The Role of Central Banking in the Global Economic and Financial Crisis

Topics: Monetary policy, Central bank, European Central Bank Pages: 6 (2080 words) Published: July 29, 2013
"The Role of Central Banking in the Global Economic and Financial Crisis"



1.Introduction

It is fair to say that central banks around the world have learned the lessons from previous crises and they attempted to change financial regulations to keep pace with the changing global financial system. The policy response triggered by the recent financial crisis has been rapid and it appears that the global policy response has helped to mitigate the effects of the financial crisis. European Central Bank response to the latest crisis was an example of swift and effective reaction. It combined a mix of standard and non-standard monetary actions.

2.European Central Bank (ECB) – history and mission

The ECB is the central bank for Europe's single currency (the euro) and its main task is to maintain the euro's purchasing power and thus price stability in the euro area. The ECB was created in 1998 to serve as the central bank representing the interests of the countries belonging to the European Union. In less than a decade, the ECB, headquarter in Frankfurt, Germany, has emerged as one of the world’s most important financial institutions. The Treaty of Nice (1967) established a three-stage plan to create a single currency and monetary policy for the euro area by creating the European System of Central Banks (ESCB). The ESCB consists of the ECB as well as the national central banks for each of the member nations. The ECB is 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 to handle the transitional issues of states adopting the euro and prepare for the creation of the ECB and European System of Central Banks. The ECB formally replaced the EMI on 1 June 1998 by virtue of the Treaty on European Union; however it did not exercise its full powers until the introduction of the euro signaling the third stage of EMU. The ESCB officially became law for the countries participating in the ESCB on January 1, 1999 – this date also saw the introduction of the Euro as the official currency for the euro area, replacing the native currencies of each country.

3.European Central Bank monetary policy and role

European Central Bank has one monetary objective – promoting price stability – unlike US Federal Reserve System which is also empowered to promote maximum employment and moderate long term interest rates (Eckes). According to the ECB official website, the basic tasks of ECB are definition and implementation of monetary policy for the euro area; conduct of foreign exchange operations; holding and management of the official foreign reserves of the euro area countries and promotion of the smooth operation of payment systems. Some of the additional tasks include the issuance of banknotes within the euro area, collecting statistical information, and maintaining working relations with relevant international and European institutions. Although the ECB is governed by European law directly and thus not by corporate law applying to private law companies, its set-up bring to mind a corporation in the sense that the ECB has shareholders and stock capital. Its capital is five billion euros which is held by the national central banks of the member states as shareholders. Like most other central banks the European Central Bank relies on open market operations to influence short-term interest rates in order to manage the Euro system’s money supply. The ECB also uses public messages and press releases to indicate its position with respect to monetary policy. To make it possible to measure results, the ECB has adopted the following benchmarks: the ECB’s Governing Council defines price stability as “a year-on-year increase in the Harmonized Index of Consumer Prices (HICP) for the euro area of below 2%”. In addition, the ECB has adopted the measuring of inflation as a reference as well by stating that “in the pursuit of...

References: Eckes, A. (2011) The Contemporary Global Economy, Oxford, UK: Wiley -Blackwell
Preat, P (2012) Managing financial crises: the role of the ECB. Retrieved August 20, 2012
http://www.ecb.int/press/key/date/2012/html/sp120510.en.html
Rinkus, M. A (2011) Modern Global Financial Crises: A Commercial Banker’s Perspective
Stiglitz, J.E. (2010) Freefall: America, free markets, and the sinking of the world economy.
New York: W.W. North & Company.
The European Central Bank official website Retrieved September 6, 2012
http://www.ecb.int/ecb/html/index.en.html
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