powers until the introduction of the euro on 1 January 1999, signalling the third stage of EMU. The bank was the final institution needed for EMU, as outlined by the EMU reports of Pierre Werner and President Jacques Delors. It was established on 1 June 1998.

The first President of the Bank was Wim Duisenberg, the former president of the Dutch central bank and the European Monetary Institute. While Duisenberg had been the head of the EMI (taking over from Alexandre Lamfalussy of Belgium) just before the ECB came into existence, the French government wanted Jean-Claude Trichet, former head of the French central bank, to be the ECB's first president. The French argued that since the ECB was to be located in Germany, its president should be French. This was opposed by the German, Dutch and Belgian governments who saw Duisenberg as a guarantor of a strong euro. Tensions were abated by a gentleman's agreement in which Duisenberg would stand down before the end of his mandate, to be replaced by Trichet.

Trichet replaced Duisenberg as President in November 2003.

Mario Draghi, the current President of the ECB

There had also been tension over the ECB's Executive Board, with the United Kingdom demanding a seat even though it had not joined the Single Currency. Under pressure from France, three seats were assigned to the largest members, France, Germany, and Italy; Spain also demanded and obtained a seat. Despite such a system of appointment the board asserted its independence early on in resisting calls for interest rates and future candidates to it.

When the ECB was created, it covered a Eurozone of eleven members. Since then, Greece joined in January 2001, Slovenia in January 2007, Cyprus and Malta in January 2008, Slovakia in January 2009, Estonia in January 2011, Latvia in January 2014 and Lithuania in January 2015, enlarging the bank's scope and the membership of its Governing Council.

On 1 December 2009, the Treaty of Lisbon entered into force, ECB according to the article 13 of TEU, gained official status of an EU institution.

In September 2011, when German appointee to the Governing Council and Executive board, Jürgen Stark, resigned in protest of the ECB's bond buying programme, Financial Times Deutschland called it "the end of the ECB as we know it" referring to its perceived "hawkish" stance on inflation and its historical Bundesbank influence.

On 1 November 2011, Mario Draghi replaced Jean-Claude Trichet as President of the ECB.

In April 2011, the ECB raised interest rates for the first time since 2008 from 1% to 1.25%, with a further increase to 1.50% in July 2011. However, in 2012–2013 the ECB sharply lowered interest rates to encourage economic growth, reaching the historically low 0.25% in November 2013. Soon after the rates were cut to 0.15%, then on 4 September 2014 the central bank reduced the rates by two thirds from 0.15% to 0.05%, the lowest rates on record.

In November 2014, the bank moved into its new premises.

Powers and objectives

Objective

Euro banknotes

The primary objective of the European Central Bank, set out in Article 127(1) of the Treaty on the Functioning of the European Union, is to maintain price stability within the Eurozone. The Governing Council in October 1998 defined price stability as inflation of under 2%, “a year-on-year increase in the Harmonised Index of Consumer Prices (HICP) for the euro area of below 2%” and added that price stability ”was to be maintained over the medium term”. (Harmonised Index of Consumer Prices) Unlike for example the United States Federal Reserve System, the ECB has only one primary objective but this objective has never been defined in statutory law, and the HICP target can be termed ad-hoc.

The Governing Council confirmed this definition in May 2003 following a thorough evaluation of the ECB's monetary policy strategy. On that occasion, the Governing Council clarified that “in the pursuit of price stability, it aims to maintain inflation rates below, but close to, 2% over the medium term”. All lending to credit institutions must be collateralised as required by Article 18 of the Statute of the ESCB. The Governing Council clarification has little force in law.

Without prejudice to the objective of price stability, the Treaty also states that "the ESCB shall support the general economic policies in the Union with a view to contributing to the achievement of the objectives of the Union".

Basic tasks

The basic 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 to promote smooth operation of the financial market infrastructure under the TARGET2 payments system and being currently developed technical platform for settlement of securities in Europe (TARGET2 Securities).

Further tasks, among others, include 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 ECB shall also collect statistical information to fulfil the tasks of the European System of Central Banks, and contribute to financial stability and supervision.

Organization

The ECB has four decision-making bodies, that take all the decisions with the objective of fulfilling the ECB's mandate:

• the Executive Board,
• the Governing Council,
• the General Council, and
• the Supervisory Board.

Decision-making bodies of the ECB

The Executive Board

Jean-Claude Trichet, the second President of the European Central Bank

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. It can issue decisions to national central banks and may also exercise powers delegated to it by the Governing Council. Executive Board members are assigned a portfolio of responsibilities by the President of the ECB. The Executive Board normally meets every Tuesday.

It is composed of the President of the Bank (currently Mario Draghi), the Vice-President (currently Luis de Guindos) and four other members. They are all appointed for non-renewable terms of eight years. Member of the Executive Board of the ECB are appointed "from among persons of recognised standing and professional experience in monetary or banking matters by common accord of the governments of the Member States at the level of Heads of State or Government, on a recommendation from the Council, after it has consulted the European Parliament and the Governing Council of the ECB".

José Manuel González-Páramo, a Spanish member of the Executive Board since June 2004, was due to leave the board in early June 2012 and no replacement had been named as of late May 2012. The Spanish had nominated Barcelona-born Antonio Sáinz de Vicuña, an ECB veteran who heads its legal department, as González-Páramo's replacement as early as January 2012 but alternatives from Luxembourg, Finland, and Slovenia were put forward and no decision was made by May. After a long political battle, Luxembourg's Yves Mersch, was appointed as González-Páramo's replacement.

The Governing Council

The Governing Council is the main decision-making body of the Eurosystem. It comprises the members of the Executive Board (six in total) and the governors of the National Central Banks of the euro area countries (19 as of 2015).

Since January 2015, ECB publishes on its website a summary of the Governing Council deliberations ("accounts"). These publications came as a partial response to recurring criticism against the ECB's opacity . However in contrast with other central banks, the ECB still does not disclose individual voting records of the governors seating in its Council.

Members of the Governing Council (as of September 2018)

	Name	Role	Terms of office
Executive Board of the ECB	Mario Draghi	President	1 November 2011	31 October 2019
	Luis de Guindos	Vice-President	1 June 2018	31 May 2026
	Yves Mersch	Member of the Executive Board	15 December 2012	14 December 2020
	Sabine Lautenschläger	Member of the Executive Board	27 January 2014	26 January 2022
	Benoît Cœuré	Member of the Executive Board	1 January 2012	31 December 2019
	Peter Praet	Member of the Executive Board & Chief Economist	1 June 2011	31 May 2019
National Governors	Pablo Hernández de Cos		11 June 2018	10 June 2024
	Jens Weidmann		1 May 2011	31 April 2019
	Jan Smets		11 March 2011	1 January 2019
	Yannis Stournaras		20 June 2014
	François Villeroy de Galhau		1 November 2015
	Gaston Reinesch
	Ewald Nowotny		September 2008	August 31, 2019
	Jozef Makúch		12 January 2010
	Vitas Vasiliauskas
	Olli Rehn		12 July 2018
	Carlos Costa		7 June 2010
	Mario Vella		1 July 2013
	To be appointed
	Ardo Hansson		7 June 2012
	Ilmārs Rimšēvičs		2001
	Klaas Knot		1 July 2011
	Ignazio Visco		1 November 2011
	Chrystalla Georghadji		11 April 2014
	Philip R. Lane		3 November 2015

The General Council

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 Supervisory Board

The Supervisory Board meets twice a month to discuss, plan and carry out the ECB’s supervisory tasks. It proposes draft decisions to the Governing Council under the non-objection procedure. It is composed of Chair (appointed for a non-renewable term of five years), Vice-Chair (chosen from among the members of the ECB's Executive Board) four ECB representatives and representatives of national supervisors. If the national supervisory authority designated by a Member State is not a national central bank (NCB), the representative of the competent authority can be accompanied by a representative from their NCB. In such cases, the representatives are together considered as one member for the purposes of the voting procedure.

It also includes the Steering Committee, which supports the activities of the Supervisory Board and prepares the Board’s meetings. It is composed by the Chair of the Supervisory Board, Vice-Chair of the Supervisory Board, one ECB representative and five representatives of national supervisors. The five representatives of national supervisors are appointed by the Supervisory Board for one year based on a rotation system that ensures a fair representation of countries.

Composition of the Supervisory board of the ECB
Name	Role
Danièle Nouy	Chair
Sabine Lautenschläger	Vice Chair
Ignazio Angeloni	ECB Representative
Luc Coene	ECB Representative
Julie Dickson	ECB Representative
Sirkka Hämäläinen	ECB Representative

Capital subscription

The ECB is governed by European law directly, but its set-up resembles that of a corporation in the sense that the ECB has shareholders and stock capital. Its initial capital was supposed to be €5 billion and the initial capital allocation key was determined in 1998 on the basis of the member states' populations and GDP, but the key is adjustable. The euro area NCBs were required to pay their respective subscriptions to the ECB's capital in full. The NCBs of the non-participating countries have had to pay 7% of their respective subscriptions to the ECB's capital as a contribution to the operational costs of the ECB. As a result, the ECB was endowed with an initial capital of just under €4 billion. The capital is held by the national central banks of the member states as shareholders. Shares in the ECB are not transferable and cannot be used as collateral. The NCBs are the sole subscribers to and holders of the capital of the ECB.

Today, ECB capital is about €11 billion, which is held by the national central banks of the member states as shareholders. The NCBs’ shares in this capital are calculated using a capital key which reflects the respective member’s share in the total population and gross domestic product of the EU. The ECB adjusts the shares every five years and whenever a new country joins the EU. The adjustment is made on the basis of data provided by the European Commission.

All national central banks (NCBs) that own a share of the ECB capital stock as of 1 January 2015 are listed below. Non-Euro area NCBs are required to pay up only a very small percentage of their subscribed capital, which accounts for the different magnitudes of Euro area and Non-Euro area total paid-up capital.

NCB	Capital Key (%)	Paid-up Capital (€)
National Bank of Belgium	2.4778	268,222,025.17
Deutsche Bundesbank	17.9973	1,948,208,997.34
Bank of Estonia	0.1928	20,870,613.63
Central Bank of Ireland	1.1607	125,645,857.06
Bank of Greece	2.0332	220,094,043.74
Bank of Spain	8.8409	957,028,050.02
Bank of France	14.1792	1,534,899,402.41
Bank of Italy	12.3108	1,332,644,970.33
Central Bank of Cyprus	0.1513	16,378,235.70
Bank of Latvia	0.2821	30,537,344.94
Bank of Lithuania	0.4132	44,728,929.21
Central Bank of Luxembourg	0.2030	21,974,764.35
Central Bank of Malta	0.0648	7,014,604.58
De Nederlandsche Bank	4.0035	433,379,158.03
Oesterreichische Nationalbank	1.9631	212,505,713.78
Banco de Portugal	1.7434	188,723,173.25
Bank of Slovenia	0.3455	37,400,399.43
National Bank of Slovakia	0.7725	83,623,179.61
Bank of Finland	1.2564	136,005,388.82
Total	70.3915	7,619,884,851.40
Non-Euro area:
Bulgarian National Bank	0.8590	3,487,005.40
Czech National Bank	1.6075	6,525,449.57
Danmarks Nationalbank	1.4873	6,037,512.38
Croatian National Bank	0.6023	2,444,963.16
Hungarian National Bank	1.3798	5,601,129.28
National Bank of Poland	5.1230	20,796,191.71
National Bank of Romania	2.6024	10,564,124.40
Sveriges Riksbank	2.2729	9,226,559.46
Bank of England	13.6743	55,509,147.81
Total	29.6085	120,192,083.17

Reserves

In addition to capital subscriptions, the NCBs of the member states participating in the euro area provided the ECB with foreign reserve assets equivalent to around €40 billion. The contributions of each NCB is in proportion to its share in the ECB's subscribed capital, while in return each NCB is credited by the ECB with a claim in euro equivalent to its contribution. 15% of the contributions was made in gold, and the remaining 85% in US dollars and Japanese yen.

Languages

The internal working language of the ECB is generally English, and press conferences are usually held in English. External communications are handled flexibly: English is preferred (though not exclusively) for communication within the ESCB (i.e. with other central banks) and with financial markets; communication with other national bodies and with EU citizens is normally in their respective language, but the ECB website is predominantly English; official documents such as the Annual Report are in the official languages of the EU.

ECB independence framework

The European Central Bank (and by extension, the Eurosystem) is often considered as the "most independent central bank in the world". In general terms, this means that the Eurosystem tasks and policies can be discussed, designed, decided and implemented in full autonomy, without pressure, or need for instructions from any external body. The main justification for the ECB independence is that such institutional setup helps maintaining price stability.

ECB Independence

In practice, the ECB's independence is pinned by four key principles:

• Political independence: The Community institutions and bodies and the governments of the member states may not seek to influence the members of the decision-making bodies of the ECB or of the NCBs in the performance of their tasks. Symmetrically, EU institutions and national governments are bound by the treaties to respect the ECB's independence.
• Operational and legal independence: the ECB has all required competences to achieve its price stability mandate and thereby can steer monetary policy in full autonomy and by means of high level of discretion. The ECB's governing council deliberates with a high degree of secrecy, since individual voting records are not disclosed to the public (leading to suspicions that Governing Council members are voting along national lines.) In addition to monetary policy decisions, the ECB has the right to issue legally binding regulations, within its competence and if the conditions laid down in Union law are fulfilled, it can sanction non-compliant actors if they violate legal requirements laid down in directly applicable Union regulations. The ECB's own legal personality also allows the ECB to enter into international legal agreements independently from other EU institutions, and be party of legal proceedings. Finally, the ECB can organise its internal structure as it sees fit.
• Personal independence: the mandate of ECB board members is purposefully very long (8 years) and Governors of national central banks have a minimum renewable term of office of five years. In addition, ECB board members and are vastly immune from judicial proceedings. Indeed, removals from office can only be decided by the Court of Justice of the European Union (CJEU), under the request of the ECB's Governing Council or the Executive Board (i.e. the ECB itself). Such decision is only possible in the event of incapacity or serious misconduct. National governors of the Eurosystem' national central banks can be dismissed under national law (with possibility to appeal) in case they can no longer fulfil their functions or are guilty of serious misconduct.
• Financial independence: the ECB is the only body within the EU whose statute guarantees budgetary independence through its own resources and income. The ECB uses its own profits generated by its monetary policy operations and cannot be technically insolvent. The ECB's financial independence reinforces its political independence. Because the ECB does not require external financing and symmetrically is prohibited from direct financing to public institutions, this shields it from potential pressure from public authorities.

ECB transparency

In addition to its independence, the ECB is subject to limited transparency obligations in contrast to EU Institutions standards and other major central banks. Indeed, as pointed out by Transparency International, "The Treaties establish transparency and openness as principles of the EU and its institutions. They do, however, grant the ECB a partial exemption from these principles. According to Art. 15(3) TFEU, the ECB is bound by the EU’s transparency principles “only when exercising [its] administrative tasks” (the exemption – which leaves the term “administrative tasks” undefined – equally applies to the Court of Justice of the European Union and to the European Investment Bank)."

In practice, there are several concrete examples where the ECB is less transparent than other institutions:

• Voting secrecy: while other central banks publish the voting record of its decision makers, the ECB's Governing Council decisions are made in full discretion. Since 2014 however, the ECB publishes "accounts" of its monetary policy meetings, but those remain rather vague and do not include individual votes.
• Access to documents: The obligation for EU bodies to make documents freely accessible after a 30-year embargo applies to the ECB. However, under the ECB’s Rules of Procedure the Governing Council may decide to keep individual documents classified beyond the 30-year period.
• Disclosure of securities: The ECB is less transparent than the Fed when it comes to disclosing the list of securities being held in its balance sheet under monetary policy operations such as QE.

ECB's democratic accountability

In return to its high degree of independence and discretion, the ECB is accountable to the European Parliament (and to a lesser extent to the European Court of Auditors, the European Ombudsman and the Court of Justice of the EU (CJEU). In practice, this accountability involves five main mechanisms:

• Annual report: the ECB is bound to publish reports on its activities and has to address its annual report to the European Parliament, the European Commission, the Council of the European Union and the European Council. In return, the European Parliament evaluates the past activities to the ECB via its annual report on the European Central Bank (which is essentially a non legally-binding list of resolutions).
• Quarterly hearings: the Economic and Monetary affairs Committee of the European Parliament organises a hearing (the "Monetary Dialogue") with the ECB every quarter, allowing members of parliament to address oral questions to the ECB president.
• Parliamentary questions: all Members of the European Parliament have the right to address written questions to the ECB president. The ECB president provides a written answer in about 6 weeks.
• Appointments: The European Parliament is consulted during the appointment process of executive board members of the ECB.
• Legal proceedings: the ECB' own legal personality allows civil society or public institutions to file complains against the ECB to the Court of Justice of the EU.

The ECB's response to the euro crisis

Main article: European debt crisis

From late 2009 a handful of mainly southern eurozone member states started being unable to repay their national Euro-denominated government debt or to finance the bail-out of troubled financial sectors under their national supervision without the assistance of third parties. This so-called European debt crisis began after Greece's new elected government stopped masking its true indebtedness and budget deficit and openly communicated the imminent danger of a Greek sovereign default.

Foreseeing a possible a sovereign default in the eurozone, the general public, international and European institutions, and the financial community reassessed the economic situation and creditworthiness of some Eurozone member states, in particular Southern countries. Consequently, sovereign bonds yields of several Eurozone countries started to aise sharply. This provoked a self-fulfilling panic on financial markets: the more Greek bonds yields rose, the more likely a default became possible, the more bond yields increased in turn.

This panic was also aggravated because of the inability of the ECB to react and intervene on sovereign bonds markets for two reasons. First, because the ECB's legal framework normally forbids the purchase of sovereign bonds (Article 123. TFEU). This prevented the ECB from implementing quantitative easing like the Federal Reserve and the Bank of England did as soon as 2008, which played an important role in stabilizing markets. Secondly, a decision by the ECB made in 2005 introduced a minimum credit rating (BBB-) for all Eurozone sovereign bonds to be eligible as collateral to the ECB's open market operations. This meant that if a private rating agencies were to downgrade a sovereign bond below that threshold, many banks would suddenly become illiquid because they would lose access to ECB refinancing operations. According to former member of the governing council of the ECB Athanasios Orphanides, this change in the ECB's collateral framework "planted the seed" of the euro crisis.

Faced with those regulatory constraints, the ECB led by Jean-Claude Trichet in 2010 was reluctant to intervene to calm down financial markets. Up until May 6th 2016, Trichet formally denied at a press conference the possibility of the ECB to embark into sovereign bonds purchases, even though Greece, Portugal, Spain and Italy faced waves of credit rating downgrades and increasing interest rate spreads.

Securities Market Programme

ECB Securities Markets Programme (SMP) covering bond purchases since May 2010

On 10 May 2010, the ECB announced the launch of a "Securites Market Programme" (SMP) which involved the discetionary purchase of sovereign bonds in secondary markets. Extraordinarily, the decision was taken by the Governing Council during a teleconference call only three days after the ECB's usual meeting of May 6th (when Trichet still denied the possibility of purchasing sovereign bonds). The ECB justified this decision by the necessity to "address severe tensions in financial markets." The decision also coincided with the EU leaders decision of May 10 to establish the European Financial Stabilisation mechanism, which would serve as a crisis fighting fund to safeguard the euro area from future sovereign debt crisis.

The's ECB bond buying focused primarily on Spanish and Italian debt. They were intended to dampen international speculation against those countries, and thus avoid a contagion of the Greek crisis towards other Eurozone countries. The assumption is that speculative activity will decrease over time and the value of the assets increase.

Although SMP did involve an injection of new money into financial markets, all ECB injections were "sterilized" through weekly liquidity absorption. So the operation was neutral for the overall money supply.

When the ECB buys bonds from other creditors such as European banks, the ECB does not disclose the transaction prices. Creditors profit of bargains with bonds sold at prices that exceed market's quotes.

As of 18 June 2012, the ECB in total had spent €212.1bn (equal to 2.2% of the Eurozone GDP) for bond purchases covering outright debt, as part of the Securities Markets Programme.

Outright Monetary Transactions

On 6 September 2012, the ECB announced a new plan for buying bonds from eurozone countries. The duration of the previous SMP was temporary, while the Outright Monetary Transactions (OMT) programme has no ex-ante time or size limit. On 4 September 2014, the bank went further by announcing it would buy bonds and other debt instruments primarily from banks in a bid to boost the availability of credit for businesses.

The Emergency Lending Assistance (ELA) programme was designed for financial institutions in a liquidity crisis, such as the Greek banks in the course of the 2015 Greek financial snafu, when the banks experienced massive deposit flight.

On 9 March 2015 the ECB started its quantitative easing programme, which was designed to ease sovereign stress in its member states. Purchases are initially €60bn per month and subsequently increased to €80bn per month. The program is expected to last until at least end of 2018.

Long-term refinancing operation

Though the ECB's main refinancing operations (MRO) are from repo auctions with a (bi)weekly maturity and monthly maturation, the ECB now conducts long-term refinancing operations (LTROs), maturing after three months, six months, 12 months and 36 months. In 2003, refinancing via LTROs amounted to 45 bln euro which is about 20% of overall liquidity provided by the ECB.

The ECB's first supplementary longer-term refinancing operation (LTRO) with a six-month maturity was announced March 2008. Previously the longest tender offered was three months. It announced two 3-month and one 6-month full allotment of Long Term Refinancing Operations (LTROs). The first tender was settled 3 April, and was more than four times oversubscribed. The €25 billion auction drew bids amounting to €103.1 billion, from 177 banks. Another six-month tender was allotted on 9 July, again to the amount of €25 billion. The first 12-month LTRO in June 2009 had close to 1100 bidders.

On 21 December 2011 the bank instituted a programme of making low-interest loans with a term of three years (36 months) and 1% interest to European banks accepting loans from the portfolio of the banks as collateral. Loans totalling €489.2 bn (US$640 bn) were announced. The loans were not offered to European states, but government securities issued by European states would be acceptable collateral as would mortgage-backed securities and other commercial paper that can be demonstrated to be secure. The programme was announced on 8 December 2011 but observers were surprised by the volume of the loans made when it was implemented. Under its LTRO it loaned €489bn to 523 banks for an exceptionally long period of three years at a rate of just one percent. The by far biggest amount of €325bn was tapped by banks in Greece, Ireland, Italy and Spain. This way the ECB tried to make sure that banks have enough cash to pay off €200bn of their own maturing debts in the first three months of 2012, and at the same time keep operating and loaning to businesses so that a credit crunch does not choke off economic growth. It also hoped that banks would use some of the money to buy government bonds, effectively easing the debt crisis.

On 29 February 2012, the ECB held a second 36-month auction, LTRO2, providing eurozone banks with further €529.5 billion in low-interest loans. This second long term refinancing operation auction saw 800 banks take part. This can be compared with the 523 banks that took part in the first auction on 21 December 2011. Net new borrowing under the February auction was around €313 billion – out of a total of €256bn existing ECB lending €215bn was rolled into LTRO2.

Powers and objectives during the European banking crisis

The European debt crisis has revealed some relative weaknesses in the sovereign debt of such member countries as Portugal, Ireland, Greece and Spain.

Rescue operations involving sovereign debt have included temporarily moving bad or weak assets off the balance sheets of the weak member banks into the balance sheets of the European Central Bank. Such action is viewed as monetisation and can be seen as an inflationary threat, whereby the strong member countries of the ECB shoulder the burden of monetary expansion (and potential inflation) to save the weak member countries. Most central banks prefer to move weak assets off their balance sheets with some kind of agreement as to how the debt will continue to be serviced. This preference has typically led the ECB to argue that the weaker member countries must:

• Allocate considerable national income to servicing debts.
• Scale back a wide range of national expenditures (such as education, infrastructure, and welfare transfer payments) to make their payments.

ECB balance sheet

ECB deposit facility

Current accounts at the ECB

The European Central Bank had stepped up the buying of member nations debt. In response to the crisis of 2010, some proposals have surfaced for a collective European bond issue that would allow the central bank to purchase a European version of US Treasury bills. To make European sovereign debt assets more similar to a US Treasury, a collective guarantee of the member states' solvency would be necessary. But the German government has resisted this proposal, and other analyses indicate that "the sickness of the euro" is due to the linkage between sovereign debt and failing national banking systems. If the European central bank were to deal directly with failing banking systems sovereign debt would not look as leveraged relative to national income in the financially weaker member states.

On 17 December 2010, the ECB announced that it was going to double its capitalisation. (The ECB's most recent balance sheet before the announcement listed capital and reserves at €2.03 trillion.) The 16 central banks of the member states would transfer assets to the ledger of the ECB.

In 2011, the European member states may need to raise as much as US$2 trillion in debt. Some of this will be new debt and some will be previous debt that is "rolled over" as older loans reach maturity. In either case, the ability to raise this money depends on the confidence of investors in the European financial system. The ability of the European Union to guarantee its members' sovereign debt obligations have direct implications for the core assets of the banking system that support the Euro.

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 subprime mortgage 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 System under a programme called Term auction facility to improve dollar liquidity in the eurozone and to stabilise the money market.

In late May 2012, looking ahead to further challenges with Greece, Bundesbank chief and ECB council member Jens Weidmann pointed out that the council could veto "emergency liquidity assistance" (ELA) to, for instance, Greece through a two–third majority of the council. If Greece chose to default on its debts yet wanted to stay in the Euro, the ELA would be one of the ways to accommodate the country's and its banks' liquidity needs or, alternatively, to precipitate departure.

On 31 October 2012, the ECB announced it had phased out as planned the Covered Bond Purchase programme, which was one of the crisis measures aimed at supporting the shaky banking system of the 17-country eurozone.

On Wednesday, February 24, 2016, as part of the Bundesbank's annual news conference, Bundesbank president and European Central Bank Governing Council member, Jens Weidmann, dismissed deflation in light of the ECB's current stimulus program, pointing out the healthy condition of the German economy and that the euro area isn't that bad off, on the eve of the March 9–10, 2016 meetings.

Monetary policy tools

The principal monetary policy tool of the European central bank is collateralised borrowing or repo agreements. These tools are also used by the United States Federal Reserve Bank, but the Fed does more direct purchasing of financial assets than its European counterpart. The collateral used by the ECB is typically high quality public and private sector debt.

The criteria for determining "high quality" for public debt have been preconditions for membership in the European Union: total debt must not be too large in relation to gross domestic product, for example, and deficits in any given year must not become too large. Though these criteria are fairly simple, a number of accounting techniques may hide the underlying reality of fiscal solvency—or the lack of same.

In central banking, the privileged status of the central bank is that it can make as much money as it deems needed. In the United States Federal Reserve Bank, the Federal Reserve buys assets: typically, bonds issued by the Federal government. There is no limit on the bonds that it can buy and one of the tools at its disposal in a financial crisis is to take such extraordinary measures as the purchase of large amounts of assets such as commercial paper. The purpose of such operations is to ensure that adequate liquidity is available for functioning of the financial system.

Regulatory reliance on credit ratings

Think-tanks such as the World Pensions Council have also argued that European legislators have pushed somewhat dogmatically for the adoption of the Basel II recommendations, adopted in 2005, transposed in European Union law through the Capital Requirements Directive (CRD), effective since 2008. In essence, they forced European banks, and, more importantly, the European Central Bank itself e.g. when gauging the solvency of financial institutions, to rely more than ever on standardised assessments of credit risk marketed by two non-European private agencies: Moody's and S&P.

Location

Main article: Seat of the European Central Bank

The new ECB headquarters, which opened in 2014.

The bank is based in Ostend (East End), Frankfurt am Main. The city is the largest financial centre in the Eurozone and the bank's location in it is fixed by the Amsterdam Treaty. The bank moved to new purpose-built headquarters in 2014 that were designed by a Vienna-based architectural office, Coop Himmelbau. The building is approximately 180 metres (591 ft) tall and will be accompanied with other secondary buildings on a landscaped site on the site of the former wholesale market in the eastern part of Frankfurt am Main. The main construction began in October 2008, and it was expected that the building will become an architectural symbol for Europe. While it was designed to accommodate double the number of staff who operate in the former Eurotower, that building has been retained since the ECB took responsibility for banking supervision and more space was hence required.

See also

• Economics
• European Banking Authority
• European Systemic Risk Board
• Open market operation

External links

• European Central Bank, official website.
• The origins and development of the European organisations: The European Central Bank, CVCE.eu website.
• European Central Bank: history, role and functions, ECB website.
• Statute of the European Central Bank (2012)