features in common with the US model. It is a system composed of the European
countries. The Governing Council comprises the members of the Executive Board and
the governors of the NCBs adopting the euro. The Executive Broads comprises:
- the President;
- the Vice-President;
- four other members appointed by common accord of the governments of the member states.
The main responsibility of the Executive Board is to implement monetary policy in
accordance with the guidelines laid down by the Governing Council, working through
the NCBs.
ESCB Goals
The goal of the system was explicitly defined at its outset as the maintenance of price
stability, that is, the control of inflation across the eurozone. It was established as a fully
independent central bank. Members of the ECB and of NCBs are forbidden from
taking instructions from any external body and member states may not seek to influence
members of the ECB or NCBs in the performance of their duties. Indeed since the system
was established by international treaty in one sense it is more independent than the
central bank of a sovereign state— the system can only be changed by common
agreement of all the member countries rather than by a single national legislature.
ESCB Regulations
Like the Fed , the ESCB imposes regulatory constraints on banks operating in its
territory, which are required to maintain funds on reserve with the NCBs in proportion
to their deposit base. The system of minimum reserve requirements is designed to
prevent excessive lending by the banks and also to stabilize money market interest rates.
Compliance with the requirement is based on average reserves over a period of one
month.
The ESCB has taken the decision to pay interest on reserves, perhaps to ensure that
money market activities in the euro do not move offshore where reserve requirements
would not apply. The ESCB provides short-term borrowing and lending facilities to
banks in the system and these rates establish minimum levels of interest rates
throughout the eurozone. Finally, the ESCB conducts regular open market operations
through the NCBs through which it provides funds to the markets, taking in return
securities such as government bills and bonds as collateral.
Read More : Eurozone Market
