European Central Bank

Updated on March 19, 2024
Article byWallstreetmojo Team
Edited byWallstreetmojo Team
Reviewed byDheeraj Vaidya, CFA, FRM

What is the European Central Bank?

The European Central Bank is the apex bank of the European member countries which monitors the banking and financial functions of all the member countries to maintain the price stability of the European currency, i.e., the Euro which is adopted by all the member countries to maintain the price stability and prevent themselves from financial troubles.

European Central Bank

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The primary job of the European central bank president and their immediate team is to maintain stability in the prices within the economy, create job opportunities, and create policies that boost the growth of the economy. Out of the 27 members states of the European Union, 20 states accept Euro as a legal tender for trade.

Key Takeaways

  • The European Central Bank, the apex bank of the European Union’s member states, oversees all of its members’ banking and financial operations to preserve the value of the Euro, the common currency adopted by all of its members to maintain price stability and safeguard against financial difficulties.
  • The European Central Bank President and their immediate team’s primary responsibilities are to preserve price stability within the economy, generate job opportunities, and formulate policies that encourage economic growth. 20 of the 27 European Union member nations recognize the Euro as legal money for commerce.
  • After considering macroeconomic factors, the European Central Bank determines its interest and exchange rates. To fully grasp the notion, it’s also crucial to comprehend its reporting structure and hierarchy. 

European Central Bank Explained

The European Central Bank is the central bank of the members of the European Union, which has the single aim of maintaining the price stability of the Euro, which is adopted by 20 out of 27 member states. It aims to control inflation by monitoring the monetary policyMonetary PolicyMonetary policy refers to the steps taken by a country’s central bank to control the money supply for economic stability. For example, policymakers manipulate money circulation for increasing employment, GDP, price stability by using tools such as interest rates, reserves, bonds, etc.read more and controlling the money supply in the market through interest rates. It is managed and monitored by the team of the European central bank. The team members are amongst representatives of the member states as decided and agreed upon mutually. The bank functions according to the predefined rules and regulations, and all the decisions are taken on the majority basis after surveying the market situations and conditions.

The European Central bank is the controlling bank of all the member states. Currently, 27 European countries are members of the ECB. The main aim behind establishing the bank is to maintain the price stability of the currency adopted by all the members, i.e., the Euro in the international market. The bank is also responsible for issuing guidelines, monitoring the banking system, controlling inflation and unemployment, and maintaining price stability. The structure consists of the president and vice-president as the chairpersons and Governors of all the member states and the other six executives as the Governing Committee. There are various committees under the Governing committee through which compliance is ensured. The loopholes and suggestions are communicated to the member states through the audit reportsAudit ReportsAn audit report is a document prepared by an external auditor at the end of the auditing process that consolidates all of his findings and observations about a company's financial statements.read more and compliance reports. The committee of the European central bank meets twice a month to ensure smooth conduct and to formulate and discuss the plans for achieving the various objectives, which ensures the growth of the member countries.

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History

Before discussing in depth details like the European central bank interest rates and other such details about the apex bank, it is important to understand its history. It would provide us the base from where it becomes simpler to understand their policies and actions.

The European Central Bank was started on January 1, 1999, when some European Union members adopted the Euro currency. It is a bank for Europe’s single currency, i.e., the Euro, which aims to maintain the price stability of the Euro in the international market. The head office is situated in Germany and consists of 27 members. The main aim behind establishing the Bank is to increase purchasing power through various monetary policies. It also guides the members about implementing various policies and other financial matters. In addition, the bank is accountable to the public through the parliament and publishes the annual reportAnnual ReportAn annual report is a document that a corporation publishes for its internal and external stakeholders to describe the company's performance, financial information, and disclosures related to its operations. Over time, these reports have become legal and regulatory requirements.read more of its accounts, functions, and actions.

Objectives

Let us understand the objectives set by the European central bank president and the team for the betterment of the economy through the discussion below. These policies and objectives might change from time to time according to the immediate and long-term requirements of the economy.

  1. Maintain the price stability of the currency, i.e., the Euro.
  2. To monitor the banking system of member states.
  3. To monitor and aid in preparing the monetary policy.
  4. Ensure the economic growth and maintenance of purchasing power.
  5. Guiding the member states about the foreign exchange operations and transactions.
  6. Ensures the smooth conduct of business and economy.
  7. Maintains the balance of trade in terms of imports and exports.
  8. Issue the guidelines on operations by the member states’ banks and also ensure compliance.

How Does It Work?

The European central bank interest rates and exchange rates are decided after considering circumstances on a macro level. However, it is also important to understand its hierarchy and reporting structure to completely understand the concept. Let us understand how it works through the explanation below.

  • The Team of ECB consists of 6 Executive members plus the Governors of the central bank of all the member states plus the president and vice-president.
  • The team ensures the performance of their state’s banking system as per the guidelines.
  • The Monetary Policy is framed with suggestions and reviews from all the team members and based on a market survey.
  • The team of banks ensures the member states follow the guidelines issued by the bank by inspection, audit, and report on this behalf.
  • Then, the team meets twice a month and discusses the various reports onwsm-tooltip header=”Compliance And Audit” description=”Compliance Audit is a detailed review of organization’s compliance towards statutory laws, local laws, internal rules, and decisions of the organization as applicable.” url=”https://www.wallstreetmojo.com/compliance-audit/”]compliance and audit[/wsm-tooltip].
  • It segregates the responsibilities amongst the members, and members ensure compliance and monitor the guidelines.
  • Then, after the discussion on the reports, the final report is sent to all the members consisting of the reviews by the team, their drawbacks, and suggestions to improve.
  • The president and vice-president approve the final report.

Structure

The structure is headed by the European central bank president. However, the structure surrounding the head of the organization is slightly complicated. Let us demystify the structure through the points below.

Functions

The widely recognized and common function that people know is the European central bank interest rates. However, there are multiple other avenues that the apex bank has to concentrate on based on the requirement of the economy.

  1. To Prepare the Monetary policies to maintain price stability.
  2. Monitor the banking and financial institutionsFinancial InstitutionsFinancial institutions refer to those organizations which provide business services and products related to financial or monetary transactions to their clients. Some of these are banks, NBFCs, investment companies, brokerage firms, insurance companies and trust corporations. read more and ensures their compliance with the regulation and smooth conduct.
  3. To control the inflation and unemployment of the member states.
  4. Monitor the import-export transactions of the member states.
  5. Guides the member states on the functioning.
  6. Conduct surveys and audits of the member states.
  7. Maintain the stability of the currency in the international market.
  8. They are ensuring the economy’s smooth functioning.
  9. Formulate plans for economic growth.
  10. Ensures transparency and accountability at all levels and professional competency of all the members.

Frequently Asked Questions (FAQs)

What else can the European Central Bank do?

The European Central Bank (ECB) performs particular duties in banking supervision, banknotes, statistics, macroprudential policy, financial stability, and intergovernmental and European collaboration.

Does the European Central Bank impose sanctions?

Significant banks that violate directly relevant EU legislation, ECB rulings, or rules may face financial penalties from the ECB

What is the ECB interest rate?

As a result, starting on May 10th, 2023, the interest rates on the primary remortgage operations, the marginal lending facility, and the deposit facility will all increase to 3.75%, 4.00%, and 3.25%, respectively.

What is the maturity period of the ECB?

The minimum average maturity time for ECB securities up to $50 million or equivalent will be three years, while for ECB securities beyond $50 million or equivalent, it will be five years.

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