Tag: Structure of the bank

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Organisation of the European Central Bank

Globalisation has led to an integration of the various aspects of people’s lives from consumer habits to cultural aspects. The economy has not been indifferent to this phenomenon and the

Globalisation has led to an integration of the various aspects of people’s lives from consumer habits to cultural aspects. The economy has not been indifferent to this phenomenon and the

Globalisation has led to an integration of the various aspects of people’s lives from consumer habits to cultural aspects. The economy has not been indifferent to this phenomenon and the relations between most countries have been internationalised so that there is more and more dependency between them and for that reason greater co-operation between governments and between the central banks of each country.

There are more and more processes of regional integration, which has led geographically close countries to eliminate barriers to trade between each other and generate an economic bloc that is more competitive with the rest of the world. But not all forms of integration are equal, there are some deeper ones that allow macroeconomic policies to be co-ordinated and create a single currency and other unions that simply reduce trade barriers between countries without going beyond a privilege in trade with certain countries.

The European Union has developed a legal and political system that promotes continental integration through common policies that cover different spheres of European society, although the origin of this union is especially economic. The form of integration was a monetary union where a single currency was created to facilitate transactions between countries, but some countries belonging to the European Union avoided giving up their control over their currency and therefore did not adopt the Euro as a transaction unit.

In order to achieve monetary union, certain requirements of fiscal homogeneity need to be met in order to synchronise their macroeconomic policies, which is why some European countries have first had to meet some public deficit targets in order to be part of the integration. Being part of a monetary union, the member countries give part of their sovereignty to the European Central Bank, in charge of issuing the common currency and fixing the monetary policy of the economic union.

The countries that make up this economic agreement have:

  • Preferences among members to boost trade within their borders.
  • Elimination of trade barriers for members of the agreement.
  • Common external protection.
  • Free mobility of capital, people and productive factors
  • Economic policy coordination
  • Unique economic policy

The first historic step for the consolidation of the European Central Bank occurred in 1998, where the decision was made to build an economic and monetary union with free capital mobility within Europe, a central monetary authority and a single monetary policy within the European area. But before formally taking the decision two previous events had occurred that allowed the creation of the bank.

  1. In 1990, free capital mobility is allowed among some European countries, as well as greater co-operation among central banks, which allows a convergence in the economy of several European countries.
  2. The European Monetary Institute (EMI) was established in 1994, central banks were prohibited from continuing to grant loans, monetary policy co-ordination was further increased, economic convergence followed and the establishment of central bank independence to take the necessary measures for the good performance of the economy.

Already in 1999 stronger steps were taken for the monetary and economic union, such as the introduction of the Euro, the establishment of a single monetary policy set by the European System of Central Banks (ESCB) and the conversion rates were set.

Since the 1st of January, 1999 the European Central Bank has been responsible for conducting the monetary policy for the eurozone consisting of 19 state members. To be part of this union, each country had to comply with certain economic and legal criteria. The following chart shows the main stages of the European Central Bank.

Graph 74. Stages of the European Central Bank.

 

The European Central Bank has a legal status under international law and is considered an international institution. The Euro system is composed of the European Central Bank (ECB) and the National Central Banks (NCBs) of the countries that adopted the Euro. The Euro system and the European Central Banks system will continue to co-exist as long as there are members of the economic union who have decided not to adopt the Euro. The following chart shows the member countries of the eurozone.

 

Graph 74A. Euro Area 1999-2015. Retrieved 16th February 2018, from https://www.ecb.europa.eu/euro/intro/html/map.en.html

 

Mandate

The main objective of the bank and its monetary policy is to maintain price stability. As complementary objectives, the bank must help the economies of member countries in their growth and in the dynamics of the labour market, but without these variables diverting the main objective of keeping inflation under control.

For the bank, price stability is defined as an annual increase in the Harmonised Index of Consumer Prices (HICP) for the entire eurozone below 2% and a long-term target of 2%.

 

Organisation

The European Central Bank has four major subdivisions that make all the decisions to fulfil the bank’s mandate.

  • The Executive Board
  • The Governing Council
  • The General Council
  • The Supervisory Board

 

The Executive Board

All the members of the board are appointed by the European Council. Each member is chosen for a period of eight years without the possibility of renewing. The board meets normally every Tuesday and is composed of:

  • The President
  • The Vice-President
  • Four other members

The committee is responsible for the implementation of the monetary policy defined by the governing council and the instructions given by the National Central Banks (NCBs). It is also in charge of the daily management of the bank and prepares the meetings of the governing council.

 

The Governing Council

It is the decision-making body of the bank, composed of six members of the executive committee as well as the governors of the central banks of the 19-member countries of the Euro-system. It is chaired by the president of the ECB. They meet every six weeks and publish the minutes of the meetings with all the necessary information four weeks after the meeting. In total it is composed of 25 members with the accession of Lithuania in 2015 and there is a rotation of the votes in the meetings as follows:

 

Rotation of voting rights in the Governing Council

 

 

Graph 75. Rotation of voting rights in the Governing Council in 2018. Retrieved 16th February 2018, from https://www.ecb.europa.eu/ecb/orga/decisions/govc/html/votingrights.en.html

The responsibilities are to define the monetary policy of the euro area and in particular to establish the interest rate at which commercial banks will be given resources, in addition to the supply of Euro-system reserves.

 

The General Council

It is composed of the president of the ECB, vice president of the ECB and the governors of the 28 National Central Banks (NCBs) that belong to the European Union, where 19 countries are of the euro area and 9 countries of non-euro areas. Other members who attend the meetings, but without the right to vote are the president of the Council of the European Union and members of the European Commission.

The general council carries out the tasks assumed by the European Monetary Institute (EMI) that the ECB should execute as the last phase the economic and monetary union since not all the member states adopted the Euro. Its functions are the collection of statistical information, preparation of the annual report of the ECB among others. This body will be dissolved when all the members of the economic union assume the same currency.

 

The Supervisory Board

The supervisory board meets twice a month to discuss, plan and carry out supervisory tasks of the bank’s departments. It consists of, the president appointed for a period of 5 years, vice president elected from among the members of the executive board, four representatives of the ECB and representatives of national supervisors

In conclusion, there is a certain similarity between the way monetary policy decisions are made between the European Central Bank and the US Federal Reserve since it is done through voting by the governors of the banks that make up the central bank and take turns the votes in the meetings. The difference is that the rotation of the votes of the districts that make up the Federal Reserve is annual while the votes of the banks that make up the ECB are rotated monthly as shown in the graph above.

Regarding the mandate of the central banks, there is a greater similarity between the ECB and the Bank of England since both have to maintain price stability as its main objective, and the objective of the annual growth of inflation is 2%. Although they also worry about economic growth and the unemployment rate, these objectives are secondary. While for the Federal Reserve the three variables are equally important, so by mandate they are responsible for maintaining low unemployment rates, stable economic growth with good growth rates and an inflation rate that is close to 2%.

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Bank of Japan

The Bank of Japan is the central bank of Japan. It is a juridical entity established by the Bank of Japan Act. It has no governmental character nor is it

The Bank of Japan is the central bank of Japan. It is a juridical entity established by the Bank of Japan Act. It has no governmental character nor is it

The Bank of Japan is the central bank of Japan. It is a juridical entity established by the Bank of Japan Act. It has no governmental character nor is it a private corporation. The law states that the bank’s objectives are to issue banknotes, carry out monetary control and monitor the stability of Japan’s financial system. The law also stipulates price stability as the main objective of the bank which will contribute to the development of the national economy.

The Bank of Japan started its operations on the 10th of October 1882 as a central bank under the laws of that country. The original statutes were modified in 1942 due to the war situation and after this conflict ended, the bank’s regulations were modified again. In 1949 the Policy Board was set as the governing body and responsible for making the most important decisions of the bank. The law of 1942 was completely revised in 1997 and it was stipulated that the bank’s independence and transparency were fundamental pillars of the bank.

The organisation of the bank is divided as follows:

Graph 70. Organization Chart. Retrieved 15th February 2018, from https://www.boj.or.jp/en/about/organization/chart.pdf

 

The Policy Board was established as the most important bank entity for decision making. The board examines the guidelines for monetary and currency control, establishes the basic principles to carry out the operations of the bank and supervises the fulfilment of the duties of bank officials.

It is composed of 9 people. The Governor who represents the bank and exercises general control over the affairs of the bank, two Deputy Governors who assist the governor and they control some matters of the bank, and six members of the Policy Board who serve as support for the Governor and Deputy Governors. They are also in charge of other matters of the bank.

Then there are the Bank’s Officers who are made up of the Governor, the Deputy Governors, the members of the board of directors, auditors, executive directors and counsellors. These officers are responsible for managing the operations of banks, to ensure that employees comply with the required tasks and assist in the tasks of the Policy Board.

Finally, there are the Departments, Branches, Local Offices in Japan, and Overseas Representative Offices. There are 15 departments, 32 branches and 14 local offices in Japan and 7 overseas representative offices

The bank is capitalised by 100 million Yen due to the bylaws, and 55% of the capital is subscribed by the government. The law does not grant the holders of the subscription certificates the right to participate in the management of the bank and in the event of liquidation they are only granted the right to request the distribution of the remaining assets up to the sum of the paid-in capital. Dividend payments in paid-up capital are limited to 5% or less each fiscal period.

The central objective of the monetary policy of the bank is the stability of prices. It was stipulated as an objective from 2013 that the maximum rate of annual growth of prices was 2%, this rate promotes economic growth and the well-being of the population. Price stability is important because it provides the basis for the nation’s economic activity.

In a market economy where there is a diversity of markets, individuals and companies make decisions about consuming, investing or saving according to the prices of goods and services in addition to the interest rates of the financial system. When prices fluctuate beyond what is expected, it is difficult for agents to make decisions and this may hinder the efficient allocation of resources and revenues.

The Policy Board of the bank decides on the basic stance of monetary policy in its meetings, discusses the economic and financial situation and then makes an appropriate guide for monetary policy operations. After each meeting, the bank publishes its evaluations of the economic activity and the price level, as well as the position adopted by the monetary policy in the short term.

According to the guidelines stipulated by the board, the bank controls the amount of money circulating in the economy, mainly through Money Market Operations. The central bank offers funds to financial institutions through loans that are backed by guarantees given to the central bank.

The meetings of the board of the central bank are held eight times a year and each meeting takes two days of discussions. At each meeting, the members of the board of directors discuss and decide on the guidance of future operations in the money market. Monetary policy decisions are taken by majority vote of the nine members of the Policy Board.

One aspect that has become widespread but is still important is the independence of the central bank since the decisions made by the bank have an impact on the daily life of the Japanese people. The bank and its employees conduct economic and financial system research to be well informed about the most appropriate decision on monetary policy.

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The Bank of England

Bank of England

The Central Bank of England is in charge of dictating the monetary policy of the country through a specialised committee. In addition to ruling the monetary policy of England, it also serves as the central bank of the government of the United Kingdom. Although it belongs to the European system of central banks, it has full autonomy from monetary policy due to the non-adoption of the Euro as a national currency. It is located in London.

The governor of the Bank of England is the most important position within the Bank of England as it belongs to the monetary policy committee and therefore has a predominant role in the orientation of national economic and monetary policies. The bank of England is the UK’s central bank. The mission of the central bank is to promote the good of the people by maintaining monetary and financial stability. The bank of England has four basic functions:

  • Regulate other banks
  • Issue banknotes
  • Set monetary policy
  • Maintain the financial stability of the system

One of the most important tasks of the central bank is to design and print banknotes. Only the central bank of England can issue banknotes in England and Wales, but seven commercial banks can issue them in Scotland and Northern Ireland. The Bank of England is responsible for keeping the UK’s economy healthy through an adequate monetary policy. The bank has two main tools to intervene in the economy by moving the interest rate (formally known as Bank Rate) and in special circumstances using Quantitative Easing (QE). Decisions on monetary policy are made by the Monetary Policy Committee (MPC) eight times a year.

Also, the Bank of England is responsible for the surveillance of the financial system. The Financial Policy Committee (FPC) identifies and monitors risks in the financial system and intervenes to reduce or remove these risks. Among other tasks that the bank has, it is responsible for conducting studies and research on the state of the economy, regulate and supervise other financial institutions.

The governors of the Bank of England perform at one of the highest levels of the executive team and are jointly responsible for the bank’s policy committees to achieve the bank’s mission of providing stability to the British economy and its population. The governor together with various committees and the court of directors are responsible for studying the behaviour of the British economy and making decisions depending on the tasks of each committee.

The Court of Directors acts as a unitary board setting the strategies of the bank’s organisation and budget, in addition to making key decisions about the appointments in the bank and the resources of each area and committee in the bank.

The Court is required to meet at least seven times a year and has five executive members of the bank and up to nine non-executive members. All members of the court are appointed by the crown and one of the non-executive members is selected by the chancellor to preside over the court. The governor serves the court for a term of eight years, deputy governors for five years and non-executive members for up to four years.

In addition to the meetings of the directors of the court, the court is assisted by other committees each with specific tasks that they have to comply with and assist the court in the management of the bank. Since the foundation of the bank in 1694, the directors of the bank have met regularly to discuss various issues related to the administration and operations of the bank. Since 2012 the financial service minutes mandated the board of directors of the court to publish the minutes of the meetings a few weeks after each meeting they held.

Although the mandate was established in 2012, minutes of the meetings have been kept in the bank’s archive since the first one in 1694 in London. To access the minutes of previous meetings the bank decided to digitise minutes dating from the late twentieth century thus facilitating the investigations of investors and academics on the decisions taken by the central bank.

One of the aspects that most worries central banks in the world is the behaviour of inflation because this variable affects transactions, the wealth of households and often also determines the behaviour of the labour market. Inflation is calculated by the central bank through a team of specialists from the national statistics office, which collects price information from the goods and services market, forming a basic consumption basket. That basket of goods is used to calculate the consumer price index (CPI). The statistical office publishes the change of this index every month.

The central government of England is the one that dictates what will be the annual inflation target that the Bank of England should sustain in order to achieve the proposed goals regarding the number of employees and the welfare of the population. The government has set the target at 2%.

To achieve this goal of 2% there is a committee in charge of dictating the monetary policy called the Monetary Policy Committee (MPC). This committee is in charge of changing the bank’s official interest rate. This is the rate that the central bank pays for maintaining the reserves of commercial banks and generally the change of that rate is transferred to consumers. When the rate goes up by the central bank, commercial banks pay more for people’s savings, but they also raise the cost of loans and other financial products such as credit cards.

The logic of the bank is that if inflation is above the target level, interest rates are raised so the loans and credit card consumption is reduced, affecting consumption by the people, which will lead to inflation decreases. The same happens in the opposite case, if it is necessary to encourage greater consumption so that inflation rises, the rates are lowered to encourage spending by households and businesses. There is a mandate from the bank where if the rate of inflation at the end of the year is above 3% or below 1%, the governor of the Bank of England must deliver a letter written to the chancellor explaining why the bank failed in its goal of 2%, and what measures will be taken to meet the goal the following year.

The monetary policy committee is responsible for making decisions about how and what tools to use to achieve the inflation target. Historically the Bank of England has used the interest rate, but recently the bank has tried to use quantitative easing to stimulate the economy and reach the target inflation rate. Reaching the inflation rate proposed by the government is the main objective of the monetary policy, but there are also other objectives such as serving as support to the government objectives in terms of economic growth and the unemployment rate.

The monetary policy committee (MPC) is composed of nine members: the governor, the three deputy-governors for monetary policy, financial stability and markets and banking, a chief economist and four external members appointed by the chancellor. These external members are appointed to ensure that the MPC has a diversity of thoughts and experience of members who do not belong to the bank.

Also at the meetings of the MPC is a representative of the HM Treasury who cannot vote on the decisions of the committee, but can discuss what would be the best decisions they could make in monetary policy. MPC members serve by fixed terms and after their cycles are completed they are replaced or re-elected.

In conclusion, the objective of the MPC is to maintain price stability within the United Kingdom and to support government policies to encourage growth and good job creation rates. The bank has several tools such as the interest rate and the volume of purchases of assets financed by the issuance of bank reserves and exchange intervention. The MPC has no responsibility with respect to the risk profile of the Bank’s balance sheet, that responsibility falls on the Court of Directors, or the Court may delegate it to the Governor and the Bank Executive.

The MPC has no responsibility with respect to the provision by the Bank of financial assistance to financial institutions. That responsibility also falls to the Court of Directors (or may be delegated by the Court), although the Financial Policy Committee may make recommendations on the Bank’s provision of collective assistance.

The Financial Policy Committee (FPC) identifies, monitors and takes the necessary measures to eliminate or reduce systemic risks to protect and improve the financial system of the United Kingdom. The financial policy committee was established in 2013 as part of a new regulatory system that was imposed to improve financial stability after the global financial crisis that occurred in 2008. The financial committee normally has thirteen members. Six members are staff of the Bank of England, the Governor, four deputy governors and the Executive Director of Strategy and Financial Stability Risk. In addition, there are five external members who are selected for their experience in, and knowledge of, financial services.

Another committee of the Bank of England is the Prudential Regulation Committee (PRC). The PRC makes the prudential regulation authority’s most important decisions. The PRC is made up of twelve people. It is chaired by the Governor of the Bank of England and the other four members are Bank England Deputy Governors. A positive aspect of the committee is that the majority of the members came from outside the bank.

In addition to the aforementioned committees, the Bank of England has a network of twelve agencies located throughout the United Kingdom. These agencies play an important role in linking businesses, people and local economies with those in charge of monetary policy and other committees belonging to the bank in London. The agencies are responsible for the central bank to ensure that its economic prospects are correct because they are more in contact with the market than the bank is.

Each agency is composed of four agents and an administrative team. These agents have face-to-face conversations with people, businesses and some industries located near each agency, as well as attending local events to find out what the agents’ perspectives are on the economy.

Each agency has a network of contacts with those who can talk regularly but who belong to organisations from all sectors of the economy, so they have contact with a wide range of companies, ranging from small companies to multinational companies with each agency.

After these meetings with each major agent in each area, the agencies share their information with the Bank of England to take these reports into account at the monetary policy meetings, the financial policy committee and the prudential regulation authority. In addition to this good organisation, each agent can schedule meetings with local agents with the people belonging to each committee so that they can hear the information first-hand.

The bank publishes the agents’ findings eight times a year, but they do not necessarily share the opinion of the agents, just as the committees do not always act solely based on these reports. In recent years each agency has been collecting greater amounts of information for the bank to be more efficient in its mandates and try to create a more robust and more stable system.

There is evidence that indicates that these agencies have been efficient in their work in terms of information that has managed to warn the bank of risks in the corporate credit market, and abnormal conditions in the real estate (housing) market.

Finally, it is important to clarify what the role of the HM treasury member is and to identify why they are always present at the meetings of the MPC and in the monetary policy decisions. The HM Treasury is the government’s ministry of economy and finance and tries to control public spending, direct the economic policy of the United Kingdom and make decisions that help sustain strong economic growth.

As already mentioned, this entity oversees:

  • Public expenditure: departmental expenses, public sectors and pensions
  • Financial services policies: Regulation of financial and banking services, financial stability and ensuring the competitiveness of the system
  • Strategic supervision of the UK tax system

The priorities of the committee are to achieve a strong and sustainable economic growth, reduce the deficit of the trade balance of the economy, ensure good management of taxes, try to have an efficient and simple tax system, among others.

In conclusion, the Bank of England is one of the most efficient banks in the world due to its different committees and agencies that allow its governors and directors to be in permanent contact with market agents and the perspectives of people who face the local conditions daily. In addition, in its committees, there are members external to the bank which allows adding more knowledge to the discussions and different perspectives of the internal members of the bank, so there are different profiles in the members of the committees. In addition, the bank is independent of the government as is the case for most of the central banks of the world which gives greater flexibility when acting.

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