The Eurosystem comprises the European Central Bank at its center as well as the national central banks of the twelve countries currently participating in monetary union. (1) The European Central Bank was established in July 1998, six months before the beginning of Stage Three of economic and monetary union. Although decisions regarding monetary policy are made centrally by the Governing Council (2) of the Eurosystem, the operational aspects of monetary policy--including open market operations, administration of the minimum reserve system, and management of the standing facilities--are undertaken in a decentralized fashion at the twelve national central banks. The main features of the Eurosystem's operating procedures are similar in many respects to those employed by the Bundesbank and other national central banks in the euro area in recent years.
Total assets of the Eurosystem as of December 2000 were about 836,000 million euros. Of these assets, lending to the financial sector, which was primarily in the form of repurchase operations, amounted to about 270,000 million euros--about one-third. The remaining assets are predominantly gold (about 14 percent), foreign currency claims (about 30 percent), euro-denominated securities (10 percent), and other assets (also 10 percent). Holdings of foreign currency claims in large part reflect the foreign exchange reserves of the Eurosystem; with the start of the European Monetary Union (EMU), all foreign exchange reserves in the euro area are held by the national central banks (NCBs), except for a fraction amounting to about 40 billion euros which the NCBs transferred directly to the European Central Bank (ECB). No foreign exchange reserves are held by euro-area finance ministries or treasury departments.
Policy Objective of the ECB
As specified in the Maastricht Treaty, the primary objective of the ECB is to "maintain price stability." The published definition of price stability is inflation of below 2 percent, measured as the twelve-month change in the harmonized index of consumer prices. In setting monetary policy, the Governing Council considers incoming information under two "pillars": the growth in a euro-area monetary aggregate in relation to a published "reference value," and a mix of other euro-area indicators defined as a "broadly based assessment of the outlook for future price developments." Among other things, this second pillar includes wages, bond prices, the yield curve, measures of real activity, business and consumer confidence, and the exchange rate. The ECB's focus in setting monetary policy is on area-wide price developments and activity, and not on developments in individual countries. The Maastricht Treaty grants the ECB frill constitutional independence. It explicitly states that neither the ECB nor any member of its decision-making bodies shall seek or take instructions from European Commission institutions, from any government of any member state, or from any other organization or institution.
Operating Procedures (3)
Main Refinancing Operations
The Eurosystem provides liquidity to the euro-area banking system primarily through a weekly refinancing operation with a two-week maturity. This operation provides approximately 70 percent of the liquidity needs of the euro-area banking system. Additional liquidity is provided through longer-term monthly tenders that are conducted as variable-rate tenders with a three-month maturity; these tenders provide the bulk of the remaining needed liquidity.
Beginning with its first weekly tender settled on January 7, 1999, and up until June 28, 2000, the ECB offered only fixed-rate tenders at its weekly refinancing operations. This choice soon came under question when, at a typical Eurosystem refinancing operation, the amount bid far exceeded the amount allotted. As of late 1999, the resulting allotment …