chapter 16 money, banking, and financial markets: the structure of central banks: the bank of...
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Chapter 16Money, Banking, and
Financial Markets:The Structure of Central
Banks: The Bank of Canada,the Federal Reserve, and the
European Central Bank
©2010 McGraw-Hill Ryerson Ltd.Tim Berry, Humber College
©2010 McGraw-Hill Ryerson Ltd.
Structure of Central Banks:The Big Questions
• How is the Bank of Canada structured and what are its key objectives?
• How is the Federal Reserve organized to meet its objectives?
• How is the European Central Bank organized?• What are the differences and similarities
between these three central banks?
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The Bank of Canada:History
• Prior to the creation of the B.O.C., bank notes were issued by chartered banks and the Dept. of Finance
• Under the gold standard there was no real power in setting monetary policy
• Relatively no bank panics in Canada as compared to the U.S. where Fed. Reserve was created to reduce incidence of panics
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The Bank of Canada:History
• When a Canadian bank ran into financial trouble another bank took it over
• Canadian banks also tended to keep larger reserves as a buffer in case needed
• Canadian banks continue to have a top world reputation for stability
• The B.O.C. was established during the Great Depression in 1934 , as a precautionary move
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The Bank of Canada:Structure
• Created under the Bank Act of 1934• CEO of the bank is the governor - appointed
by a board of directors and approved by the Minister of Finance and federal cabinet
• Bank governor is appointed for a seven-year term and acts with independence from the elected government
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The Bank of Canada:Key Objectives
• Bank’s focus is on three key areas:1. Currency2. Monetary policy3. Financial system stability
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Assessing the Bank of Canada’s Structure
• Independence from political influence• Decision-making by committee• Accountability and transparency• Clear statement of intentions
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The Federal Reserve System:Origins
• 1870 to 1907: - US had 21 financial panics
• Anatomy of 19th century bank panics:– Crop Failure Loan Default– Loan default damaged rural bank– Rural bank withdrew deposits from city bank– Financial difficulties spread
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The Federal Reserve System:Origins
• Panic of 1907 – must be a better way.• Federal Reserve Created in 1914• Europe:– Post WWII: unstable inflation and exchange
rates– Consensus moved toward monetary union– 1999: Created European Central Bank
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The Federal Reserve System:Structure
• Federal Reserve Banks• Board of Governors• Federal Open Market Committee
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The Federal Reserve System:Federal Reserve Banks
• 12 Districts – much more complicated organization and system compared to B.O.C.
• Each is a Private Non-Profit Organizations and Chartered Banks
• Owned by commercial bank “members”• Overseen by both – Board of Directors– Board of Governors in Washington
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The Federal Reserve System:The Twelve Districts
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The Federal Reserve System:What the Reserve Banks Do
• Perform same functions as Bank of Canada• Government’s Bank– Issue currency– Maintain the Treasury’s account– Manage the Treasury debt
• Bankers’ Bank– Hold reserve deposits– Operate the payments system– Make discount loans at the discount rate– Supervise and regulate financial institutions– Collect data
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Federal Reserve System:Structure and Policy Organization
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New York Fed Only:
•Auction Treasury Securities•Foreign Government Services•Monetary Policy Operations•Fedwire: Large Value Interbank •Funds Transfer System
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Federal Reserve Bank of NY:The Gold Vault
• 250 million ounces• Over $85 billion at
current market prices• 10% of all the gold
that has ever been taken out of the ground
• One bar weights about 400 ounces
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• Structure–Seven governors including a
chairman and vice-chairman–Serve 14-year terms
The Federal Reserve System: The Board of Governors
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• European Monetary Union began January 1, 1999
• Euro notes and coins began circulation January 1, 2002
• As of January 1, 2008, 15 of 27 countries in the European Union
European Central Bank
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The European System of Central Banks
On Jan 1, 2008 Cyprus and Malta joined the Eurosystem.
Has any other country joined since?
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European Central Bank:Key Players
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European Central Bank:Organizational Structure
• Executive Board and European Central Bank in Frankfurt similar to the Board of Governors
• National Central Bankssimilar to the Federal Reserve Banks
• Governing Council formulates policysimilar to the FOMC
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Comparing ECB to B.O.C.and The Federal Reserve
• ECB does not regulate financial institutions – similar to B.O.C.
• ECB’s monetary intervention is accomplished by all the National Central Banks.
• ECB’s budget is controlled by the National Central Banks
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The ECB’s Objective and Strategy
• The Treaty establishing the ECB state:
“The primary objective of the European System of Central Banks shall be to maintain price stability.”
Seems clear!
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• Price stability is currently defined as inflation of close to two percent but not more than in a euro-area measure called the Harmonized Index of Consumer Prices, over the medium term.
The ECB’s Objective and Strategy
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Assessing the ECB’s Structure
• Independence from political influence• Decision making by committee• Accountability and transparency
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• In the 1990s the Japanese economy languished• The Ministry of Finance (MoF) was blamed• Until 1998, the MoF controlled the monetary
policy of the Bank of Japan• Since 1998 the Bank of Japan has been
independent and – Has an eight-member policy board– Has the primary goal of price stability– Communicates regularly to keep the public informed
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Chapter 16Money, Banking, and
Financial Markets:The Structure of Central Banks:
The Bank of Canada,the Federal Reserve, and the
European Central Bank
End of Chapter
©2010 McGraw-Hill Ryerson Ltd.Tim Berry, Humber College