European Central Bank

The ECB is the central bank for Europe's single currency, the euro. The ECBs main task is to maintain the euro's purchasing power and thus price stability in the euro area. It administers the monetary policy of the 17 EU member states which constitute the Eurozone, one of the largest currency areas in the world. Basic tasks to be carried out through the Euro system are: The definition and implementation of monetary policy for the Eurozone: 1. Main focusa. On Price Stability i.e. to maintain inflation rates at levels below, but close to, 2%, recognizing relative change in prices, avoiding inflation risk, etc. 2. Strategya. By setting short-term interest rates, monetary policy influences the economy, and ultimately the price level. b. How? :- Two pillar approach- Economic Analysis for assessing the short to medium-term determinants of price developments influenced largely by the interplay of supply and demand in the goods, services and factor markets. Monetary Analysis focuses on credit and liquidity conditions in the economy and their consequences in terms of risks to price stability. 3. Monetary Policy Instrumentsa. Deposit Facilities b. Marginal lending Facilities c. Open market operations like long term financing d. Reserve requirements like reserve base, reserve ratio, etc.

The conduct of foreign exchange operations: The holding and management of the official foreign reserves of the euro area countries (portfolio management): The ECBs foreign reserves ensure that the ECB has sufficient liquidity to conduct foreign exchange operations. The ECBs foreign reserves portfolio consists of US dollars, Japanese yen, g old and special drawing rights. The promotion of the smooth operation of payment systems (TARGET2). Further tasks Banknotes: The ECB has the exclusive right to authorize the issuance of banknotes within the euro area. Financial stability and supervision: The Euro system contributes to the smooth conduct of policies by the competent authorities as regards the prudential supervision of credit institutions and the stability of the financial system. International and European cooperation: The ECB maintains working relations with relevant institutions both within the EU and at the global level, in respect of the tasks entrusted to the Euro system. ECBs response to subprime mortgage crisis: -Aug 2007: Provided overnight liquidity to the interbank money markets to reduce short-term interest rate volatility and to contain the risk that tensions in the financial markets -Dec 2007: The ECB started, in cooperation with the Federal Reserve System, to provide dollar funding to euro area banks to address shortages of dollar liquidity.

-Oct 2008: Euro zone banks were able to get unlimited liquidity from the ECB at the main refinancing rate provided they offered adequate collateral. -Jun 2009: Announces covered bond purchase programme. Its purpose was to help revive the market in covered bonds. -May 2010: Introduce the (now terminated) Securities Markets Programme so that ECB and the national central banks of the euro zone could intervene in certain debt securities markets, mostly government bond markets. -Dec 2011: Conducted 2 long term refinancing operations, decided to increase the availability of collateral by reducing the rating threshold for certain asset-backed securities, reduce the reserve ratio to 1% (from 2%).

Euro Convertible Bonds

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