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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 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%.[1] 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.[2]

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.[3]

The latter can be seen, for example, in the bank's intervention during the financial crisis of 2007 when it loaned billions of euros to banks to stabilise the financial system.[4]

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.[5]


Central banking in the EMU

Source: European Central Bank, History, Role and Functions, ECB, 2006

"Having adopted the euro as their single currency, the EU Member States that are part of the euro area have relinquished their monetary sovereignty. The ECB, as the core of the newly established central banking system called the European System of Central Banks (ESCB), has taken on responsibility for the monetary policy in the euro area.

The ECB, the ESCB and the Eurosystem

Under the EC Treaty, the ESCB is entrusted with carrying out central banking functions for the euro. However, as the ESCB has no legal personality of its own, and because of differentiated levels of integration in EMU, the real actors are the ECB and the NCBs of the euro area countries. They exercise the core functions of the ESCB under the name “Eurosystem”...

...There are three main political and economic reasons why a system was established to carry out central bank functions for the euro, and not a single central bank:

  1. The establishment of a single central bank for the whole euro area (possibly concentrating central bank business in one single place) would not have been acceptable on political grounds.
  2. The Eurosystem approach builds on the experience of the NCBs, preserves their institutional set-up, infrastructure and operational capabilities and expertise; moreover, NCBs continue to perform some non-Eurosystem-related tasks.
  3. Given the large geographic area of the euro area, it was deemed appropriate to give credit institutions an access point to central banking in each participating Member State. Given the large number of nations and cultures in the euro area, domestic institutions (rather than a supranational one) were considered best placed to serve as points of access to the Eurosystem.

The construction of the Eurosystem builds on established central bank structures and respects the cultural and national diversity of the euro area."

National rescue measures in response to the crisis

Source: National rescue measures in response to the current financial crisis ECB Legal Working Paper, June, 2009

The current financial crisis is unprecedented and has dramatically shown the weaknesses of global interconnected financial markets, especially concerning the underestimation and underpricing of risk. These weaknesses have been and remain to be addressed by European legislators, both in the short term and in the long term.

With regard to long-term measures to counter the crisis, a review of the regulatory and supervisory framework for the financial sector is vital. It has become obvious that better coordination of supervision at a European level is required. Here, both macro- and micro- prudential supervision must be addressed.

With regard to macro-prudential supervision, i.e. supervision of the financial system as a whole, the report of the de Larosière group envisages that the ECB will play a central role. Indeed, the ECB is at the heart of the ESCB, collecting, pooling and analysing all the information crucial for the assessment of the banking sector, which is an essential element for decision-making in the supply of liquidity to the euro markets.

Becoming macro-supervisor is, therefore, a natural development of its monetary functions, which requires an enhancement of its means and tools, and a clear and legally sound stability mandate. As a macro-supervisor, the ECB will need to interact in a cooperative way and in both directions with the micro-supervisors, whose EU-wide dimension needs an important overhaul of existing structures.

This paper deals with the short-term measures taken by EU Member States to counter the immediate effects of the crisis, as adopted from October 2008 onwards. The intention is to provide a detailed overview of such rescue measures.

With regard to the measures adopted in response to the crisis, the ECB has played a guiding role, for example, through the adoption of its Recommendations on guarantee and recapitalisation schemes and the Guiding principles on bank asset support schemes. The ECB’s Directorate-General Legal Services has also provided guidance in assessing the legal implications of the crisis measures, in particular, by taking the lead role in preparing the ECB’s opinions issued in response to consultation requests from the Member States.

With regard to the challenges identified above, reform of worldwide financial sector legislation has only yet started. This paper is intended to serve as a useful tool for prospective legislative activities in this field.

Bloomberg sues ECB over disclosure

Bloomberg News filed a lawsuit against the European Central Bank, seeking to make it disclose documents showing how Greece used derivatives to hide its fiscal deficit and helped trigger the region’s sovereign debt crisis.

The lawsuit asks the European Union’s General Court in Luxembourg to overturn a decision by the ECB not to disclose two internal documents drafted for the central bank’s six-member executive board in Frankfurt this year. The notes show how Greece used swaps to hide its borrowings, according to a March 3 cover page attached to the papers obtained by Bloomberg News.

ECB President Jean-Claude Trichet withheld the documents after the European Union and International Monetary Fund led a 110 billion-euro bailout ($144 billion) for Greece. The dossier should be disclosed to stop governments from using the derivatives in that way again and show how EU authorities acted on information they had on the swaps, according to the suit, filed by Bloomberg Finance LP, the parent of Bloomberg News.

The EU is dependent “on member states taking an open and transparent approach in relation to their levels of debt,” Bloomberg said in its suit. “If Greece has failed to take such an approach in the past, there is a compelling public interest in relevant information being disclosed.”

ECB reports and working papers


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