Table of Contents
Introduction
A comparison between the Federal Reserve Bank and the European Central Bank, exploring the differences between bank structures, work models, main policies and roles. The paper will go in more details about each bank, explaining the roles of each bank, responsibilities. It will also cover the establishment history and how it became important worldwide, and a main point of financial transactions between the banks in the world. FED, formally known as Federal Reserve is the gatekeeper of the U.S. economy. It is the central bank of the United States, it is also known as the bank of banks in the United States. Every single bank, small or large, has to be monitored and registered with the Federal Reserve Bank.
The FED monitors and regulates all banks in the U.S, it also controls the nations money, and everything money related in the United States has to go through the FED. The banks don’t requests permissions for transactions from the FED, but the FED has to know about all transactions inside and outside. The FED also influences the nations economy in many ways; it has control over taxes, interest rates, budgets for big financial projects, and more money topics that we will cover in the paper.
The European Central bank is one of 7 bank institutions in Europe and the central bank in Europe. The European Central bank supervises every transaction that happens between bank in Eurozone, and it is considered to be on of the most critical bank in the world. The European Central bank monitors over 120 central banks or commercial banks in Europe, or in the member states.
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The Federal Reserve Bank
The Federal Reserve Bank is the central bank of the United States; it was founded by the congress in 1913 to provide the nation with a safer financial and banking system to easy the transactions between US citizens and to reduce frauds and money loss. The role of the Federal Reserve Bank has expanded of the years, and become a main point of transactions in the US economy and the world. The Federal Reserve Bank has three main functions: Monetary policies, stability of the financial System, banking supervision and Financial Services. In this paper we will explore all functions in more details.
The Federal Reserve Bank Structure
The establishers of the Federal Reserve Bank created a central banking system that is based on three key features:
The Board of governors
The members of the Federal Reserve Bank are nominated by the president to be board member of the bank. The board of members is an agency that works with the FED on the behalf of the congress where they report to the congress and overseas the 12 centrals banks. The Federal Reserve banks 12 Federal Reserve Banks spread out in the United States; they are operators of the Federal Reserve banking system.
The Federal Open Market Committee (FOMC)
The term “monetary policy” refers to actions taken by the central bank, such as the Federal Reserve, to influence the availability and cost of money and credit to help promote national economic objectives. The Federal Reserve Act of 1913 gave the Federal Reserve the responsibility to set monetary policy.
Main Policy Tools
To ensure employment for citizens, stable prices, and consistent long-term interest rate in the economy.
The Federal Reserve has control over three main monetary tools:
– Open market operation
– The discount Rate
– Reserve requirements
The board is responsible for the discount rate and reserve requirements in the system. However, for the open market operation there is a committee that is responsible for that. Using the three tools mentioned above, the Federal Reserve bank is able to control, and influence the financial demand and supply, therefore, balances that money depository at Federal Reserve Bank.
The European Central Bank
The ECB started in 1998 following the Treaty of Amsterdam that amended the Treaty on the European Union. The bank succeeded the European Monetary Institute (EMI), which had been formed at the second stage of the Economic and Monetary Union (EMU) to handle transitional issues of adopting Euro as a currency. It also prepared for the creation of ECB and European System of Central Banks (ESCB). The ESCB includes the ECB and the national central banks of all the EU member states, including those that have not adopted Euro.
The ECB first exercised its full powers on 1 January 1991 after the introduction of the Euro as the official currency for the Euro area. During this time, the national central banks of the 11 EU member states transferred their monetary policy function to the ECB. Other states within the EU joined later on, with Greece, Slovenia, Cyprus, Malta, Slovakia, Estonia, Latvia and Lithuania joining the EU between 2001 to 2015. The expansion enlarged the bank’s scope, and it marked a milestone in the complex process of EU integration.
There are four decision-making bodies of the ECB that are mandated to undertake the objectives of the institution. These bodies include the Governing Council, Executive Board, General Council and the Supervisory Board.
The Governing Council
The Governing Council comprises six members of the Executive Board and Governors of the national central banks of the 19 Euro area member states. The Council members meet twice a month at the institution’s offices in Germany. The minutes of their meetings are required to be published prior the next meeting.
One of the primary functions of this body is the formulation of monetary policy for the Euro area. In this regards, they make decisions on monetary objectives, interest rates and the supply of reserves in the Euro system. Every six weeks, the President and Vice-President of the ECB must chair a press conference to explain in detail their monetary policy decisions. The Governing Council also takes necessary decisions that ensure the performance of the functions of ECB and the Euro system.
The Executive Board
The Executive Board comprises the President, Vice-President and four other executive members appointed by the European Council. The executive members serve for an 8-year non-renewable term. The role of the Executive Board is to implement the monetary policy as defined by the Governing Council and manage the day-to-day operations of the ECB, alongside the Chief Services Officer. Also, the board prepares the Governing Council meetings, and it exercises power delegated to it by the Governing Council. It holds meetings every Tuesday.
The General Council
The General Council is a transitional body that carries out responsibilities taken over from the European Monetary Institute (EMI). It comprises the President, Vice-President, and Governors of the national central banks of the 28 EU member states. The body will continue to exist until all EU member states have adopted the Euro. Currently, only 19 out of the 28 EU member states have taken up the Euro as their single currency.
As a transitional body, the General Council is tasked with fixing the exchange rates of currencies for countries taking up the Euro. The council also contributes to the preparation of ECB annual report, setting conditions of employment of the European Central Bank members of staff and collection of data.
The Supervisory Board
The Supervisory Board comprises the chair, vice-chair, four ECB representatives and representatives of national supervisors. The board plans and executes the supervisory function of the ECB. It also proposes draft decisions to the Governing Council through the non-objection procedure.
There is a Steering Committee that supports the board’s activities, including organizing the board’s meetings. The Steering Committee members comprise the Chair and Vice-Chair of the Supervisory Board, One ECB representative and five representatives of national supervisors.
The primary function of the European Central Bank is to maintain price stability and safeguard the value of the Euro. The Governing Council defined price stability as inflation of under but close to 2%. Price stability is essential for spurring economic growth and job creation, which are core objectives of the EU.
The ECB has the monopoly on the issue of bank notes in the Euro area. It influences the amount of money in the market by controlling money available to eligible central and commercial banks in EU member states. Also, the ECB makes weekly announcements on the amount of money it wishes to supply and the minimum acceptable interest rate. Eligible banks that have given collateral then place their bids for the ECB funds through an auction mechanism. Once the banks have got the funds, they use them to advance loans to individuals and businesses.
In conclusion, to ensure the robustness of the banking system, central & federal banks are responsible for banking supervision in the economy. In respect of banking supervision, central & federal bank has the power to grant and withdraw banking licenses, conduct supervisory reviews and set higher capital requirements to counter any financial risks, and to ensure stability in the economy, and high rate of employment.
The main difference between the Fed and the ECB is at times of crisis, where the Feds buys U.S. Treasury bond that belongs to the government, while the ECB lends money to the government and commercial bank in Europe. The loan has a deadline and banks must pay ECB back when the loan expires.
Reference:
- https://www.federalreserve.gov/aboutthefed.htm
- https://corporatefinanceinstitute.com/resources/knowledge/economics
- https://europa.eu/european-union/about-eu/institutions-bodies/european-central-bank_en
- https://www.quora.com/What-is-the-difference-between-the-European-Central-Bank-and-the-Federal-Reserve
- https://www.researchgate.net/publication/270466380_The_European_Central_Bank_and_the_US_Federal_Reserve_as_Lender_of_Last_Resort
- https://www.ecb.europa.eu/press/key/date/2016/html/sp161012_1.en.html
- https://voxeu.org/article/ecb-and-fed-comparative-narrative
