European Central Bank (ECB)

Central bankers in Europe have always resented the narrow monetary policy mandate given to the ECB under the Maastricht Treaty. Banking supervision was not included among the ECB s objectives, though one article of the treaty gives the system of European central banks as a whole the task of contributing to effective supervision.

The ESM, supported by the ECB, could become a European version of the International Monetary Fund, and the new funds in the European budget could become, with support from the European Investment Bank, Europe s World Bank. All of this will take time, but there is some movement in the right direction.

If savers in Portuguese banks start moving their money to Germany, the ECB will recycle these euros back to Portugal through interbank deposits. Again, there is no limit to how much money the ECB can recycle, provided Portuguese banks remain solvent which they will, so long as the ECB continues to buy Portuguese government bonds.

After the outbreak of turbulence in financial markets last year, the European Central Bank immediately provided ample liquidity to calm the situation, and has continued to do so ever since. At the same time, the ECB never lost sight of its main goal maintaining price stability.

PALO ALTO Once upon a time, European Central Bank President Jean Claude Trichet communicated effectively with the outside world. Not anymore.

It will not do ECB credibility any good if takes an economic collapse to convince it that the coast is clear on the inflation front. The ECB is not the old Bundesbank, which had such public support and trust in Germany that it could get away with almost anything.

The European Central Bank would also be prepared to attend a meeting to clarify terms of reference.

My proposal is to use the European Financial Stability Facility (EFSF) and the European Stability Mechanism (ESM) to insure the European Central Bank against the solvency risk on any newly issued Italian or Spanish treasury bills that it may buy from commercial banks. This would allow the European Banking Authority to treat these various T bills as the equivalent of cash, because they could be sold to the ECB at any time.

In January, it fully adopted QE. Indeed, by now the Fed, the Bank of England, the Bank of Japan, the ECB, and a variety of smaller advanced economies central banks, such as the Swiss National Bank, have all relied on such unconventional policies.

The ECB s Battle against Central Banking

Germany s consent was needed to create Europe s banking union, which entailed the transfer of supervisory powers to the European Central Bank and the creation of a common fund to resolve failing banks. And German resistance contributed to a delay in the ECB s intervention in bond markets when the ECB finally did launch its bond buying program, it did so with Germany s tacit approval.

The European Central Bank provides an interesting analogy, because it has two voting procedures, depending on the issue at hand. The ECB s Governing Council comprises the six members of the Executive Board plus the governors presidents of the 16 national central banks of the eurozone countries.

(b) Intergovernmental organizations African Development Bank, European Commission and European Space Agency (ESA)

The euro would, however, have to be accepted as legal tender in the UK, alongside the pound, and in the commonwealth countries, and this would demand close cooperation between the Bank of England and the ECB. Such a compromise would increase the EMU s weight both inside and outside Europe.

This collaboration has included joint financing with the EU, UNDP, the World Bank, central banks and bilateral partners.

Ecb Is Now Europe s Anchor

But QE would present a problem for the ECB that the Fed and other central banks do not face. The eurozone has no centrally issued and traded Eurobond that the central bank could buy.

EBRD European Bank for Reconstruction and Development

Mr. R. Burston European Bank for Reconstruction and Development (EBRD)

Photograph of Jean Claude Trichet (c) European Central Bank Andreas Böttcher

In December 2011 and February 2012, the European Central Bank announced the long term refinancing operation (LTRO), whereby European banks were lent around 1 trillion ( 1.3 trillion) in two tranches. Then, in July, came ECB President Mario Draghi s famous assurance to do whatever it takes to save the euro.

Capturing the ECB

From Central Bank to Central Planning?

All eyes are now on the European Central Bank s asset quality review, due to be completed in the next couple of months. The AQR is the key element in a comprehensive assessment of Europe s banks before the ECB formally takes on supervisory responsibility for more than 80 of the eurozone banking system in November.

CAMBRIDGE The European Economic and Monetary Union (EMU) and the euro are about to celebrate their tenth anniversary. The euro was introduced without serious problems and has since functioned well, with the European Central Bank delivering the low inflation that is its sole mandate.

Its clients are the banks it is a place where banks can go to borrow money when they really need to and its functions are to support the banking sector so that banks can make their proper profits as they go about their proper business. Above all, the central bank must ensure that the money supply is large enough that mere illiquidity, rather than insolvency, does not force banks into bankruptcy and liquidation.

As long as banks and thus governments, which sell their debt to the banks can draw cheap credit up to any amount from the European System of Central Banks, Europe will remain volatile. The exodus of capital will continue, and enormous compensation claims of the European core s central banks, particularly the German Bundesbank and the Dutch central bank, will pile up.

To fund these redemptions on behalf of some member states, the ECB would issue bonds in its own name, guaranteed solely by the ECB, but repaid, in full, by the member state. Upon the issue of such an ECB bond, the ECB would simultaneously open a debit account for the member state on whose behalf it issued the bond.

Not every country s central bank not even every friendly country s central bank has been invited to join the swap lines club. Membership is restricted to the United States Federal Reserve, the Bank of England, the European Central Bank, the Bank of Japan, the Swiss National Bank, and the Bank of Canada.

Central Bank (Information and Financial Analysis Unit)

The ECB Grows Up

In short, the ECB bond buying program has transformed the ECB from a passive observer of the euro crisis, paralyzed by the outdated legalistic constraints of the Maastricht Treaty, into a proper lender of last resort. With powers to monetize government debts similar to those exercised by the US Federal Reserve, the Bank of Japan, and the Bank of England, the ECB can now guarantee the eurozone against financial contagion.

The final decision, of course, rests with European heads of state and government. But, in our view, Trichet s successor will most likely answer to the name of Weber, Wellink, or Liikanen.

But, while doing so, they are not likely to be expanding private sector lending to support economic growth. European banks are far more thinly capitalized, and account for a much larger share of credit extended, than banks in the US, where much more lending originates in capital markets.

Credibility The eurozone s new banking supervision mechanism will have the ECB at its heart. The choice of tasks to be entrusted to the ECB will ensure rigorous, high quality, and equal prudential supervision of eurozone banks, thereby contributing decisively to maintaining confidence between the banks and thus increasing financial stability throughout the eurozone.

CAMBRIDGE The European Central Bank is moving, hesitantly but ineluctably, toward quantitative easing. The threat of deflation and the ineffectiveness of its previous measures leaves it no choice.

Is the ECB Doing Enough?

The ECB s Leap into the Unknown

The ECB Picks Up The Pace

Central Bank Confidential

Whose Central Bank?

Furthermore, and contrary to common belief, the ECB president need not be very diplomatic, but should be able to unite all members of the ECB s Governing Council. As political pressure on central banks, including the ECB, increases, its president must not hesitate to criticize European politicians and, if necessary, publicly name and shame them.

The vision of central bank independence as a necessary part of the constitution of a sound and stable political order was not simply a European construct in the 1990 s. It was also reflected in legislative changes affecting other central banks, and in central bankers growing prestige.

Who Next at the ECB Helm?