ECB and FED in the financial crisis

1. ECB and FED in the financial crisis

4. Eurosystem

5. ECB Responsible for conducting monetary policy for the euro area - the world’s largest economy after the United States. The ECB’s main task is to maintain the euro's purchasing power and thus price stability in the euro area Liquidity to the banking system

6. FED The Federal Reserve System is the central banking system of the United States.

7. MONETARY POLICY

9. Art 4 of the EC Treaty “stable prices, sound public finances and monetary conditions and a sustainable balance of payments” and the “principle of an open market economy with free competition” Monetary and exchange rate policies centralised at Community level VS Economic policy with the Member States conducted within a Community framework for cooperation in macroeconomic policies. Importance of the ECB exclusive responsibility for the single monetary policy for the euro area:

10. FED The Federal Reserve Act of 1913 gave the Federal Reserve responsibility for setting monetary policy: “to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.”

12. Divergence in Fed and ECB monetary policy FED: “Dual mandate" to balance the goals of price stability and sustainable growth ECB achieve price stability The power of Europe's unions, hyperinflation and the need of credibility for a young institution justify ECB's previous tough stance, today policies changing to respond to the crisis. European markets’ greater inflexibility = “pre-emptive” monetary policy strategy capable of stably anchoring inflation expectations. ECB has adopted a quantitative definition of price stability (2%) promoting macroeconomic stability. In the United States greater fiscal activism in an anti-cyclical direction (demand shocks). In the euro area, by contrast, the adoption of active budget policies ought to have been discouraged by the greater frequency of supply shocks. Differences in terms of gradualism and activism respond to differences in the way the economies are structured and how they function. Coordinated action today

13. Current functions of the Federal Reserve System To address the problem of banking panics To serve as the central bank for the United States To strike a balance between private interests of banks and the centralized responsibility of government To supervise and regulate banking institutions To protect the credit rights of consumers To manage the nation's money supply through monetary policy to achieve the sometimes conflicting goals of maximum employment stable prices moderate long-term interest rates To maintain the stability of the financial system and contain systemic risk in financial markets To provide financial services to depository institutions, the U.S. government, and foreign official institutions, including playing a major role in operating the nation’s payments system To facilitate the exchange of payments among regions To respond to local liquidity needs To strengthen U.S. standing in the world economy

15. Standing Facilities

16. Minimum Required Reserve

17. Role/importance of eurosystem in the turmoil 

18. ECB reacting by changing the liquidity demand pattern 1.Frontloading

19. 2. open market procedures - liquidity supplied to the banking system more frequent fine-tuning operations: - because of the volatility in banks’ liquidity demand and the difficulty of producing a reliable ex-ante estimate of the overall liquidity conditions - to provide overnight liquidity in addition to the liquidity provided at its weekly main refinancing operations. increased average maturity of its lending to euro area banks: - longer-term refinancing operations increased by around €270 billion since 2007. - September 2008, a series of special term refinancing operations with a maturity of six weeks. fixed rate tender procedure: adopted On 8 October with full allotment for all weekly main refinancing operations. ECB reacting by changing the liquidity demand pattern

20. International cooperation 1. Enhanced information exchange and collective monitoring of market developments 2. Coordinated steps to provide liquidity TAF operations –provides US dollar liquidity to euro area banks on behalf of the Federal Reserve System. These fixed interest rates for full allotment would be conducted. Counterparties in these operations will be able to borrow any amount they wish against the appropriate collateral in each jurisdiction. This is a “world premiere” in exceptionally confident cooperation between central banks. liquidity-providing operations do not have a direct effect on euro liquidity conditions, but are rather conducted to address the concerns of euro area banks regarding the limited availability of funding denominated in US dollars and are aimed at improving global funding conditions. 13 October 2008, the ECB announced, together with the Bank of England and the Swiss National Bank, that – thanks to a swap agreement with the FED –tenders of US dollars funding at 7-day, 28-day and 84-day maturities Supervision: As the International Accounting Standards Board is intensifying its work to enhance the accounting and disclosure standards for off-balance sheet entities and to develop guidance for valuation in illiquid markets, the ECB is monitoring developments in this area,

21. Are these measures working? contributing to the stabilisation of conditions in the euro money market containing the volatility in the very short-term rates, especially in the overnight rate as measured through the EONIA limiting the volatility in the three-month Euribor

22. FED and treasury 1/ Implicite role of the FED after the 1929 depression is also to protect the stock market, and act a lender of last resort for the banking system 2/ Role of the treasury department and main difference with FED 3/ tackling the current crisis true monetary policies and financial stimulus    a/ Act1:   FED lowers fed funds and discount window in 18 September 2007, to stop the disruption in the money market      b/ Act2:   FED engineered the bailout of Bear Sterns by JPM by providing 20BLN funding for JPM, and also extend their lending facility to investment banks.     

23. c/  Act3: Treasury and FED decide not to bailout Lehman Brothers, pushing Merrill lynch in Bank of America hand, and also allowing Goldman sachs and Morgan stanley to become banks d) Act4: one week later the treasury begged the congress to approve the TARP(700BLN$) to allow them to buy toxic assets from banks to free their balance sheet e) Act5: FED start cutting rate aggressively after inflation pressure started easing, and replaced the TARP program by a direct investment into the banks capital, following the UK example, and the same medication implemented successfully by Sweden in the 1992. FED and treasury

24. 4) The regulator will play a much bigger role in the coming years as spending taxpayer money to bailout the economy means, a huge expansion of their balance sheet. Not only.,it will become a main shareholder of USA Inc, which require a strong business management skills but also with a ballooning debt it will be challenging to keep raising money from the rest of the world at as cheaply as in the past.  FED and treasury

25. Conclusion:The FED and Treasury department will remain at the centre of the current economic transformation, we are moving toward and new form of capitalism and globalisation. The question will remain whether we a supranational regulator (IMF for example) to play a much bigger role to warranty the survival of the global market, otherwise we are going to retreat back into national fortresses that could impoverish us all over the long term. FED and treasury

26. SOURCES http://www.ecb.int http://www.federalreserve.gov/ http://www.ft.com