CH4: Central banking

International relations of the ECB

- permanent observer status at IMF - participates in multilateral organizations and fora - is a member and shareholder of the BIS - participates in a number of committees & working groups of the OECD - participates in the new Financial Stability Board

European banking union

response to financial crisis in 2008, EU-wide rules for banks in EURO area.

Prudential regulation

rules that financial institutions have to comply with in order to ensure effective risk management and the safety of depositors' funds.

Financial Stability Board

set up by G20 leaders as successor to FSF

ECB

European Central Bank conducts monetary policy for the euro area.

ESCB

European System of Central Banks

ECB task

prudential supervision of credit institutions

Capital requirement directive

reflects the Basel rules on capital measurements and standards "Global risk management"

Basel Committee on Banking Supervision

1987, comprised of central banks & supervisory authorities of 10 countries

Convergence criteria

4 criteria that EU member states must fulfill to enter the euro zone: price stability, government finance, exchange rate stability & long-term interest rate.

Economic analysis

Analysis of economic dynamics and shocks

Monetary analysis

Analysis of monetary trends

BIS

Bank for International Settlements

Treaty on the Functioning of the EU

Basic tasks are definition and implementation of monetary policy for the euro area, conduct of foreign exchange operations, portfolio management and promotion of smooth operations of payment systems.

Non-euro

Bulgaria, Croatia, Czech Republic, Denmark, Hungary, Poland, Romania, Sweden & UK

CRD

Capital requirement directive

Financial markets

Channel excess funds from lenders to borrowers.

IMF

International Monetary Fund regularly monitor & assess the economic developments & policies of their member countries.

European System of Central Banks

ECB + NCBs of all EU member states

Eurosystem

ECB + NCBs of countries that have adopted the euro

Statistics

ECB collect statistical information from national authorities or directly from economic agents.

Two-pillar monetary policy strategy

Economic analysis & Monetary analysis

FSF

Financial Stability Forum

Single rulebook

Foundation of the banking union that consists of a set of legislative texts that all financial institutions in the EU must comply with

HIPC

Harmonized Index of consumer prices

Financial intermediaries

Indirectly bring lenders and borrowers together.

Tasks of the ESCB

Maintain price stability, define & conduct monetary policy within the euro-area, publish statistical data and international cooperation.

NCBs

National central banks

OECD

Organization for Economic Co-operation and Development acts as a separate member of the EU delegation alongside European Commission.

Price stability

Primary objective inflation below but close to 2% over the medium term

SSM

Single Supervisory Mechanism composed of the ECB & the national competent authorities.

ECB legal basis

Treaty on the Functioning of the European Union (Maastricht Treaty)

Financial infrastructure

allows transfer of payments & the trading, clearing & settlement of securities

Government finance

annual government deficit must not exceed 3% of GDP and government debt must not exceed 60% of GDP

Exchange rate stability

applicants must not devaluate their currency

Financial system

consist of financial markets, financial intermediaries and financial infrastructure.

Euro area

consists of the EU countries that have adopted the euro

Financial stability

crucial role in the financial system

Prudential supervision

ensuring that financial institutions follow these rules.

minimum risk-based capital adequacy

first drafted basel document: international "minimum" amount of capital that banks should hold

Monitoring & assessment activities

identify vulnerabilities and risks in the financial system

Convergence criteria: Price stability

inflation rate must not exceed by > 1,5 point of 3 best performing member states

Single rulebook rules

lay down capital requirement for banks, ensure better protection for depositors and regulate the prevention & management of bank failures

Why below, but close to 2%?

low enough to fully reap the benefits of price stability. ECB's commitment to provide an adequate margin to avoid the risks of deflation: nominal interest rates cannot fall below zero. Overstatement of HICP versus true inflation. Provide sufficient margin for inflation differentials in the euro area.

Lines of defense

measures adopted by public authorities to prevent or mitigate financial crises: Prudential regulation, prudential supervision and monitoring & assessment activities.

Long-term interest rate

not be more than 2% higher than 3 best performing member states