The European System of Central Banks (ESCB) was founded at the beginning of June 1998. It is responsible for conducting monetary policy for member states of the European Union – the world’s largest economy after the United States and China.
The national central banks of EU member states are all parties to an agreement that set up the European Central Bank (ECB). The agreement consolidates responsibility for the monetary policy of all the member states of the European Union.
The ESCB is not directly responsible for policy or management of the euro currency since several EU member states have not joined the euro area, for example, the British pound before Brexit.
Structure of the ESCB
The main decision-making body is the Governing Council, which consists of the Executive Board and the governors of the national central banks from eurozone countries. It assesses economic and monetary developments, defines eurozone monetary policy and fixes the interest rates at which commercial banks can borrow from the ECB.
The day-to-day running of the ECB is handled by the Executive Board, made up of a president, a vice-president and four other members appointed for 8-year terms by the leaders of the eurozone countries. It implements monetary policy, manages day-to-day operation according to the directives of the Governing Council.
An advisory board for coordination consists of the ECB president and vice-president and the governors of the central banks from all EU countries.
Co-existence of ECB and ECSB
The Eurosystem comprises the ECB and the national central banks of those countries that have adopted the euro.
The Eurosystem and the ESCB will co-exist as long as EU member states outside the euro area have not adopted the euro as their national currency.
What does the ECB do?
The European Central Bank is responsible for the supervision of credit institutions located in the euro area and non-euro member states. It has established the Single Supervisory Mechanism (SSM) together with the relevant authorities in each country. It establishes and maintains the banking system’s safety and the goal is to ensure the soundness of the European financial system. It leads to cooperation between central banks in the eurozone.
- ECB sets the base interest rates at which commercial banks in the eurozone can borrow
- works to control the money supply and inflation
- manages foreign currency reserves
- manages currency trading to stabilize exchange rates
- supervises financial markets & institutions together with the relevant national authorities
- authorises production of euro banknotes by eurozone countries
- monitors price trends and assesses risks to price stability.
