European Central Bank

European Central Bank

Subject: Economy

Context:

The European Central Bank (ECB) raised interest rates again and signalled it was keen to start shrinking its  balance sheet, taking another big step in tightening policy to fight off a historic surge in inflation.

Details:

• ECB curbed the subsidy it provides to lenders of ultra-cheap three-year loans called Targeted Longer-Term Refinancing Operations, or TLTROs.
• Changes may encourage banks to repay them early– shrinking the ECB’s balance sheet.

Concept:

The targeted longer-term refinancing operations (TLTROs) 

• Launched by the Eurosystem 
• It provides financing to credit institutions.
•  By offering banks long-term funding at attractive conditions they preserve favourable borrowing conditions for banks and stimulate bank lending to the real economy.
• A first series of TLTROs was announced on 5 June 2014, a second series (TLTRO II) on 10 March 2016 and a third series (TLTRO III) on 7 March 2019.
• How do they work?
  • The TLTROs are targeted operations, as the amount that banks can borrow is linked to their loans to non-financial corporations and households.
  • In TLTRO III, similarly to TLTRO II, the interest rate to be applied is linked to the participating banks’ lending patterns. The more loans participating banks issue to non-financial corporations and households (except loans to households for house purchases), the more attractive the interest rate on their TLTRO III borrowings becomes.

The European Central Bank (ECB): 

• The European Central Bank (ECB) is the prime component of the Eurosystem and the European System of Central Banks (ESCB) as well as one of seven institutions of the European Union.
• It is the central bank for the euro and administers monetary policy within the Eurozone, which comprises 19 member states of the  European Union.
• Governing Council – It is the main decision-making body of the ECB.
  • It consists of the Executive Board plus the governors of the national central banks from eurozone countries.
  • It  makes monetary policy for the Eurozone and the European Union, administers the foreign exchange reserves of EU member states, engages in foreign exchange operations, and defines the intermediate monetary objectives and key interest rate of the EU
• Executive Board – It handles the day-to-day running of the ECB.
  • It consists of the ECB President and Vice-President and 4 other members appointed by national governments of eurozone countries.
  • It enforces the policies and decisions of the Governing Council, and may direct the national central banks when doing so.
• Functions–the ECB’s tasks include:
  • Defining and implementing monetary policy
  • Managing foreign exchange operations
  • Maintaining the payment system to promote smooth operation of the financial market infrastructure under the TARGET2 payments system and being currently developed as a technical platform for settlement of securities in Europe (TARGET2 Securities).
  • Consultative role: by law, the ECB’s opinion is required on any national or EU legislation that falls within the ECB’s competence.
  • Collection and establishment of statistics
  • International cooperation
  • Issuing banknotes: the ECB holds the exclusive right to authorise the issuance of euro banknotes. Member states can issue euro coins, but the amount must be authorised by the ECB beforehand (upon the introduction of the euro, the ECB also had exclusive right to issue coins).
  • Financial stability and prudential policy
  • Banking supervision: since 2013, the ECB has been put in charge of supervising systemically relevant banks.
• It is located in Frankfurt (Germany).
• Mandate and inflation target-Unlike many other central banks, the ECB does not have a dual mandate where it has to pursue two equally important objectives such as price stability and full employment (like the US Federal Reserve System). The ECB has only one primary objective – price stability – subject to which it may pursue secondary objectives.