OBJECTIVES AND TASKS OF THE ESCB
The primary objective of the European System
of Central Banks (ESCB), as defined in Article 2 of the Statute of the
European System of Central
Banks and of the European Central Bank (ESCB
Statute), is to maintain price stability. Without prejudice to the primary
objective of price stability, the
ESCB shall support the general economic policies
in the Community with a view to contributing to the achievement of the
objectives of the Community.
In pursuing its objectives, the ESCB shall
act in accordance with the principle of an open market economy with free
competition, favouring an efficient
allocation of resources.
The basic tasks to be carried out by the ESCB are defined in Article 3 of the ESCB Statute. These tasks include:
to define and
implement the monetary policy of the Community;
to conduct foreign
exchange operations;
to hold and
manage the official foreign reserves of the participating Member States;
to promote the
smooth operation of payment systems; and
to contribute
to the smooth conduct of policies pursued by the competent authorities
relating to the prudential supervision of credit institutions
and the stability
of the financial system.
Monetary functions and operations of the ESCB
The ESCB Statute (Articles 17 to 24) specifies
the monetary functions and operations of the ESCB. On the basis of these
provisions, the European
Monetary Institute (EMI) prepared an operational
framework for the ESCB's monetary policy. The final decision on the operational
framework will be
taken by the Governing Council of the European
Central Bank (ECB). The Governing Council of the ECB may decide not to
use all the available
options or may change certain features of
the instruments and procedures presented below. Further detailed information
on these issues can be found in
the EMI publications entitled “The single
monetary policy in Stage Three - Specification of the operational framework”
(January 1997) and “The single
monetary policy in Stage Three - General documentation
on ESCB monetary policy instruments and procedures” (September 1997).
Monetary policy instruments
The operational framework consists of a set
of instruments; the ESCB will conduct open market operations, it will offer
standing facilities and it may
require credit institutions to hold minimum
reserves on accounts with the ESCB.
Open market operations
Open market operations will play an important
role in the monetary policy of the ESCB for the purpose of steering interest
rates, managing the liquidity
situation in the market and signalling the
stance of monetary policy. Five types of instruments will be available
to the ESCB for the conduct of open
market operations. The most important instrument
will be reverse transactions (applicable on the basis of repurchase agreements
or collateralised
loans). The ESCB may also use outright transactions,
the issuance of debt certificates, foreign exchange swaps and the collection
of fixed-term
deposits. Open market operations will be initiated
by the ECB, which will also decide on the instrument to be used and the
terms and conditions for the
execution of such operations. It will be possible
to execute open market operations on the basis of standard tenders, quick
tenders or bilateral
procedures. With regard to their aim, regularity
and procedures, the ESCB open market operations can be divided into the
following four categories:
The main refinancing
operations are regular liquidity-providing reverse transactions with a
weekly frequency and a maturity of two weeks. They
will be executed
by the national central banks on the basis of standard tenders and according
to a pre-specified calendar. The main refinancing
operations will
play a pivotal role in pursuing the purposes of ESCB open market operations
and provide the bulk of refinancing to the financial
sector.
The longer-term
refinancing operations are liquidity-providing reverse transactions with
a monthly frequency and a maturity of three months. They
will be executed
by the national central banks on the basis of standard tenders and according
to a pre-specified calendar. These operations aim
to provide counterparties
with additional longer-term refinancing. As a rule, the ESCB will not intend
to send signals to the market by means of
these operations
and will therefore normally act as a rate taker.
Fine-tuning
operations can be executed on an ad hoc basis with the aim both of managing
the liquidity situation in the market and of steering
interest rates,
in particular in order to smooth the effects on interest rates caused by
unexpected liquidity fluctuations. Fine-tuning operations will
primarily be
executed as reverse transactions, but may also take the form of outright
transactions, foreign exchange swaps and the collection of
fixed-term deposits.
The instruments and procedures applied in the conduct of fine-tuning operations
will be adapted to the types of transactions
and the specific
objectives pursued in performing the operations. Fine-tuning operations
will normally be executed by the national central banks
through quick
tenders or bilateral procedures. The Governing Council of the ECB will
decide whether, under exceptional circumstances,
fine-tuning
bilateral operations may be executed by the ECB itself.
In addition,
the ESCB may carry out structural operations through the issuance of debt
certificates, reverse transactions and outright transactions.
These operations
will be executed whenever the ECB wishes to adjust the structural position
of the ESCB vis-à-vis the financial sector (on a
regular or non-regular
basis). Structural operations in the form of reverse transactions and the
issuance of debt instruments will be carried out by
the national
central banks through standard tenders. Structural operations in the form
of outright transactions will be executed through bilateral
procedures.
Standing facilities
Standing facilities aim to provide and absorb
overnight liquidity, signal the general stance of monetary policy and bound
overnight market interest rates.
Two standing facilities, which will be administered
in a decentralised manner by the national central banks, will be available
to eligible counterparties on
their own initiative:
Counterparties
will be able to use the marginal lending facility to obtain overnight liquidity
from the national central banks against eligible
assets. The
interest rate on the marginal lending facility will normally provide a
ceiling for the overnight market interest rate.
Counterparties
will be able to use the deposit facility to make overnight deposits with
the national central banks. The interest rate on the deposit
facility will
normally provide a floor for the overnight market interest rate.
Minimum reserves
Preparatory work has been carried out with
a view to enabling the ESCB to impose minimum reserves as from the start
of Stage Three. It will be up to
the Governing Council of the ECB to decide
whether minimum reserves will actually be applied. Any minimum reserves
system would be intended to
pursue the aims of stabilising money market
interest rates, creating (or enlarging) a structural liquidity shortage
and possibly contributing to the control of
monetary expansion. The reserve requirement
of each institution would be determined in relation to elements of its
balance sheet. In order to pursue the
aim of stabilising interest rates, the ESCB's
minimum reserves system would enable institutions to make use of averaging
provisions. This implies that
compliance with the reserve requirement would
be determined on the basis of the institutions' average daily reserve holdings
over a one-month
maintenance period.
Counterparties
The ESCB monetary policy framework is formulated
with a view to ensuring the participation of a broad range of counterparties.
If minimum reserves
are applied, only institutions subject to
minimum reserves may access the standing facilities and participate in
open market operations based on standard
tenders. If no minimum reserves are applied,
the range of counterparties will broadly correspond to credit institutions
in the euro area. The ESCB may
select a limited number of counterparties
to participate in fine-tuning operations. For outright transactions, no
restrictions will be placed a priori on the
range of counterparties. Active players in
the foreign exchange market will be used for foreign exchange swaps conducted
for monetary policy
purposes.
Underlying assets
Pursuant to Article 18.1 of the ESCB Statute,
all ESCB credit operations have to be based on adequate collateral. The
ESCB will allow a wide range
of assets to underlie its operations. A distinction
is made, essentially for purposes internal to the ESCB, between two categories
of eligible assets: “tier
one” and “tier two” respectively. Tier one
consists of marketable debt instruments which fulfil uniform Monetary Union-wide
eligibility criteria specified
by the ECB. Tier two consists of additional
assets, marketable and non-marketable, which are of particular importance
for national financial markets
and banking systems and for which eligibility
criteria are established by the national central banks, subject to ECB
approval. No distinction will be made
between the two tiers with regard to the quality
of the assets and their eligibility for the various types of ESCB monetary
policy operations (except for
the fact that tier two assets are normally
not used in outright transactions). The eligibility criteria for underlying
assets to ESCB monetary policy
operations are the same as those applied by
the ESCB for underlying assets to intraday credit. Furthermore, ESCB counterparties
may use eligible
assets on a cross-border basis, i.e. they
may borrow from the central bank of the Member State in which they are
established by making use of assets
located in another Member State.
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