The European Central Bank (ECB) is an institution of the European Union (EU).
The central bank is a type of bank that acts as the entity responsible for the monetary policy of a nation or a group of them. Due to its characteristics, this bank operates very differently from the rest: it interacts with the State and other banks and not with private clients, for example.
It should be noted that bank is a term with several meanings. On this occasion we are interested in the definition of a bank as a financial entity whose function is to manage money . These institutions, which emerged in the Renaissance , are responsible for providing services such as capital lending or securities depository.
Central , on the other hand, is that belonging to or relating to the center . This concept can refer to the basic or essential of something , to the space where coordinated actions converge or to that which is in the middle or center of something.
Operation of a central bank
In some countries, the central bank is an entity independent of the government of the country to which it belongs. It is a public institution regulated by statutes and laws and whose benefits are derived from the State.
However, although it is an independent institution, we must not forget that the central bank has a series of obligations and duties with respect to the government of the State or States to which they belong. Specifically, they must fulfill three tasks:
- It is essential that it must be held accountable for the management it has been carrying out. For this reason, each year it must present not only a report where its balance of accounts is recorded, but also where details of all the activities it has carried out are given as well as, in the same way, the monetary policy it has been following. .
- Another obligation that every central bank has with respect to the government is to be totally transparent . Avoiding any type of regular action as well as cases of corruption is what this duty seeks to achieve. To this end, the aforementioned financial entity makes available information regarding its decisions, procedures and strategy that it has been undertaking.
- Likewise, we must not forget that it is especially important that the central bank also has the obligation to distribute the profits obtained, once all the expenses it has in terms of personnel, costs of what would be its maintenance, the preparation of annual reports…
A central bank has instruments to try to avoid a recession or economic depression.
Examples of financial entities of this type include some such as the European Central Bank , the Central Bank of Brazil , the Central Bank of Chile, the Central Bank of the Russian Federation and the Central Bank of the Argentine Republic .
We cannot fail to mention that there are nations that lack a central bank, as is the case with Panama (whose National Bank performs some of the usual functions of this type of entity but is not authorized to issue money because the currency used is the US dollar, which means it does not have the power to set monetary policy), Monaco and several small Polynesian countries.
The issuance of legal money is one of the attributes of a central bank.
Issuance of money and management of interest rates
One of the most important functions of a central bank is the issuance of currency (in fact, it is the only entity authorized to issue legal money).
The central bank is also responsible for managing interest rates (to maintain price stability and safeguard the value of the currency), granting loans to commercial banks or States, guarding gold and foreign exchange reserves, and advising the government. to promote financial stability and economic development.
There are other activities that a central bank can carry out. If we take the case of the Central Bank of the Argentine Republic , it also assumes the execution of the exchange rate policy (establishing the exchange rate or exchange control) according to the legislation sanctioned by Congress; serves as financial agent of the national State; regulates the clearing and settlement chambers, the payment system, the companies that transport funds and the remitters of funds; and protects the rights of those who use financial services.
By defining monetary policy , a central bank affects the cost of money, and can reduce interest rates to boost economic growth or increase them to combat inflation. Financing commercial banks to guarantee liquidity is another task that an entity of this type can assume.
It is important to note that, currently, the central authorities also regulate the operation of cryptocurrencies (such as Bitcoin ). Returning to the Argentine case, the central bank of this South American country prohibited in May 2023 FinTechs from facilitating operations with digital assets for their clients. Previously, along the same lines, it had prohibited the traditional banking system from marketing cryptocurrencies.