What is the European Central Bank?

Explanation

The European Central Bank is the central bank of the European countries, which has the single aim of maintaining the price stability of the Euro, which is adopted by all the member states. It aims to control inflation by monitoring the monetary policyMonetary PolicyMonetary policy refers to the steps taken by a country’s central bank to control the money supply for economic stability. For example, policymakers manipulate money circulation for increasing employment, GDP, price stability by using tools such as interest rates, reserves, bonds, etc.read more and controlling the money supply in the market through interest rates. It is managed and monitored by the team of the European central bank. The team members are amongst representatives of the member states as decided and agreed mutually. The bank functions according to the predefined rules and regulations, and all the decisions are taken on the majority basis after surveying the market situations and conditions.

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History

The European Central Bank was started on January 1, 1999, when some European Union members adopted the Euro currency. It is a bank for Europe’s single currency, i.e., the Euro, which aims to maintain the price stability of the Euro in the international market. The head office is situated in Germany and consists of 27 members currently. The main aim behind establishing the Bank is to increase the purchasing power through various monetary policies. It also guides the members about implementing various policies and other financial matters. In addition, the bank is accountable to the public through the parliament and publishes the annual reportAnnual ReportAn annual report is a document that a corporation publishes for its internal and external stakeholders to describe the company’s performance, financial information, and disclosures related to its operations. Over time, these reports have become legal and regulatory requirements.read more of its accounts, functions, and actions.

Objectives

  • Maintain the price stability of the currency, i.e., Euro.To monitor the banking system of member states.To monitor and aid in preparing the monetary policy.Ensure the economic growth and maintenance of purchasing power.Guiding the member states about the foreign exchange operations and the transactions.Ensures the smooth conduct of business and economy.Maintains the balance of trade in terms of imports and exports.Issue the guidelines on operations by the member states’ banks also ensure compliances.

How does the European Central Bank (ECB) Works?

The working is as under –

  • The Team of ECB consists of 6 Executive members plus the Governors of the central bank of all the member states plus the president and vice-president.The team ensures the performance of their states’ banking system as per the guidelines.The Monetary Policy is framed with suggestions and reviews from all the team members and based on a market survey.The team of banks ensures the member states follow the guidelines issued by the bank by inspection, audit, and report on this behalf.Then, the team meets twice a month and discusses the various reports onwsm-tooltip header=”Compliance And Audit” description=”Compliance Audit is a detailed review of organization’s compliance towards statutory laws, local laws, internal rules, and decisions of the organization as applicable.” url=”https://www.wallstreetmojo.com/compliance-audit/”]compliance and audit[/wsm-tooltip].It segregates the responsibilities amongst the members, and members ensure compliance and monitor the guidelines.Then, after the discussion on the reports, the final report is sent to all the members consisting of the reviews by the team, their drawbacks, and suggestions to improve.The president and vice-president approve the final report.

Structure of the European Central Bank

  • President and vice-president are the chairpersons of the bank, which ensures, monitors, and issues the various guidelines.The Governing Council consists of members under the president and vice-president and six persons as members of the executive board and the governors of the member states. The governing council participates in policy formulation and strategic decisions.Under the Governing council, there is an executive board that consists of a president, vice-president, and the four members nominated by the executive council. They are responsible for monitoring and enforcing the guidelines and policies.After the Governing council, there is a general council consisting of the president, vice-president, and the governors of the member states responsible for data collection and implementation of their state and report on the implementation of the guidelines and policies.Under the general council, a supervisory board consist of the membersBoard Consist Of The MembersBoard members comprise the individuals whom the shareholders elect as their representatives. They are responsible for taking crucial corporate decisions regarding the company’s policies, dividend payouts, top-level managers’ recruitment or layoff and executive compensation.read more nominated by the European Central bank, which supervises the banking and financial activities at the ground level.At all levels, transparency and accountability are the musts.

Functions of ECB

  • To Prepare the Monetary policies to maintain the price stability.Monitor the banking and financial institutionsFinancial InstitutionsFinancial institutions refer to those organizations which provide business services and products related to financial or monetary transactions to their clients. Some of these are banks, NBFCs, investment companies, brokerage firms, insurance companies and trust corporations. read more and ensures their compliance with the regulation and smooth conduct.To control the inflation and unemployment of the member states.Monitor the import-export transactions of the member states.Guides the member states on the functioning.Conduct surveys and audits of the member states.Maintain the stability of the currency in the international market.They are ensuring the economy’s smooth functioning.Formulate plans for economic growth.Ensures transparency and accountability at all levels and professional competency of all the members.

Conclusion

The European Central bank is the controlling bank of all the member states. Currently, 27 European countries are members of the ECB. The main aim behind establishing the bank is to maintain the price stability of the currency adopted by all the members, i.e., the Euro in the international market. The bank is also responsible for issuing guidelines, monitoring the banking system, controlling inflation and unemployment, and maintaining price stability. The structure consists of the president and vice-president as the chairpersons and Governors of all the member states and the other six executives as the Governing Committee. There are various committees under the Governing committee through which compliance is ensured. The loopholes and suggestions are communicated to the member states through the audit reportsAudit ReportsAn audit report is a document prepared by an external auditor at the end of the auditing process that consolidates all of his findings and observations about a company’s financial statements.read more and compliance reports. The committee of the European central bank meets twice a month to ensure smooth conduct and to formulate and discuss the plans for achieving the various objectives, which ensures the growth of the member countries.

This has been a guide to what the European Central Bank?. Here we discuss the structure history of the European central bank and how it works along with its objectives and functions. You may learn more about financing from the following articles –

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