The European Central Bank and the Global Financial Crisis
The European Central Bank and the Global Financial Crisis
Central banks have existed for a long time since Sweden began the operation of the Riksbank in 1668 (Pollard, 2003). Since then, central banking has revolutionized from just being the government's banker. The primary role of the early central banks was to finance military activities, and this was the reason that charters to central banks that existed before 1850 was in the war context (Broz 1998 as cited in Pollard, 2003). Currently, the role of central banks includes a diverse of activities that are not limited to the provision of financial and banking stability. Central banks are required to formulate monetary policies that will help to ensure the sustainability of its host country.
Economic challenges that a country faces may jeopardize the above primary function of central banks. One such challenge was the financial crisis that occurred in 2007-2008. According to Cour-Thimann and Winkler (2012), this crisis saw the occurrence of the leverage cycle and great moderation. The European Central Bank is one of the stakeholders of the financial crisis in the Euro-zone. This paper seeks to explore European Central Bank’s role. Moreover, the paper evaluates how the bank handled the global financial crisis.
Role of the European Central Bank (ECB)
The roles of the ECB are stipulated in Article 9.2 of European System of Central Banks (ESCB) statute. The primary function of the bank is to ensure that Eurosystem tasks are carried out. Eurosystem tasks are carried out either by the activities of the national central bank or those of ECB. In particular, Hanspeter (2004) explains that the bank acts as the center for making decisions for the Eurosystem and ESCB. ECB has two bodies, the Executive Board and the Governing Council, that make decisions regarding ESCB and the Eurosystem. Moreover, there exists the General Council that also makes decisions for the Euro-zone due to the existence f nationalities that do not use the Euro as their monetary system. These bodies are required to govern ESCB and the Eurosystem as well as govern the ECB.
ECB bank is also required to ensure that there is consistency in policy decisions implementation. According to Hanspeter (2004), ECB provides instructions and guidelines aiming Eurosystem operations execution decentralization. These instructions and guidelines are intended to ensure that there is a consistent implementation of policies and maintenance of integration of the Eurozone system. While still ensuring this role, ECB supports the committees of ESCB that act as a forum for promoting intra-system cooperation. In the same regard, ECB ensures that there is real-time information exchange between national central banks and ECB as a means of monitoring decentralized operations and ensure there is compliance with its instructions and guidelines.
Moreover, in 2004, Hanspeter observed that ECB has regulatory powers. ECB has two instruments that are vital in the achievement of this role. These instruments are the ECB Decisions and the ECB regulations. These instruments are used to adopt legal acts that have direct effects on third parties rather than the Eurosystem's national central banks. The regulatory powers of ECB allow it to achieve its activities autonomously without the reliance on member states or the community institutions. However, the regulatory powers are limited. ECB can only exercise the powers in the context that allows it to carry out Eurosystem tasks. Periodic penalties and fines are used to ensure that there is compliance with the obligations of ECB Regulations and Decisions.
ECB also has advisory activities (Hanspeter, 2004). ECB adopts opinions and recommendations on legal acts that are non-binding within its area of competence. ECB also publishes opinions and recommendations whose relevance is on a general scope in their official journal. ECB is also required to monitor compliance with provisions of Articles 101 and 102 of Council Regulations' treaty. These articles involve issues regarding monetary privileged access and financing. ECB is also mandated to undertake the role of taking over tasks from European Monetary Institute (EMI). ECB is required to take over two primary roles from EMI. One of the responsibilities involves fostering cooperation between non-euro area national central banks and the Eurosystem. The second responsibility taken over from EMI by ECB is the making of preparations essential for integration of new national central banks into the ESCB.
How ECB Handled the Financial Crisis
The occurrence of the 2007-2008 global financial crisis saw central banks enact measures to ensure market sustainability. Some of the measures adopted by ECB include such as interest rates lowering and expansion of operations of refinancing. The following section discusses some of the measures that were adopted by ECB as a response to the global financial crisis.
One of the measures adopted by ECB was the enhancement of its credit programme. Richter and Wahl (2011) explain that this enhancement of the credit programme included the easing of the lending requirements, encompassing bond purchases and lengthening of the refinancing operations maturity. In such way, the bank took the last resort lender. The bank did this by giving all other banks liquidity with the assumption that there was efficiency in the financial markets, and they could regulate themselves. According to Micossi (2015), such initiatives helped to protect against the effect of collapse of the interbank and wholesale markets.
Moreover, the bank gave LTRO and MRO on a full allotment and fixed rates with the maturity of the former being raised to six in 2008 and later to twelve in 2009 (Micossi, 2015). Such initiatives helped to ensure that liquidity demand was satisfied at a stable cost in the presence of adequate collateral. In curbing the financial crisis, ECB also launched Covered Bond Purchase Programme (CBPP1). This programme was intended to revive the market normally by representing the primary funding source for European banks. Such source had dried up concerning issuance and liquidity and the bank used this programme to purchase securities worth €60 billion.
Moreover, ECB opted to deviate from its principle of not lending to authorities. ECB launched Securities Market Programme that lend money to its member state’s governments indirectly (Richter & Wahl, 2011). Moreover, the programme was intended to tame extreme turbulence of the market (Micossi, 2015). This lending was achieved through the buying of sovereign bonds in the secondary market. Moreover, ECB cut the primary refinancing rates between 2008 and 2009 by 325 points basis.
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Micossi, S. (2015). The Monetary Policy of the European Central Bank (2002-2015). Centre for European Policy Studies.
Richter, F., & Wahl, P. (2011). The role of the European Central Bank in the financial crash and the crisis of the Euro-zone. In the Report based on a Weed expert meeting.