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: The distinct philosophy of the ECB’s monetary and prudential tasks

: Monetary policy: favouring the market approach

The Union shall have exclusive competence in monetary and exchange-rate matters for those Member States whose currency is the euro. The ECB, together with the national central banks (NCBs) of these Member States constitute the Eurosystem. The Eurosystem is governed by the decision-making bodies of the ECB (i.e. the

Governing Council and the Executive Board) and is responsible for carrying out a number of “basic tasks” of a monetary nature, including the definition and implementation of monetary policy.[1] The Eurosystem and the ECB are entrusted with additional tasks. The Eurosystem carries out its tasks in accordance with the dual operating principle of centralised decision-making at ECB level and decentralised execution at the level of the NCBs.

The implementation of those tasks by the Eurosystem is objective-oriented: the primary objective of the Eurosystem shall be to maintain price stability and, without prejudice to this objective, to support the general economic policies in the Union. These objectives are to be pursued in accordance with the principle of an “open market economy with free competition”. When carrying out the tasks conferred on it by the Treaties or the Statute, the ECB shall, for example, determine the Eurosystem’s monetary policy strategy, quantify the level of price stability to be achieved, and choose among the instruments at its disposal to achieve its objectives. In this regard, the ECB has to choose between two approaches: (i) regulatory control of the money supply in circulation in order to influence prices directly; or (ii) indirect control of prices in the medium term through the exercise of its monetary power. This second option is favoured by the Treaties and corresponds to the practice of modern central banks. This is the choice made by the ECB since the very beginning.

It is essential to understand that monetary power is of a fundamentally different nature from regulatory power. The monetary power represents the ECB’s ability to create money, either by issuing euro banknotes or by granting credit in 'central bank money’ to counterparties (e.g. credit institutions) which have an account in NCBs of the Eurosystem. Whenever the ECB lends 'central bank money’ to a credit institution, this loan is recorded in the balance sheet of that institution as a liability. At the same time, the liquidity obtained from the ECB constitutes a resource available to the credit institutions to meet their refinancing needs. Although the ECB unilaterally defines the conditions under which credit institutions may participate in monetary policy operations,23 credit institutions have no legal obligation to participate. Under normal circumstances, credit institutions cover their financial needs by turning to the interbank market. The exercise of monetary power does not preclude the use of regulatory power. On the contrary, they are complementary. The ECB requires credit institutions established in the euro area to hold minimum reserves with the NCBs of the Eurosystem. The increase or decrease in the level of minimum reserves affects the structural liquidity needs of credit institutions. Although regulatory power contributes to the effectiveness of monetary power, the influence of monetary power on the alignment of credit institutions’ behaviour derives from elsewhere. The ECB has a unlimited monetary capacity and acts as a “bank for the commercial banks”.24 This unique feature is the reason why credit institutions are concerned to maintain access to the ECB’s liquidity and comply as much as possible with the operational rules of monetary policy, the legal requirements for the transmission of statistical information and the holding of minimum reserves. Non-compliance with legal requirements is thus far from being common.

  • [1] See Article 127(2) TFEU. 2 Article 127(4) TFEU on advisory tasks and Article 127(6) on specific tasks relating to prudential supervision carried out by the ECB; Article 127(5) TFEU on the contribution of the ESCB to the smooth conduct of prudential policy and the stability of the financial system. 3 See R.M. Lastra, ‘The Division of Responsibilities between the European Central Bank and the National Central Banks within the European System of Central Banks’, in J.-V. Louis, H. Bronkhorst (eds), The Euro and European Integration / L’euro et l’intégration européenne (Euro Institute / P.I.E. Peter Lang 1999), 199-216. 4 Article 127(1) TFEU, and Article 2 of the Statute. 5 Articles 119(2) and 127(1) TFEU, and Article 2 of the Statute. 6 Control may consist in setting ceilings on credit openings by credit institutions, setting minimum limits on Treasury bill subscriptions by credit institutions, etc. Abandoned in practice by the monetary authorities since the 1970s, the use of instruments of monetary control is still considered in the Treaties. 7 Article 128 TFEU, and Article 16 of the Statute. 8 Article 17 of the Statute.
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