European Central Bank (ECB)
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    European Central Bank (ECB)


    European Central Bank (ECB)

    ECB is an international credit and financial institution that unites the financial systems of the member-states of the Eurozone Union.
    The ECB is established with a goal to conduct a unified and independent policy of the member-countries of the European Union. Other important goal is to ensure the stability of currencies of the EU member-states and the prices within the territory of the Eurozone.
    ECB serves for creation of official currency reserves of the European Union, the organization of international lending and financial mutual assistance between the states of the European Union.


    Originally, the beginning of the creation of the ECB lies in the very roots of the creation of the European Union and the Eurozone itself (the Eurozone is a union of member-countries). The first proposals for European integration were expressed at the Paris Conference of 1867, but the proposal was not accepted, because only those countries, which could regulate their economies very well, could enter the zone of the union. After a period of time, only after the Second World War, when the countries of Europe realized that the development of the economy and the restoration of resources is possible only with the unification of efforts, Europe (Eurozone) started to be created. Thus, gradually signing one law after another, the countries began a close alliance. But as a consequence, whole structure of the association needed the central bank, the main goal of which would be to ensure the freedom of people in the financial world, goods, services and capital turnover.
    The European Central Bank, was established on June 1, 1998, where the best place to locate the headquarters of the city was the city of Frankfurt am Main. In addition to freedom of movement and services, the purpose of creating such type of bank was required by a few more reasons:
    - Facilitation of mutual settlements between the countries of the Eurozone;
    - stabilization of money exchange rates;
    - also the emergence of a single, stable and strong European currency that could compete with the dollar index in world markets.
    On 10-11th December, 1991 was enacted the Maastricht Treaty, with a purpose to consolidate the goals and ways of creating the Economic and Monetary Union. Maastricht Treaty entered into force on February 7, 1992, in Maastricht (the Netherlands). This contract envisaged the creation not only of an Economic and Monetary union, but also a political alliance between the countries involved.
    After signing it, the countries of the European Union (EU) have moved to conduct general economic and financial policies, the ultimate goal of which was announced the introduction of a single currency for the countries of the Eurozone.




    On 1st January 1999, the European Central Bank assumed responsibility for the conduct of monetary policy for the member countries. Before the transition to the "euro" all the candidate countries of the Eurozone were obligated to fulfill a few conditions on the convergence of the economy of each member-country. The purpose of these conditions wasto ensure economic and legal prerequisites that would successfully take part in the activities of the Euro zone monetary union aimed at achieving price stability.
    Despite initial expectations, the formation of the Monetary Union was subjected to significant trials. In 1992-1993, the European currency suffered severe crisis moments. After that, such countries as Spain and Portugal were heavily devalued, Britain and Italy entirely withdrew from the EU zone. To solve crisis situation, it was decided to increase the permissible limits of currency fluctuations to 15%. After such fluctuations in the structure, some countries called for an exit from the Eurozone. There was a difficult period and only in January 1994 and soon was established a currency institute, which was transformed into the European Central Bank in 1998.

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    Structure of the ECB.

    The European System of Central Banks (ESCB) is an international banking system comprised of the European Central Bank (ECB) and the National Central Bank (NCB) of the member-states of the European Community.
    The management of the European Central Bank is carried out by three governing bodies: the Governing Council, the Executive Board and the General Council.
    Since its inception in Germany (Frankfurt), ECB has united under its guidance a whole system of European central banks. Its structure includes:


    - Bank of Belgium.
    - Bundensbank.
    - Bank of Greece.
    - Bank of Spain.
    - Bank of France.
    - Monetary Institute of Luxembourg.


    The Central European Bank performs several dominant functions simultaneously:


    - Development and implementation of monetary policy in the euro area.
    - Providing, developing and managing the exchange reserves of states from the euro area.
    - Euro emission. Establishment of interest rates.
    - Ensuring price stability in the European zone.


    Integration, as well as the introduction of a single currency in the member-countries, required specific structure that would be able to change and to direct alterations in the economic life of some states. The Governing Council of the ECB manages the reserves of the European system of central banks, determines the monetary policy of the eurozone countries, sets key interest rates.
    The main objective of the entire structure is to maintain price stability and ensure the economic growth of the countries of the union.

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    The management of the European Central Bank.

    Due to the fact that the structure of the bank implies the participation of Eurozone member-countries, the ECB project management also means candidates from different countries. To ensure a more stable economic situation in the Euro zone, the governance structure was divided into several parts:


    - The Board of Governors
    - Executive Board
    - The General Council. The main governing body is the Board of Governors, which consists of 25 people.
    The Executive Board of the ECB is 6 people.

    And also 19 people, who are the leaders of the National Banks of the Eurozone.


    It is clear that the board of the bank includes members of the board and heads of the Central Banks of the zone of participation. Currently, the board consists of six people. Nominations are proposed by the Board of Governors, approved by the European Parliament and the heads of states, belonging to the Eurozone: 1) Mario Draghi - President of the ECB; 2) Vítor Constâncio - Vice-President of the ECB; 3) Peter Praet - Member of the Executive Board of the ECB (Chief Economist of the ECB); 4) Sabine Lautenschläger - Member of the Executive Board of the ECB; 5) Yves Mersch - Member of the Executive Board of the ECB; 6) Benoît Cœuré - Member of the Executive Board of the ECB. The institute of the European Central Bank widely uses the institution of curators, where each member of the Executive Board's Board oversees a certain direction of the European Central Bank's activities, which in my opinion is a sufficiently serious consideration, and strengthens the structure of the ECB's governance.
    Formally, the ECB is independent, at the same time, it must annually report to the European Parliament, the European Commission, the Council of the European Union and the Council of Europe.

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    The formation of a single European currency - Euro.

    The history of the Euro currency is closely related to the emergence of the European Union as a whole.


    The purpose of creating a single currency for the Euro zone was:


    - ensuring integration;
    - creation of a stability zone with a single currency;
    - protection of the common market from the expansion of the dollar;
    - bringing together the economic and financial policies of the member countries.
    The development of the Euro currency design was chosen from a variety of options. The symbol is based on the letter of the Greek alphabet - epsilon, which is attributed to the symbolism of reliability and stability in combination with two parallel lines. Except the symbol on the bills, there is an encoded serial number, the first letter of which determines the country of issue.


    Euro banknotes have multi-stage protection and alltogether they exclude qualitative falsification:


    - Quality of paper.
    - Watermark.
    - Protective thread.
    - Microtext.
    - Holographic drawing.
    - Holographic elements.
    - Fluorescent paint.
    - Printing method.
    - Special luminescence in UV rays.

    The introduction of the Euro into circulation was a gradual process. Non-cash transactions have been transferred to a new currency since 1st January, 1999, and cash transfers - since the beginning of 2002. However, Euro is a world reserve currency. Its feature is the presence of powerful gold and currency reserves in the EU countries.
    In 2007, it was suggested that the Euro could completely replace the dollar, but so far it is seen only as a prospect.


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    The Monetary Policy of the ECB.

    The European Central Bank is responsible for implementing the monetary policy (MP) of the countries of the euro-area.


    For today ECB is the key to successful cooperation for countries of the European Union, which has been endeavored with a lot of effort and time. The stability of the currencies of the member-states speaks about well-developed economic, political and financial structure of the union, which is supported by strong resistance to currency shocks in the world
    market. Euro zone currency - Euro, as it was expected, could compete on an equal footing with a powerful dollar. At the moment, the ECB holds the leading position in responsibility for maintaining stability in the Euro zone. As it is already known, the main goal of the ECB is the maintainance of stability and competitiveness in the financial market.
    National banks of member-countries are the only shareholders of the ECB, but despite this the ECB resorts to usage of monetary policy instruments only in the most necessary cases. It is known that the monetary policy of the EU operates on two levels:


    -All decisions that are related to an independent unified policy on the part of the targets are taken by the ECB and implemented centrally throughout the Eurozone.
    - MP instruments are used practically decentralized by national central banks of the EU. NCBs have the right to discuss and make recommendations on the problems and perspectives of the MP. At the same time, in each EU country national central banks have specific historical and legal features that inevitably affect their decisions and are often at variance with the ECB's strategy. The latter has to make efforts patiently and consistently in order to promote an adequate understanding of the goals and objectives of the monetary policy and the expectations placed on it by the EU and its individual countries. All this increases the credibility of the activities of the European Central Bank.


    In order to stabilize the economy and improve the level of service, the ECB conducted a reduction in interest rates for loans. The ECB's key interest rate determines the %, at which short-term loans are provided under the MRO (in the course of the crisis, the rates for MRO and LTRO were unified). In the pre-crisis period, the discount rate was considered the most powerful tool of the Central Bank. ECB actively involved it in the period of the global financial crisis - six step-by-step decisions were taken to reduce it from 3.25% in November 2008 to 1% in May 2009. Then the rate remained unchanged for two years. However, in April and July 2011, the leadership of the ECB, headed by the chairman - JK Trichet, made two decisions about raising it - each of them by 0.25%.
    This decision was motivated by fears of overclocking inflation due to a significant increase in world energy prices. Meanwhile, the main task of the ECB is to maintain a stable growth in consumer prices at about 2% per year, which is considered to be optimal for the financial system and economic growth. Apparently, at that time it seemed to the ECB management that inflation was growing too fast, and the worst period of stress in the financial markets was behind us and therefore we could resort to tightening the MP.


    Since the euro-area currency was created with a goal to compete with the dollar, today it can be noted that the work of the ECB was laborious and the Euro went a long way to become stable, to have a good index in the financial market. All these aspects and fetters of the economic and political standing of the ECB have a direct impact on the life of the member-countries and on the exchange rate of the national currency.

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    Financial guarantees of the ECB

    All credit operations in the banking system of the Eurozone (including obtaining maximum loans) should be provided with a sufficient guarantee. The ECB has a two-leveled system of guarantees. The first is represented by a debt instrument in the euro market (is very demanded on the market), which meets the universal and widespread requirements of the ECB on the territory of the Eurozone. The second level consists of additional euro-denominated popular and non-popular assets, which have the particular importance for the national banking system and financial market. Requirements for assets in a two-tier system
    of guarantees vary from the ECB and the national central banks included in the Eurozone. In some countries, the allowable assets are limited by public debt and institutions, belonging only to CB, while in other countries the permissibility of the used assets is much wider and it can include highly liquid market and non-market bonds of banks and corporations. The ECB decided that a full harmonization of monetary policy before the creation of the Monetary Union is not possible, partially because the definition of its participants was rather late - in the second stage, and it is not a prerequisite for currency policy.


    There is no difference between the two types of guarantees regarding their acceptability for financial transactions in the Euro system, despite the fact, that only one type of asset can be directly used in transactions. I assure that up-to-date information on eligible assets is readily available to all parties, the ECB publishes a weekly listing on its official website. Practically, almost all types of guarantees, used by banks in the Euro zone, belong to the first type, despite the fact, that over time their share decreased from 98% in 1999 to 96% in 2000. Government bonds account for slightly more than half of the allowable assets; their share decreased from 60% in early 1999 to 56% in March 2000, partially because of the increase in the issuance of corporate bonds denominated in Euros. About 30% of the allowable assets are issued by credit institutions, the remaining part - by corporations. However, other participants note a higher share of corporate bonds: government bonds account for approximately 47%, and the same share have corporate bonds. A slight increase in the use of the second type of assets over time and a decrease in the share of government bonds mean that credit institutions in the Euro zone have preferences for using less liquid assets, for example, with guarantees, in exchanging operations in the Euro zone. Most of the market debt bonds of the second group of assets are not actively traded in secondary markets. Liquidity of these instruments is low, as the volume of their issue, so investors try to keep them until maturity. Liquidity of bonds issued by credit institutions is generally lower than government bonds.

    FUNCTIONS OF FINANCIAL SYSTEM
    Attachment 21129
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    The ECB maintains its monetary policy.

    Up to date, we can say that the ECB has reached its goal and the Euro has become quite competitive not only against the Dollar index, but in general in the entire foreign exchange market. The ECB Governance has made great efforts for such stability. But still the Euro is not yet fully stabilized and the ECB repeatedly takes attempts to grow against the main currency- dollar. To get this goal, the ECB, at many meetings both increased and reduced base interest rates.



    If you look at the market from the beginning of trading in EUR/USD, then you can understand that from 1995 to 2001, the ECB's currency suffered hard moments and the crisis affected its condition. But after ECB Governance found a solution and lowered interest rates, giving a good boost to the growth of the Euro.
    And so, from 2001 to 2009, the Euro was experiencing stable and balanced growth, which gave the economies of the Euro zone member-countries an opportunity to boost their economy and reach a completely new and high level of both financial and political status.
    But starting from 2009 to the present day, the dollar has become more stable against the backdrop of global influences. Since the dollar is the main currency of settlement in international markets, its privileges are quite high compared to the Euro. Now the ECB at the next meeting is taking attempts to improve stability in the financial and economic situation of the member-countries, thereby trying to preserve the Euro Union itself.
    So at the last meetings in September, 2017 Regulator kept the benchmark interest rate at a record low of 0%. The deposit rate was maintained at minus 0.4%, the margin rate remained at 0.25%. In addition, the European Central Bank retained the forecast for inflation for the current year at 1.5%, in the following year it will be reduced from 1.3% to
    1.2%, and in 2019 - from 1.6% to 1.5%. Draghi explained that the lowering of the forecast was due to the streongthening of the euro.
    Now investors are waiting for the meeting of the Federal Reserve System (FRS) of the United States, which is scheduled for September 19-20, 2017. As a result of the July meeting, the US Federal Reserve kept the benchmark interest rate at the level of 1-1.25% per annum. The Regulator also added that it plans to start reducing assets on the balance sheet "relatively soon." According to the CME Group at September 8, about 31.3% of investors expect an increase in the key interest rate of the US Federal Reserve at the December meeting.
    Thus it is clear that today the ECB manages to improve the stability of the Euro. Here it can be seen that the EUR/USD rate continues to grow.

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    The formation of the Euro as a stable currency and its impact on the world market

    If you look at the stages of the development of the Euro, you can say that due to the creation of a single currency in the Euro area, countries and in particular the industrial corporations, realized that using the Euro as a single currency of pricing and payment provides reducing the costs associated with currency conversion , foreign exchange risk insurance. This is important for improving the finances of enterprises, increasing the profitability of their shares, the less developed South of the euro area will gradually be pulled to the North by key indicators.


    Thus, all the participating countries understood that for the stability of the development and maintenance of the economies of the countries it is necessary to adhere to the policy of the ECB. Also the access to foreign markets will be more stable for the Euro.

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    Status of European system of CB and ECB

    EXTRACTS FROM PROTOCOL (№ 18) ON THE STATUTE OF THE EUROPEAN SYSTEM OF CENTRAL BANKS AND OF THE EUROPEAN CENTRAL BANK
    Article 12 (Responsibilities of the decision-making bodies)
    12.1. The Governing Council shall adopt the guidelines and take the decisions necessary to ensure the performance of the tasks entrusted to the ESCB under this Treaty and this Statute. The Governing Council shall formulate the monetary policy of the Community including, as appropriate, decisions relating to intermediate monetary objectives, key interest rates and the supply of reserves in the ESCB, and shall establish the necessary guidelines for their implementation. The Executive Board shall implement monetary policy in accordance with the guidelines and decisions laid down by the Governing Council. In doing so the Executive Board shall give the necessary instructions to national central banks. In addition the Executive Board may have certain powers delegated to it where the Governing Council so decides. To the extent deemed possible and appropriate and without prejudice to the provisions of this Article, the ECB shall have recourse to the national central banks to carry out operations which form part of the tasks of the ESCB.
    12.2. The Executive Board shall have responsibility for the preparation of meetings of the Governing Council
    Article 17 (Accounts with the ECB and the national central banks)
    In order to conduct their operations, the ECB and the national central banks may open accounts for credit institutions, public entities and other market participants and accept assets, including book entry
    securities, as collateral.
    Article 18 (Open market and credit operations)
    18.1. In order to achieve the objectives of the ESCB and to carry out its tasks, the ECB and the national central banks may:
    — operate in the financial markets by buying and selling outright (spot and forward) or under repurchase agreement and by lending or borrowing claims and marketable instruments, whether in Community or in non-Community currencies, as well as precious metals;
    — conduct credit operations with credit institutions and other market participants, with lending being based on adequate collateral.
    18.2. The ECB shall establish general principles for open market and credit operations carried out by itself or the national central banks, including for the announcement of conditions under which they stand ready to enter into such transactions.
    Article 19 (Minimum reserves)
    19.1. Subject to Article 2, the ECB may require credit institutions established in Member States to hold minimum reserve on accounts with the ECB and national central banks in pursuance of monetary policy objectives. Regulations concerning the calculation and determination of the required minimum reserves may be established by the Governing Council. In cases of noncompliance the ECB shall be entitled to levy penalty interest and to impose other sanctions with comparable effect.
    19.2. For the application of this Article, the Council shall, in accordance with the procedure laid down in Article 42, define the basis for minimum reserves and the maximum permissible ratios between those reserves and their basis, as well as the appropriate sanctions in cases of non-compliance.
    Thus, getting acknowledged with some facts of the ECB's position it can be noted that the structure of the bank is divided into different stages and has a lot of indications in order to observe and fulfill the ECB's own tasks. Since the Board of Governors is allowed to create and change the rules of the ECB, this gives a lot of advantages to the structure of the ECB. As the market is constantly changing, the governing bodies are obliged to adapt to it and sometimes make fatal decisions. In this way, management can also develop certain strategies to maintain the stability of the ECB's monetary policy.

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    The quantitative easing program (QE) of the ECB

    Recently, the decline of Euro index against the US Dollar could be observed in the European market, which facilitated the decision of the ECB to introduce a QE program that could ease the terms of access to monetary resources and at the same time increase the amount of money supply. Many politicians take the view that the quantitative easing program is the "last chance" for the economy. The essence of the program is simple, the Central Bank carries out additional issue of non-cash money in large amounts. There is an additional infusion of funds into the economy and thus the cost of credit resources is decreasing. For this purpose, banks lowered discount rates or purchased short-term government bonds. Thus, banks set the goal of economic growth in the Euro zone. According to the accepted QE program, the ECB should buy out long-term bonds from the state, but belonging only to the most reliable elements that have good sponsorship.

    The programs of quantitative easing are actively monitored by investors and traders around the world, since this program is an important fundamental factor that exerts a strong influence on exchange markets. At the moment, M. Draghi said that the program gives its results, but the curtailment of the program is not planned, since there is no desired stability in the macroeconomic indicator of

    the Eurozone. In his opinion, in order to accelerate core inflation, it is necessary to keep stimulating programs.

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