EUROPEAN CENTRAL BANK Mission of the European Central Bank .

The European Central Bank and the national central banks together constitute the Eurosystem, the central banking system of the euro area. The main objective of the Eurosystem is to maintain price stability: safeguarding the value of the euro. We at the European Central Bank are committed to performing all central bank tasks entrusted to us effectively. In so doing, we strive for the highest level of integrity, competence, efficiency and transparency.
Mission of the Eurosystem The Eurosystem, which comprises the European Central Bank and the national central banks of the Member States whose currency is the euro, is the monetary authority of the euro area. We in the Eurosystem have as our primary objective the maintenance of price stability for the common good. Acting also as a leading financial authority, we aim to safeguard financial stability and promote European financial integration. In pursuing our objectives, we attach utmost importance to credibility, trust, transparency and accountability. We aim for effective communication with the citizens of Europe and the media. We are committed to conducting our relations with European and national authorities in full accordance with the Treaty provisions and with due regard to the principle of independence.

We jointly contribute, strategically and operationally, to attaining our common goals, with due respect to the principle of decentralisation. We are committed to good governance and to performing our tasks effectively and efficiently, in a spirit of cooperation and teamwork. Drawing on the breadth and depth of our experiences as well as on the exchange of know-how, we aim to strengthen our shared identity, speak with a single voice and exploit synergies, within a framework of clearly defined roles and responsibilities for all members of the Eurosystem. The strategic intents of the Eurosystem Acknowledged authority in monetary and financial matters Building on its solid constitutional basis, its independence and its internal cohesion, the Eurosystem, the central banking system of the euro area, shall act as the monetary authority of the euro area and as a leading financial authority, fully recognized inside and outside Europe. In pursuing its primary objective, the maintenance of price stability, the Eurosystem shall undertake the necessary economic and monetary analyses and adopt and implement appropriate policies. It shall also properly and effectively respond to monetary and financial developments. Financial stability and European financial integration The Eurosystem shall aim to safeguard financial stability and promote European financial integration in cooperation with the established institutional structures. To this end, it shall contribute to policies providing for a sound European and global architecture for financial stability.

Accountability, credibility and trust. Closeness to the citizens of Europe The Eurosystem attaches utmost importance to credibility, trust, transparency and accountability. It aims for effective communication with the citizens of Europe and the media. It is committed to conducting its relations with European and national authorities in full accordance with the Treaty provisions and with due regard to the principle of independence. To this end, the Eurosystem will keep abreast of the transformations affecting money and financial markets and will be sensitive to the public interest and market needs. Shared identity, clarity of roles and responsibilities and good governance The Eurosystem shall aim to strengthen its shared identity within a framework of clearly defined roles and responsibilities for all its participants. To this end, the Eurosystem will build on the potential and deep involvement of all its members, as well as on their commitment and willingness to work towards agreement. Furthermore, the Eurosystem is committed to good governance and to applying effective and efficient organizational structures and working methods. In performing its activities, the Eurosystem shall be guided by a number of organisational principles. Organisational principles for the fulfilment of Eurosystem functions by all members of the Eurosystem With due respect to the principle of decentralisation which is at the root of the System:

Participation All members of the Eurosystem shall contribute strategically and operationally to the goals of the Eurosystem. Cooperation All Eurosystem functions shall be performed in a spirit of cooperation and teamwork by the members of the Eurosystem. Transparency and accountability All members of the Eurosystem shall act transparently and be fully responsible and accountable for the effectiveness of all Eurosystem functions. Distinguishing Eurosystem activities Eurosystem activities performed by national central banks shall be clearly identified and distinguished to the extent possible from those pertaining to national responsibilities. Cohesion and unity While respecting the legal status of its members, the Eurosystem and its staff shall act and appear as a cohesive and unified entity. In that spirit and working as a team, the Eurosystem shall speak with a single voice and be close to the citizens of Europe. Exchange of resources The exchange of personnel, know-how and experience shall be promoted by and among all members of the Eurosystem. Effectiveness and efficiency in decision-making All Eurosystem decision-making and deliberative processes need to pursue effectiveness and efficiency. Decision-making shall focus on analysis and arguments as well as on expressing views in their variety. Cost efficiency, measurement and methodology The Executive Board of the ECB and the Governors of

the national central banks shall manage all resources prudently and shall promote effective and costefficient solutions in all parts of the Eurosystem. The ECB and the NCBs shall develop control systems and performance indicators to measure the fulfillment of Eurosystem functions and their alignment with the objectives of the Eurosystem. Comparable cost evaluation and cost-reporting methods should be elaborated. Exploit synergies and avoid duplications Potential synergies and economies of scale shall be identified and exploited to the extent feasible. Unnecessary duplication of work and resources at functional levels and over-extensive and inefficient coordination shall be avoided. To this end, the Eurosystem shall energetically pursue organizational options that ensure effectiveness, efficiency and prompt action, taking advantage of the experience available both at the ECB and at the NCBs through intensified use of existing resources. The outsourcing of Eurosystem support functions and activities shall be considered against the same criteria and shall take security aspects into account.

Since 1 January 1999 the European Central Bank (ECB) has been responsible for conducting monetary policy for the euro area - the worlds largest economy after the United States. The euro area came into being when responsibility for monetary policy was transferred from the national central banks of 11 EU Member States to the ECB in January 1999. Greece joined in 2001, Slovenia in 2007,

Cyprus and Malta in 2008, Slovakia in 2009 and Estonia in 2011. The creation of the euro area and of a new supranational institution, the ECB, was a milestone in the long and complex process of European integration. To join the euro area, the 17 countries had to fulfil the convergence criteria, as will other EU Member States prior to adopting the euro. The criteria set out the economic and legal preconditions for countries to participate successfully in Economic and Monetary Union.

The mission of the ECB and the Eurosystem European Central Bank The legal basis for the single monetary policy is the Treaty establishing the European Community and the Statute of the European System of Central Banks and of the European Central Bank . The Statute established both the ECB and the European System of Central Banks (ESCB) as from 1 June 1998. The ECB was established as the core of the Eurosystem and the ESCB. The ECB and the national central banks together perform the tasks they have been entrusted with. The ECB has legal personality under public international law. European System of Central Banks The ESCB comprises the ECB and the national central banks (NCBs) of all EU Member States whether they have adopted the euro or not.

Eurosystem The Eurosystem comprises the ECB and the NCBs of those countries that have adopted the euro. The Eurosystem and the ESCB will co-exist as long as there are EU Member States outside the euro area. Euro area The euro area consists of the EU countries that have adopted the euro. Division of labour in the Eurosystem The Eurosystem consists of the ECB and the national central banks (NCBs) of those EU countries that have adopted the euro. Under Article 8 of the Statute of the European System of Central Banks (ESCB Statute), it is the ECB's decision-making bodies that govern the Eurosystem. Within their respective responsibilities, these bodies take all the decisions that are necessary to enable the Eurosystem to carry out its tasks. Except for the statutory tasks that have been exclusively assigned to the ECB, the ESCB Statute does not indicate to what extent ECB policies are to be implemented through the activities of the ECB or the NCBs. For the bulk of the Eurosystem's activities, the actual intra-System division of labor has been guided by the principle of decentralization, with the ECB having recourse to the NCBs, to the extent deemed possible and appropriate, to carry out operations which form part of the task of the Eurosystem (cf. Article 12.1 of the ESCB Statute). Thus, the ECB and the NCBs jointly contribute to attaining the Eurosystem's common goals. However, according to Article 9.2 of the Statute, the ECB has to ensure that all tasks are carried out properly and

consistently. To ensure this across the euro area, the ECB has the power to issue guidelines and instructions to the NCBs. Tasks of the ECB (1/2) In contrast to the national central banks (NCBs), the ECB carries out only a few operations. Instead, it focuses on formulating the policies and on ensuring that the decisions are implemented consistently by the NCBs. In particular, the ECB is responsible for Defining Eurosystem policies: the Governing Council of the ECB is in charge of monetary policy for the single currency. This includes the definition of price stability, how inflationary risks are analyzed, etc. Deciding, coordinating and monitoring the monetary policy operations: the ECB instructs the NCBs on the details of the required operations (value, time, date, etc.) and checks their successful execution. Adopting legal acts: within closely defined limits, the decision-making bodies have the power to issue intraEurosystem binding legal acts, such as Guidelines and Instructions, to ensure that decentralised operations are carried out consistently by the NCBs. Moreover, within defined limits, they can adopt Regulations and Decisions, which are binding outside the Eurosystem. Authorising the issuance of banknotes: this encompasses the strategic planning and coordination of the production and issuance of euro banknotes. Furthermore, the ECB coordinates the Eurosystem's research and development activities and the security and quality of the euro banknote production. In addition, the ECB hosts the Counterfeit Analysis Centre for the analysis and classification of euro counterfeits,

the central database for euro banknote counterfeits, and the International Counterfeit Deterrence Centre, which contributes to global central bank cooperation on counterfeit deterrence under the auspices of the G10 Governors. Interventions on the foreign exchange markets: if needed, also jointly with individual NCBs. This involves the buying and/or selling of currencies on foreign exchange markets. The operation of payment systems and the oversight of payment and other financial market infrastructures: payment systems are a means of transferring money within the banking system. The ECB acts as operator of T2-ECB, a component system of TARGET2, the payment system for the euro. Furthermore, the ECB, together with the Eurosystem NCBs, performs certain oversight tasks, with oversight being the central bank function through which the safety and efficiency of financial market infrastructures and payment instruments are promoted by monitoring assessments and, where necessary, inducing change. The ECB, in cooperation with the NCBs, also induces market change in order to foster the integration of financial market infrastructures and harmonized payment services in euro. The Single Euro Payments Area (SEPA) for retail payments is a prominent example of the ECBs work as a catalyst for financial market harmonization.

Tasks of the national central banks The operational set-up of the Eurosystem takes account of the principle of decentralisation. The

national central banks (NCBs) perform almost all operational tasks of the Eurosystem. In doing so, they enact the decisions made centrally by the Governing Council of the ECB. The NCBs are responsible for Execution of monetary policy operations: this means that the NCBs carry out the actual transactions, such as providing the commercial banks with central bank money. Operational management of the ECB's foreign reserves: this includes the execution and the settlement of the market transactions necessary to invest the ECB's foreign reserves. Management of their own foreign reserves: planned NCB operations in this area are subject to approval from the ECB, if such transactions could affect exchange rates or domestic liquidity conditions and if they exceed certain limits established by ECB guidelines. The aim is to ensure consistency with the monetary and exchange rate policy of the ECB. Operation and oversight of financial market infrastructures and payment instruments: NCBs act as the operators of the national component systems of TARGET2, the payment system for the euro, and its respective national user community is thus able to participate in TARGET2. Some NCBs also operate securities settlement systems. Furthermore, NCBs are involved in the oversight of financial market infrastructures. Joint issuance of banknotes together with the ECB: both the ECB and the NCBs are issuers of euro banknotes. All banknotes are put into circulation by the NCBs, which accommodate any demand for euro banknotes by launching annual banknote production

orders and by operating a Eurosystem-wide stock management system. Both activities are coordinated by the ECB. NCBs take measures to achieve a high quality of banknotes in circulation and to analyze counterfeits. Collection of statistics and providing assistance to the ECB: the ECB requires a wide range of economic and financial data to support the conduct of its monetary policy and the fulfillment of other Eurosystem tasks. The main areas where the NCBs help by collecting data from the national financial institutions are: i) money, banking and financial markets; ii) balance of payments statistics and on the Eurosystem's international reserves; and iii) financial accounts. Functions outside the European System of Central Banks (ESCB): national central banks may also perform functions other than those specified in the Statute unless the Governing Council finds, by a majority of two-thirds of the votes cast, that these interfere with the objectives and tasks of the ESCB. Such functions are the responsibility of the national central banks. Tasks The tasks of the European System of Central Banks (ESCB) and the Eurosystem are laid down in the Treaty on the Functioning of the European Union. They are specified in the Statute of the European System of Central Banks and of the European Central Bank. The Statute is a protocol attached to the Treaty. The Treaty on the Functioning of the European Union generally refers to the ESCB rather than to the Eurosystem, since it was drawn up on the premise that all EU Member States would eventually adopt the euro.

The Eurosystem is made up of the ECB and the national central banks (NCBs) of the EU Member States whose currency is the euro, whereas the ESCB comprises the ECB and the NCBs of all EU Member States (Article 282(1) of the Treaty). As long as there are EU Member States whose currency is not the euro, it will be necessary to make a distinction between the Eurosystem and the ESCB. Objectives Article 127(1) of the Treaty defines the primary objective of the Eurosystem: "The primary objective of the European System of Central Banks [] shall be to maintain price stability". It continues as follows: "Without prejudice to the objective of price stability, the ESCB shall support the general economic policies in the Union with a view to contributing to the achievement of the objectives of the Union as laid down in Article 3 of the Treaty on European Union." The European Union has multiple objectives (Article 3 of the Treaty on European Union), which include the sustainable development of Europe based on balanced economic growth and price stability, and a highly competitive social market economy, aiming at full employment and social progress. Consequently, price stability is not only the primary objective of the ECBs monetary policy, but also an objective of the European Union as a whole. Thus, the Treaty on the Functioning of the European Union and the Treaty on European Union establish a clear hierarchy of objectives for the Eurosystem, making it clear that price stability is the

most important contribution that monetary policy can make to achieving a favorable economic environment and a high level of employment. Basic tasks According to Article 127(2) of the Treaty on the Functioning of the European Union, the basic tasks to be carried out through the Eurosystem are: the definition and implementation of monetary policy for the euro area; the conduct of foreign exchange operations; the holding and management of the official foreign reserves of the euro area countries (portfolio management); the promotion of the smooth operation of payment systems. Further tasks Banknotes: the ECB has the exclusive right to authorize the issuance of banknotes within the euro area. Statistics: in cooperation with the NCBs, the ECB collects statistical information necessary in order to fulfil the tasks of the ESCB, either from national authorities or directly from economic agents. Financial stability and supervision: the Eurosystem 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, bodies and fora, both within the EU and at the global

level, in respect of the tasks entrusted to the Eurosystem

The Governing Council

Governing Council of the ECB (as at January 2013)

The Governing Council meets

once a fortnight The Governing Council is the main decision-making body of the ECB. It consists of the six members of the Executive Board, plus the governors of the national central banks of the 17 euro area countries. Responsibilities to adopt the guidelines and take the decisions necessary to ensure the performance of the tasks entrusted to the Eurosystem; to formulate monetary policy for the euro area. This includes decisions relating to monetary objectives, key interest rates, the supply of reserves in the Eurosystem, and the establishment of guidelines for the implementation of those decisions. Meetings and decisions The Governing Council usually meets twice a month at the Eurotower in Frankfurt am Main, Germany. At its first meeting each month, the Governing Council assesses economic and monetary developments and takes its monthly monetary policy decision. At its

second meeting, the Council discusses mainly issues related to other tasks and responsibilities of the ECB and the Eurosystem. While the minutes of the meetings are not published, the monetary policy decision is explained in detail at a press conference held shortly after the first meeting each month. The President, assisted by the VicePresident, chairs the press conference. Independence Political independence The independence of the ECB is conducive to maintaining price stability. This is supported by extensive theoretical analysis and empirical evidence on central bank independence. The ECB's independence is laid down in the institutional framework for the single monetary policy (in the Treaty and in the Statute). Practical implications Neither the ECB nor the national central banks (NCBs), nor any member of their decision-making bodies, are allowed to seek or take instructions from the EU institutions or bodies, from any government of an EU Member State or from any other body. EU institutions and bodies and the governments of the Member States must respect this principle and not seek to influence the members of the decision-making bodies of the ECB (Article 130 of the Treaty)

Other provisions The ECB's financial arrangements are kept separate from those of the EU. The ECB has its own budget. Its capital is subscribed and paid up by the euro area NCBs. The Statute foresees long terms of office for the members of the Governing Council. Members of the Executive Board cannot be reappointed. Governors of NCBs and members of the Executive Board have security of tenure:

NCB governors have a minimum term of office of five years; members of the Executive Board of the ECB have a non-renewable term of office of eight years; both can be removed from office only in the event of incapacity or serious misconduct; the Court of Justice of the European Union is competent to settle any disputes.

The Eurosystem is prohibited from granting loans to EU bodies or national public sector entities. This further shield it from any influence exercised by public authorities. The Eurosystem is functionally independent. The ECB has at its disposal all instruments and competencies necessary for the conduct of an efficient monetary policy and is authorized to decide autonomously how and when to use them. The ECB has the right to adopt binding regulations to the extent necessary to carry out the tasks of the ESCB

and in certain other cases as laid down in specific acts of the EU Council. Transparency Definition Transparency means that the central bank provides the general public and the markets with all relevant information on its strategy, assessments and policy decisions as well as its procedures in an open, clear and timely manner. Today, most central banks, including the ECB, consider transparency as crucial. This is true especially for their monetary policy framework. The ECB gives a high priority to communicating effectively with the public. Transparency of the ECB's monetary policy Transparency helps the public to understand the ECB's monetary policy. Better public understanding makes the policy more credible and effective. Transparency means that the ECB explains how it interprets its mandate and that it is forthcoming about its policy goals. Credible The ECB fosters credibility by being clear about its mandate and how it performs its tasks. When the ECB is perceived as being able and willing to achieve its policy mandate, price expectations are well anchored. Regular communication about a central banks assessment of the economic situation is particularly useful. It is also helpful for central banks to be open

and realistic about what monetary policy can do and, even more importantly, what it cannot do. Self-disciplined A strong commitment to transparency imposes selfdiscipline on policymakers. It ensures that their policy decisions and explanations are consistent over time. Facilitating public scrutiny of monetary policy actions enhances the incentives for the decision-making bodies to fulfil their mandates in the best possible manner. Predictable The ECB publicly announces its monetary policy strategy and communicates its regular assessment of economic developments. This helps the markets to understand the systematic response pattern of monetary policy to economic developments and shocks. It makes policy moves more predictable for the markets over the medium term. Market expectations can thus be formed more efficiently and accurately. If market agents can broadly anticipate policy responses, this allows a rapid implementation of changes in monetary policy into financial variables. This in turn can shorten the process by which monetary policy is transmitted into investment and consumption decisions. It can accelerate any necessary economic adjustments and potentially enhance the effectiveness of monetary policy.

Change in official interest rates The central bank provides funds to the banking system and charges interest. Given its monopoly power over the issuing of money, the central bank can fully determine this interest rate. Affects banks and money-market interest rates The change in the official interest rates affects directly money-market interest rates and, indirectly, lending and deposit rates, which are set by banks to their customers. Affects expectations Expectations of future official interest-rate changes affect medium and long-term interest rates. In particular, longer-term interest rates depend in part on market expectations about the future course of shortterm rates. Monetary policy can also guide economic agents expectations of future inflation and thus influence price developments. A central bank with a high degree of credibility firmly anchors expectations of price stability. In this case, economic agents do not have to increase their prices for fear of higher inflation or reduce them for fear of deflation. Affects asset prices The impact on financing conditions in the economy and on market expectations triggered by monetary policy actions may lead to adjustments in asset prices (e.g. Stock market prices) and the exchange rate. Changes in the exchange rate can affect inflation directly, insofar as imported goods are directly used in

consumption, but they may also work through other channels. Affects saving and investment decisions Changes in interest rates affect saving and investment decisions of households and firms. For example, everything else being equal, higher interest rates make it less attractive to take out loans for financing consumption or investment. In addition, consumption and investment are also affected by movements in asset prices via wealth effects and effects on the value of collateral. For example, as equity prices rise, share-owning households become wealthier and may choose to increase their consumption. Conversely, when equity prices fall, households may reduce consumption. Asset prices can also have an impact on aggregate demand via the value of collateral that allows borrowers to get more loans and/or to reduce the risk premium demanded by lenders/banks. Affects the supply of credit For example, higher interest rates increase the risk of borrowers being unable to pay back their loans. Banks may cut back on the amount of funds they lend to households and firms. This may also reduce the consumption and investment by households and firms respectively. Leads to changes in aggregate demand and prices Changes in consumption and investment will change the level of domestic demand for goods and services relative to domestic supply. When demand exceeds

supply, upward price pressure is likely to occur. In addition, changes in aggregate demand may translate into tighter or looser conditions in labor and intermediate product markets. This in turn can affect price and wage-setting in the respective market. Affects the supply of bank loans Changes in policy rates can affect banks marginal costs for obtaining external finance banks differently, depending on the level of a banks own resources, or bank capital. This channel is particularly relevant in bad times such as a financial crisis, when capital is scarcer and banks find it more difficult to raise capital. In addition to the traditional bank lending channel, which focuses on the quantity of loans supplied, a risktaking channel may exist when the banks incentive to bear risk related to the provision of loans is affected. The risk-taking channel is thought to operate mainly via two mechanisms. First, low interest rates boost asset and collateral values. This, in conjunction with the belief that the increase in asset values is sustainable, leads both borrowers and banks to accept higher risks. Second, low interest rates make riskier assets more attractive, as the agents search for higher yields. In the case of banks, these two effects usually translate into a softening of credit standards, which can lead to an excessive increase in lean supply.