European Central Bank (ECB): Definition, Structure, and Functions

What is European Central Bank (ECB)?

The European Central Bank (ECB) is the central bank responsible for monetary policy of the European Union (EU) member countries that have adopted the euro currency. This currency union is known as the eurozone and currently includes 19 countries. The ECB's primary objective is price stability in the euro area.

Key Takeaways

  • The European Central Bank (ECB) is the central bank of the European Union and the Eurozone currency union.
  • The ECB coordinates Eurozone monetary policy, including setting target interest rates and controlling the supply of the euro common currency.
  • The ECB's primary mandate is price stability; it targets 2% inflation over the medium term as a buffer against the risk of destabilizing deflation.
  • ECB decisions on monetary policy and banking supervision are made by the ECB Governing Council comprising six executive board members and a monthly rotation of national central bank governors.

Understanding European Central Bank (ECB)

The European Central Bank (ECB) is headquartered in Frankfurt am Main, Germany. It has been responsible for monetary policy in the Euro area since 1999, when the euro currency was first adopted by some EU members.

ECB Structure

The ECB Governing Council makes decisions on eurozone monetary policy, including its objectives, key interest rates and the supply of reserves in the Eurosystem comprising the ECB and national central banks of the eurozone countries. It also sets the general framework for the ECB's role in banking supervision.

The Council consists of six executive board members and a rotation of 15 national central bank governors. Instead of an annual rotation of voting rights, as for regional Federal Reserve bank presidents, the ECB rotates voting rights monthly.

Central bank governors from the top five countries by the size of their economies and banking systems—as of May 2022, Germany, France, Italy, Spain, and the Netherlands—share four voting rights, while the central banks of the other countries vote only slightly less frequently at 11 months out of every 14.

ECB Mandate

The ECB's mandate is for price stability and it targets an annual inflation rate of 2% over the medium term.

Like the Federal Reserve's inflation targeting, it is symmetrical, so that inflation too low relative to its target is viewed as negatively as inflation above it.

The 2% target provides a buffer against the risk of a destabilizing deflation during a recession.

European Central Bank (ECB) Functions

The primary responsibility of the ECB, linked to its mandate of price stability, is formulating monetary policy. Monetary policy decision meetings are held every six weeks, and the ECB is transparent about the reasoning behind the resulting policy announcements. It holds a press conference after each monetary policy meeting, and later publishes the meeting minutes.

The Eurosystem comprises the ECB and the central banks of Eurozone countries. The Eurosystem manages the euro currency and supports the ECB's monetary policy. The parallel European System of Central Banks includes all central banks of EU states, including those that have not adopted he euro.

The ECB is also the EU body responsible for banking supervision. In conjunction with national central bank supervisors, it operates what is called the Single Supervisory Mechanism (SSM) to ensure the soundness of the European banking system. The SSM enforces the consistency of banking supervision practices for member countries—lax supervision in some member countries contributed to the European financial crisis. The SSM was launched in 2014. All euro area countries are in the SSM and non-euro EU countries can choose to join.

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  6. European Central Bank. "Banking Supervision."