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The American banking system is known as a dual banking system because its main feature is side-by-side federal and state chartering (and supervision) of commercial banks. There are federal chartered banks, under the aegis of the Comptroller of the currency, and state-chartered banks under the supervision of each of the various states. A unique feature of the system is that the regulated can choose their regulator: state banks can shift to national charters and vice versa.
The American banking system is known as a dual banking system because its main feature is side-by-side federal and state chartering (and supervision) of commercial banks. There are federal chartered banks, under the aegis of the Comptroller of the currency, and state-chartered banks under the supervision of each of the various states. A unique feature of the system is that the regulated can choose their regulator: state banks can shift to national charters and vice versa.
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The American banking system is known as a dual banking system because its main feature is side-by-side federal and state chartering (and supervision) of commercial banks. There are federal chartered banks, under the aegis of the Comptroller of the currency, and state-chartered banks under the supervision of each of the various states. A unique feature of the system is that the regulated can choose their regulator: state banks can shift to national charters and vice versa.
Hak Cipta:
Attribution Non-Commercial (BY-NC)
Format Tersedia
Unduh sebagai PDF, TXT atau baca online dari Scribd
The American commercial banking system is known as a dual banking system because its main feature is side-by-side federal and state chartering (and supervision) of commercial banks. There are federal chartered banks, under the aegis of the Comptroller of the currency, and state-chartered banks, under the supervision of each of the various states.
A unique feature of the system is that the regulated can choose their regulator: state banks can shift to national charters and vice versa, state member banks can shift to non- member status and vice versa 13 .
The justification for the dual banking system is that it is supposed to foster change and innovation by providing alternative routes so that each bank can seek charters and do business. It is claimed that a dual banking system is more responsive to the evolving banking need of the economy than a single system would be.
Federal Reserve System
The Fed, as the system is commonly called, is an independent governmental entity created by Congress in 1913 to serve as a central bank of the United States, comprising 12 regional Reserve Banks and the Board of Governors in Washington D.C. The Federal Reserve Bank of New York, one of the 12 regional reserve banks is the largest in terms of assets and volume of activity. The 12 reserve banks supervise and regulate bank holding companies as well as chartered banks in their District that are members of the Federal Reserve System. Each reserve bank provides services to
13 Ligia Georgescu Golosoiu, Business of Banking, Editura ASE, 2002 Banking systems: from regional to national depositary institutions in its respective district and functions as a fiscal agent of the U.S. government. The regional Federal Reserve Banks, one of each federal district, are geographically dispersed throughout the country: New York, Boston, St. Louis, San Francisco, Philadelphia, Atlanta, Chicago, Kansas City, Richmond, Dallas, Minneapolis, Cleveland.
The Federal Reserve System was designated to ensure its political independence and its sensitivity to divergent economic concerns. The chairman and the six other members of the Board of Governors who oversee the Federal reserve are nominated by the President of the United States and are confirmed by the Senate. The President is directed by law to select governors who provide a fair representation of the financial, agricultural, industrial and geographical divisions of the country. Only one member of the Board may be selected from any one of the twelve Federal Reserve Districts. These aspects of selection are intended to ensure representation of regional interests and the interests of various public sectors.
The primary responsibility of the Board members is the formulation of monetary policy. The seven Board members constitute a majority of the 12- member Federal Open Market Committee (FOMC), the group that makes the key decisions affecting the cost and availability of money and credit in the economy. The other five members of the FOMC are Reserve Bank presidents, one of whom is the president of the Federal Reserve Bank of New York. The other Bank presidents serve one-year terms on a rotating basis.
Each Reserve Bank is headed by a president appointed by the Banks nine- member board of directors.
FOMC is the most important monetary policymaking body of the Federal Reserve System. It is responsible for formulation of a policy designated to promote growth, full employment, stable prices and sustainable pattern of international trade and payments. The FOMC makes key decisions regarding the conduct of open market operations-purchases and sales of US government and federal agency securities-which affect the provision of reserves to depository institutions and, in turn the cost and availability of money and credit in the US economy. The FOMC also directs System operations in foreign currencies.
Reserve Bank boards of directors are divided into three classes of three persons each.
Class A directors represent the member commercial banks in the District, and most are bankers. Class B and class C directors are selected to represent the public, with due consideration to the interests of agriculture, commerce, industry, labor and consumers.
Class A and class B directors are elected by member banks in the District, while class C directors are appointed by the Systems Board of Governors in Washington.
Similarly, each of the Reserve Banks is supervised by a board of nine directors who are familiar with conditions in the area encompassed by the Branch.
The responsibilities of directors are broad, ranging from the supervision of the Reserve Bank to making recommendations on monetary policy. Directors review their reserve Banks budget and expenditures. They are also responsible for the internal audit program of the bank. They also have to set the discount rate every two weeks, subject to approval by the Board of Governors. The discount rate is the interest rate depository institutions pay when borrowing from the Reserve Banks. By raising or lowering the rate, the System can influence the cost and availability of money and credit.
The main functions of the Fed
1. Monetary policy The Fed creates and executes monetary policy to influence monetary and credit conditions and thereby contributes to the nations economic goal of non- inflationary growth. Although the Fed uses three major tools to implement policy, the most important is open market operations. Through open market operations, Fed buys and sells US Treasury securities in the secondary market in order to produce a desired level of banks reserves. The Fed adds extra credit to the banking system when it buys Treasury securities from dealers, and drains credit when it sells to the dealers. Discount window operations, a second monetary policy tool of the Fed provides secured short-term loans to depository institutions temporarily in need of funds. Each of the twelve district reserve banks lends to depository institutions in its district, but only after borrowers have exhausted their market sources of funds. Banks borrow from window at the discount rate that is set by each reserve bank, but requires the approval of the Board of Governors. The rate is adjusted occasionally to reflect changes in the market conditions and monetary policy objectives. Discount window lending is often referred to as lender of last resort function of the central bank. Reserve requirements establish the proportions of demand deposit (checking) accounts and time deposits that must be held as non- interest bearing reserves at Federal Reserve Banks or as vault cash. An increase in reserve requirements would be regarded as an attempt to restrict bank credit and restrain economic activity. A reduction in the reserve ratio would be viewed as a stimulative monetary policy move.
2. International operations The New York Fed, representing the Federal Reserve System and the US Treasury is responsible for intervening in foreign exchange markets to achieve dollar exchange rate policy objectives and to counter disorderly conditions in foreign exchange markets. Such transactions are made in close coordination with the US Treasury and Board of Governors and most often are coordinated with the foreign exchange operations of other central banks. Dollars are sold in exchange for foreign currency if the goal is to counter upward pressure on the dollar. If the objective is to counter downward pressure, dollars are purchased through the sale of foreign currency.
The Federal Reserve Bank of New York serves as fiscal agent in the United States for foreign central banks and official international financial organizations. It acts as the primary contact with the foreign central banks. The services provided for these institutions include the receipt and payment of funds in US dollars, purchase and sale of foreign exchange and Treasury securities, the custody of almost $800 billion in currency, securities and gold bullion held for over 200 foreign account holders, and the storage of over $64 billion in monetary gold for about 60 foreign central banks, governments and official international agencies (about one-third of the worlds known monetary gold reserves).
3. Supervision and regulation One of the reasons for the establishment of the Federal Reserve System was to forestall a repeat of the liquidity crisis and financial panics that occurred sporadically in the United States prior to 1913. Consequently, the Federal Reserve is one of several governmental banking regulators that share responsibility for supervising and examining depository institutions. The objective is to ensure the financial strength and stability of the nations banking system.
The Feds responsibilities extend to all state-chartered banks that are members of the Federal Reserve System, all US bank holding companies and many of the US operations of foreign banking organizations. In addition, as lender of last resort, the Fed stands ready to provide temporary or long-term liquidity to any depository institutions that meets its criteria for discount window borrowing.
The Fed is responsible for enforcing laws and establishing rules to protect customers or depository institutions. It also ensures that banks try to meet the credit needs of their communities by observing community reinvestment laws and laws assuring consumers fair and unbiased access to credit.
4. Financial services
Government services The Federal Reserve System performs various services for the US Treasury and other government, quasi- government and international agencies. Each year, billions of dollars are deposited to and withdrawn by various government agencies from operating accounts in the US Treasury held by the Federal Reserve Banks.
The Fed holds in its vaults, collateral for government agencies to secure public funds that are on deposit with private depository institutions. In addition, Reserve Banks receive for deposit to the Treasurys accounts such items as federal unemployment taxes, individual income taxes withheld by payroll deduction, corporate income taxes, and certain federal excise taxes. The Fed also issue and redeem instruments of the public debt such as bonds and Treasury securities, make periodic payments of interest on outstanding obligations of the US Treasury or federal agencies.
Depository institutions services Fed distributes currency and coin to depository institutions to meet the publics need for cash. During periods of heavy cash demand, institutions obtain larger amounts of cash from the Federal Reserve Banks. When public demand for cash is light, institutions deposit excess cash with the Reserve banks for credit to their reserve accounts. Also Fed serves as a central check-clearing system, handling almost 18 billion checks a year. It process these checks, route them to the depository institutions on which they are written and transfer payment for the checks through accounts that depository institutions maintain with the Federal Reserve Banks.
The Fed and about 7,800 institutions are linked electronically through the Federal Reserve Communications System, a network through which depository institutions can transfer funds and securities nationwide in a matter of minutes. In addition, Federal Reserve Banks and their Branches operate automated clearinghouses, computerized facilities that allow for the electronic exchange of payments among participating depository institutions 14 .
Financial institutions Commercial banks- are the most widely diversified in terms of both liabilities and assets.
Ranked in terms of assets size, these are the largest financial institutions. Traditionally, their main source of funds has been demand deposits. This situation has changed over the past twenty- five years; savings and time deposits have become an even more important source of funds for commercial banks.
Life insurance companies insure people against the financial consequences of death, receiving their funds in the form of public payments that are based on mortality statistics. They consequently purchase longer-term assets, such as long-term corporate bonds and Lon-term commercial mortgages.
Pension and retirement funds are also concerned with the long rather than short run. Their inflow of money comes from working people concerning to the retirements years. They invest in long-term corporate bonds, high- grade common stocks, large-denomination time deposits and long-term mortgages.
Mutual funds are frequently stock market related institutions but there are also mutual funds specializing in bonds of all kinds.
14 The Structure of the Federal Reserve System, www.fed.org Savings and loan associations have acquired almost all their funds through savings deposits and used them to make mortgage loans.
Sales and consumer finance companies specialize in lending money for people to buy cars and take vacations and for business firms to finance their inventories.
Property and casualty insurance companies insure homeowners against burglary and fire, car owners against theft and collision, business firms against negligence lawsuits etc.
Credit unions- are organized as co-operatives for people with some sort of common interest, such as employees of a particular company or members of a labor union. Members buy shares that make them eligible to borrow from the credit union.
Mutual savings banks-are practically identical with savings and loan associations except that there are only about 500 of them.
3.2. EU banking system
The European System of Central Banks (ESCB) is composed of European Central Bank (ECB) and the national central banks (NCBs) of all 15 EU member states. The Eurosystem is the term used to refer to the ECB and the NCBs of the member states, which have adopted the Euro. The NCBs of the member states which do not participate in the Euro area, however are members of the ESCB with a special status-while they are allowed to conduct their respective national monetary policies, they do not take part in the decision- making with regard to the single monetary policy for the Euro area and the implementation of such decisions. In accordance with the Treaty establishing the European Community and the Statute of the European System of Central Banks and the European Central Bank, the primary objective of the Eurosystem is to maintain price stability. The basic tasks to be carried out by the Eurosystem are: to define and implement the monetary policy of the Euro area; to conduct foreign exchange operations; to hold and manage the official foreign reserves of the member states and to promote the smooth operation of payment systems. In addition, the Eurosystem contributes to the smooth conduct of policies pursued by the competent authorities relating to the prudential supervision of credit institutions and the stability of the financial system. The ECB has an advisory role vis--vis the Community and national authorities on matters, which fall within its field of competence, particularly where Community or national legislation is concerned. Finally, in order to undertake the tasks of the ESCB, the ECB, assisted by the NCBs, shall collect the necessary statistical information either from the competent authorities or directly form economic agents.
The process of decision- making in the Eurosystem is centralized through the decision- making bodies of ECB, namely the Governing Council and the Executive Board. As long as there are member states, which have not yet adopted the Euro, a third decision-making body, the General Council shall also exist. The Governing Council comprises all the members of the Executive Board and the governors of the NCBs of the member states without derogation, i.e. those countries, which have adopted the Euro. The main responsibilities are: - to adopt the guidelines and take the decisions necessary to ensure the performance of the tasks entrusted to the Eurosystem. - to formulate the monetary policy in the Euro area, including, as appropriate, decisions related to intermediate monetary objectives, key interest rates and the supply of reserves in the Eurosystem - to establish the necessary guidelines for their implementation. The Executive Board comprises the President, the Vice-President and four other members, all chosen from among persons of recognized standing and professional experience in monetary or banking matters. They are appointed by common accord of the governments of the member states at the level of the Heads of State or Government, on a recommendation from the EU Council after it has consulted the European Parliament and the Governing Council of the ECB. The main responsibilities of the Executive Board are: to implement monetary policy in accordance with the guidelines and decisions laid down by the Governing Council of the ECB and, in doing so, to give the necessary instructions to the NCBs; and to execute those powers which have been delegated to it by the Governing Council of the ECB. The General Council comprises the President and the Vice-President and the Governors of the NCBs of all 15- member states. The general Council peforms the tasks which the ECB took over from the EMI (European Monetary Institute) and which, owing to the derogation of one or more member states, still have to be performed in stage three of Economic and Monetary Union (EMU). The General Council also contributes to the necessary preparations for irrevocably fixing the exchange rates of the currencies of the member states with derogation against the Euro.
The Eurosystem is independent. When performing Eurosystem-related tasks, neither the ECB, nor an NCB, nor any member of their decision- bodies may seek to take instructions from any external body. The Community institutions and bodies and the governments of the member states may nor seek to influence the members of the decision- making bodies of the ECB or of the NCBs in the performance of their tasks.
The ECBs capital amounts to EUR 5 billion 15 . The NCBs are the sole subscribers to and holders of the capital of the ECB. The subscription of the capital is based on the basis of the EU member states respective shares in the GDP and population of the Community. The Euro area NCBs have been paid up their respective subscriptions to the ECB capital in full. The NCBs of the non-participating countries have paid up 5% of their respective subscriptions to the ECBs capital as contribution to the operational costs of the ECB. In addition, the NCBs of the member states participating in the Euro area have provided the ECB with foreign reserve assets of up to an amount equivalent to around EUR 40 billion. The contributions of each NCB were fixed in proportion to its share in the ECBs subscribed capital, while in return each NCB was credited by the ECB with a claim in Euro equivalent to its contribution.
It should be stressed that both Eurosystem and ESCB are not legal persons 16 . According to the international public law, ECB is the core of the complex structure of the Eurosystem. According to the national legislation, each central bank of ESCB is a legal person. So each central bank form Eurosystem perform the tasks entrusted by the ECB. These central banks may run any other functions ouside the Eurosystem as long as they are not interfering with its objectives. Thus, the national cemntral banks perform financial operations on their name and exercise prudential supervision on the national credit institutions. The central bank of the EU countries that have not adopted euro are ESCB members with a special status.
According to the Article 122 of the Treaty, these countries are members with derogation which implies that their central banks dont have certain rights and obligations within the ESCB. The central banks from these
15 www.ecb.int, Organisation of the European System of Central Banks 16 Piata Financiara, No 11/2002 countries (Denmark, Sweden, Great Britain) may conduct their own monetary policies; they are not part of the unique monetary policy, concerning its definition and implementation.
Monetary policy instruments Open market operations- are initiated by the ECB, which decides also on the instrument to be used and the terms and conditions for the executions of such operations, With regard of their aim, regularity and procedures, the ESCB open market operations can be divided into the following four categories: - The main refinancing operations are regular liquidity-providing reverse transactions with a weekly frequency and maturity of two weeks. They are executed by the national central banks on the basis of standard tenders and according to a pre-specified calendar; - The longer-term refinancing operations are liquidity providing reverse transactions with a monthly frequency and a maturity of three months. They will be executed by the national central banks on the basis of standard tenders and according to pre-specified calendar; - Fine-tuning operations can be executed on ad- hoc basis with the aim both of managing the liquidity situation in the market and of steering both interest rates, in particular in order to smooth the effects on interest rates caused by unexpected liquidity fluctuation; - In addition, the ESCB may carry out structural operations through the issuance of debt certificates, reverse transactions and outright transactions. The operations will be executed whenever the ECB wishes to adjust the structural position of the ESCB vis--vis the financial sector.
Standing facilities aim to provide and absorb overnight liquidity, signal the general stance of monetary policy and bound overnight market interest rates. Two standing facilities, which will be administrated in a decentralized manner by the national central banks, are available to eligible counterparts on their initiative: - counterparts will be able to use the marginal lending facility to obtain overnight liquidity from the national central banks against eligible assets. The interest rate on the marginal lending facility will normally provide a ceiling for the overnight market interest rate; - Counterparts will be able to use the overnight deposit facility with the national central banks. The interest rate on the deposit facility will normally provide a floor for the overnight market interest rate.
Minimum reserves Any minimum reserve system would be intended to pursue the aims of stabilizing money market interest rates, creating (or enlarging) a structural liquidity shortage and possibly contributing to the control of monetary expansion. The reserve requirement of each institution would be determined in relation to elements of its balance sheet. Only institutions subject to minimum reserves may access the standing facilities and participate in open market operations based on standard tenders 17 .
Economic and monetary union
The first step on the road to European Integration was taken in 1951 with the signing of theTreaty establishing the Euroepan Coal and Steel Community. Then, in 1957, Belgium, the Netherlands, Luxembourg, Germany, France and Italy signed the Treaties of Rome. One Treaty introduced common economic policies, especially on agriculture and, in 1968, a custom union. The other was the Euratom Treaty on nuclear energy.
The Community gradually branched out into other areas. In 1986 the European Single Act provided for the free movement of people, goods, capital and services and established many new policies. In 1993, the Treaty on European Union ( Maastricht Treaty) entered into force. It intoduced the pillar structure: the European Community is the first pillar, foreign policy the second, and justice and home affaires the third.
In 1997, the Treaty establishing the EC was amended once again, this time at Amsterdam. Consumer policy, employment, growth and free movement of people were amongst the most important issues dealt with.
Economic and monetary union (EMU) first came to the fore as a primary objective of the EC in 1969. Each element in the term has a maximalist and a minimalist meaning. Economic union implies that the member states will, at most, cease to follow independent economic policies, and at least will follow co-ordinated policies. Monetary union means, at most the adoption of a single EU currency, at least the maintenance of fixed exchange rates between the currencies of the member states.
The history of monetary integration began in 1968 with the Werner report, which set out a blueprint for the stage-by-stage realisation of economic and
17 Ligia Georgescu-Golosoiu, Business of Banking, Ed. ASE 2002 monetary union. In 1979 the European Monetary System was established: bilateral rates were determined between all currencies in the system, which were allowed to fluctuate within pre-set margins around these rates. At the center of the EMS was the ecu, a basket currency, made up of fixed percentages of the participating national currencies. In 1989 the Delors report laid the foundations for the euro and the Maastricht Treaty of 1992 provided a legal basis for EMU and the single currency.
The Maastricht Treaty provides for EMU in three stages: the first, beginning on July 1, 1990, is mainly about the free movement of capital; the second, starting on January 1, 1994 is concerned with preparations for the single currency, including the setting up of the European Monetary Institute, which is to be dissolved in the third stage, beginning on January 1, 1999. This last stage will focus on the establishment of the European Central Bank and the introduction of the single currency.
The European Monetary System (EMS), which began operation in March 1979, had a much less ambitious aim: to create a zone of monetary stability in Europe. Although it went through several crises, it did eventually prove to be successful. However, the project for monetary union was revised in the wake of the success of the single market program, and despite opposition from the British government, and skepticism in several quarters, a single European currency, the Euro formally came into existence in January 1999 18 .
18 Stephen George & Ian Bache, Politics in the European Union, Oxford University Press Inc., New York, 2002
Study-case: EURO replaced ECU, as it was easier to pronounce Set up in 1978, ECU (European Currency Unit) was an abstract currency, a standard legal tender used by those ones in Brussels, to calculate the budgetary contributions of each member state. In fact, it represented a basket of currencies, adjusted periodically to reflect the relative economic power of each state. Over the time, ECU became more important in the international market: non-European institutions joint the ECU game in the 80. The outcome: ECU was ranged the fifth in the top of the most used currencies for international transactions with a 6% market share. Used first only for European interbanking operations, ECU became one of the main reserve currencies in the world; the European Central Banks deposited at the European Cooperation Monetary Fund 20% of their gold and US dollars reserves, in the exchange of ECU. ECU was easily accepted on international level, even without the help of a powerful institution as Federal Reserve of USA, Bundesbank or Bank of Japan. Norway wasnt member of European Economic Community, but decided to relate the value of its currency to ECU. Far away from Europe, the Japanese, the Americans, and other important players of the economic market used ECU as financial instrument to fight against the fluctuations of the yen and dollar. Great performance for a currency that really didnt exist! ECU was on its way to achieve the status of a real currency. Luxembourg introduced for a month ECU as a payment instrument and it was accepted by all the traders of the country that used cards as Visa and Eurocard and eurocheques. As a peak of this euphoria, Spain issued a gold currency with the ECU symbol, sold very quickly when Spanish peseta was officially accepted in the mechanism of exchange rates. Hotels and restaurants, air companies and even shops started to accept credit cards in ECU, paving the way for payments in ECU. A pool made by Ernst&Young among 209 European companies and 47 banks showed that ECU would have the chance to become the principal currency in the world in 1997. Although the Community does not agree to set up a common currency, ECU will become a unique currency, said John Heimann, the president of Merrill Lynch Europe. The Maastricht Treaty confirmed the launch of ECU for 1994. It was also a secret competition for the name of this currency. Some people spoke about Monnet in the honor of Jean Monnet which would have been the homonym of the French and English terms. Others backed up the term Francfort, with powerful remainder of Carolingian period and would have the merit to connect the France, Belgium, Luxembourg, and Switzerland, since their currencies were based on franc, with the German city Frankfurt (in French Francfort), where the Bundesbank and other German private banks are located. But ECU, disregarding all this scenario, was liked best by most of the people. Dont forget that ECU is the name given by the French to their golden and silver coins while France was the biggest world power. Finally, as ECU was very difficult to be pronounced in some languages of the Community, it was replaced by EURO. This decision was taken in December 1995 at the Madrid European Council.
Convergence criteria The main convergence criteria laid down by the Maastricht Treaty are as follows: an inflation rate not more than 1.5% above the average rate of the three Member States with the lowest inflation; a public budget deficit not exceeding 3% of GDP; public debt of not more than 60% of GDP; a long- term interest rate no more than 2 percentage points higher than the average rate of the three Member States with the lowest inflation; and no currency fluctuations outside the normal EMS margins for two years and no serious stains or devaluations.
The secondary convergence criteria are integration of markets, balance of payments, labour costs, price indices and ecu trends. Not all the member states will be taking part in EMU from 1 January 1999 but all of them (except Denmark and the United Kingdom) have decided to join as soon as possible. It was decided at the Brusells Council on May 1998 that Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, the Netherlands, Portugal and Spain would participate. The bilateral exchange rates between their national currencies were set and the members of the Executive Board of the ECB were appointed. The ins concluded a Pact for Stability and Growth, while pre- ins agreed to work harder towards convergence.
During the transition period (1 January 1999-31 December 2001) the ECB started to operate, all new public issues were in euro, the financial markerts and banks, for internal purposes might use euro, business also. In practice it was possible to use euro for non-cash transactions only, but anyone might open a bank account denominated in euro.
The euro was introduced as physical currency on 1 January 2002. The period from 1 Janury 2002 to 30 June 2002 was a dual-circulation period (euro and national currencies).
Study-case: The future tasks of National Bank of Romania within the ESCB The National Bank of Romania will become a member of ESCB at the moment of accession to the EU. Romania will be in the position to adopt Euro only after it has complied with the convergence criteria stated in the Treaty. The task of NBR will differ from one stage to another. There are to be no essential changes in the NBR activity since the central bank will be an ESCB member with derogation during the period between accession to EU and acceptance to the Euro area. Consequently, the NBR governor will not attend the meeting of Governing Council, but only the General Council, which has a consultative role. The NBR will keep on maintaining the price stability and will have to look the currency exchange policy as an issue of general concern. Therefore, Romania will have to participate to the exchange rate mechanism of EU-MCE II. According to the circumstances, this participation may take place immediately after accession or later. National Bank of Romania will become a full member of ESCB only after Euro will replace ROL. So NBR will no longer define the monetary policy, as our central bank will implement the unique monetary policy established by the Governing Council. But the NBR governor will be a member of this Council, thus being part of the decision-making process related to the monetary policy. NBR will have the same task of prudential supervision, issuing coins, having and establishing international relations with different institutions and effecting any financial operations for various entities. NBR will also manage the official reserves after the transfer of share-quota to the European Central Bank.
Euro-area banking system General overview The structural changes brought about by the adoption of a common currency and a common monetary policy is exerting a profund impact on the areas financial sector. Faced with the combined pressures of globalization, disintermediation, new technologies, and increased competition from non- bank financial intermediaries, banks are designing strategies to thrive in this new environment.
Altghout it is difficult to characterize the euro-area banking sector, it has been identified some common trends in bank performance, balance sheet structure, recent capital market developments. The euro areas financial system continues to be bank dominated. The proportion of financial asstes controlled by the banking systems of the euro-area countries remain high. Bank loans to to euro-area residents amount to about 100% of the areas GDP, twice the ratio in the United States and similar compared to Japan. While euro-area banks continue to play a dominant role in intermediating saving through traditional means of collecting deposits and extending loans, the use of investment funds as well as pension and insurance products as savings vehicles is growing. For instance, assets in investment funds have increased at double-digit rates in the recent years in almost all countries 19 . Unlike other developed countries, virtually all euro-area countries continue to maintain savings banks, and mutual and/or cooperative banks that gained considerable weight in the local market, particulary at the retail level. Altghough in the euro-area sector, the largest institutions in the banking sector are private commercial banks, other types of banks with different ownership structures continue to play a substantial role in the banking sector. These institutions can be characterized along the following lines: commercial (private-stock companies), savings banks, cooperative or mutually owned banks, public banks and a mixture of other types of banks, usually with special purposes. In several cases, the savings banks are publicly owned, most often by local or municipal authorities, and there are still cases of state and central government ownership of big banking institutions.
19 Agnes Belaisch, Laura Kodres, Joaquim Levy and Angel Ubide, Euro Area Banking at the Crossroads, IMF Working Paper, 2001 Germany has the largest system in terms of number of credit institutions-over 3.000-due to its large population and the diverse nature of its banking system. France has fewer than half that many, followed by Austria and Italy (with each containing slightly fewer than 1.000). Spain ranks sixth after the Netherlands. Each of the remaining countries contains fewer institutions by far. To date, consolidation in the euro area is taken mostly two forms, (1) mergers among relatively large private, commercial banks and among bank and non-bank financial institutions; and (2) mergers within the savings and cooperative banks, respectively. Consolidation has been essentially limited, sometimes with implicit government guidance, to within national borders and within their own type. Some commentators have interpreted the governments guidance as an apparent desire to limit ownership of some influencial institutions and to create a few national champions in each country to compete in the European or global market place. Consolidation has accelerated recently at the top: more than half of the 30 biggest euro-area banks are the result of recent mergers and the average size of the top five has doubled since 1995. Bank of International Settlements (BIS) data show that some 500 mergers and acquisitions took place in 1991-1992, valued at $17.5 billion, whereas in 1997-1999 only 200 took place, at a value of about $100 billion- fewer but of a much larger scale. The degree of concentration at the top is particularly striking in the smaller euro-area countries, where now just a handful of banks dominate these banking sectors. Euro-area countries banking systems are characterized by relatively few large banks, some of which are considered global palyers, and an array of medium-sized and small institutions. In almost all smaller countries, the top of five banks hold more than 50% of the total banking system whether measured by total assets, total loans, or total deposits. In a few countries, the concentration is now even more pronounced. For example, in the Netherlands and Belgium, two large banking groups have more than half of the banking sector assets, respectively. The four biggest countries have less concentrated banking sectors, although in France, the five banking groups take in nearly 90 percent of all deposits. Notably, Germany has the lowest level of concentration in the euro area almost regardlessof how it is measured. France and Spain are relatively more concentrated.
Types of Euro Area Banking I nstitutions 1. Private commercial banks. Commercial or private banks are owned by their shareholders. Such private-stock companies usually offer equity to the public, but may be owned by private equity holders. They can distribute profits to their shareholders, typycally in the form of dividents. These owners generally have limited liability and exercise control through various mechanisms, often through board of directors or supervisory bodies. Voting rights, though, may be separable from share ownership.
2. Savings banks. Savings banks often supply credit to local or regional areas. In many cases, their original purpose was to provide credit to farmers, artisans, or other underprivileged groups who were unable to obtain credit elsewhere. Even when not required to do so, savings banks often focus on individuals and small and medium sized businesses. When partly or entirely owned by state or local governments or municipalities, these institutions are usually required to allocate part of tehir operating surplus to a social fund for use in the local community and the remaining profit can be either retained or distributed to the government owner.
3. Cooperative/mutual banks. Thsese banks are typically owned by their depositors and creditors and the services of these banks may be restricted to those who own them, although recent liberalization has permitted many of these institutions to offer their services to others. Ownership shares can be restricted to ensure broad ownership. In some countries, profits are distributed as dividents to the mutual owners, sometimes in the form of highest interest rates on deposits. In other countries, profits are retained, adding to reserves and the equity base. Governance is often implemented through boards of directors selected from among the members of the cooperative or mutual institution.
4. Public banks. Public financial institutions are now less prevalent in Europe and are typically outside the banking system. However, the most common type of public banks remaining in Europe are savings banks, owned or controlled in part by local or municipal authority. Germany and Austria, with 35 percent and 14 percent of assets in banks either owned or governed by the public sector, respectively, constitute the largest public banking sectors of this type.
5. Others types of banks. Often countries have some specialized lending institutions. For instance, many EU countries contain martgage banks, Germany has the largest such sector, whose assets are predominantely mortgages and their liablities come from either household deposits or the issuance of mortgages-backed securities. In some countries, there are agricultural lending banks, postal savings banks, and other special banks servicing specific sectors of the economy.
3.3. Short comparison between Fed and Eurosystem The term Eurosystem is not to be found in the legal basis, i.e. the Treaties of Maastricht and Amsterdam including the protocols which are part of the EU Treaty. The only reference is to the European System of Central banks (ECSB), which comprises the legally independent national EU central banks (NCBs) currently 15 and the legally independent European Central Bank (ECB). The ECB was established on June 1st, 1998 as a common subsidiary of the national central banks located in Frankfurt/Main. The term Eurosystem was introduced by the decision- making bodies of the ECB at the beginning of Stage 3 of EMU (January 1st, 1999) in order to designate those parts of the European System of Central Banks which are responsible for monetary policy in the Euro area. Therefore, in addition to the ECB, the Eurosystem only comprises the national central banks of the countries participating in the monetary union. The Eurosystem bears the exclusive responsibility for monetary policy in the EMU and the ECB is the heart of the Eurosystem. It is responsible for carring out all tasks of the Eurosystem either through its own activity or through the national central banks. This means that the national central banks are, by function, subordinated to the ECB to allow the Eurosystem to operate efficiently as a single entity with a view to achieving the objectives of the Treaty. As integral parts of the Eurosystem, the national central banks act as operative arms of the ECSB, carring out the tasks conferred upon the Eurosystem in accordance with the rules established by the ECB. Therefore, the basic principle of the Eurosystem is centralized decision- making, decentralized operations. This principle of decentralization stipulates that, to the extent deemed possible and appropriate, the carrying out of the monetary policy operations is the task of the NCBs. However, decentralization applies to operations only. The monetary policy decisions and legislative activities remain centralized as necessary for a common monetary policy. Unlike the ECB, the Eurosystem and the ECSB have neither legal personality nor competence to pass decision on their own. Both are governed by the decision- making bodies of the ECB the Governing Council, the General Council, and the Executive Board.
The Federal Reserve System was set up in 1913. It is comprised of the Board of Governors and the twelve regional Federal Reserve Banks. Until 1935, the decisive role was played by the FRBs. The most important monetary policy instrument at that time, the discount rate, was decided upon independently by each FRB. In the 1920s the instrument of open market operations was discovered. It was used with varying intensity by the individual FRBs. The FOMC was founded in 1933. At that time it could only give recommendations whareas the individual FRBs had the right to decide. In order to have a common monetary policy, directed to the whole economy, a basic reform of the Fed came up in 1935. Open market policy was now placed into the responsability of the FOMC and the influence of the FRBs in the FOMC was reduced. Consequently, since then the members of the Board of Governors have had a majority in the FOMC.
The primary objective of the Eurosystem is to maintain price stability. The EU Treaty does not specify a precise, quantitative definition of price stability or a time frame within which this objective should be attained. Without prejudice to the primary goal of price stability, the Eurosystem should support the general economic policy in the EU. Insofar, as the general objective is not to the discretion of the Eurosystem, it is goal dependent.
On the contrary, the Fed shall pursue several goals. The Federal Reserve Act states the following: The Board of Governors of the Federal Reserve System and the Federal Open Market Committee shall maintain long run growth of the monetary and credit aggregates commensurate with the countrys long run potential to increase production, so as to promote efficiently the goals of maximum employment, stable prices and moderate long-term interest rates. Despite this multitude of final objectives, the monetary policy reaction function of the Fed seems to reveal a kind of implicit inflation targeting. 20
Compared to other central banks, the Eurosystem has the highest degree of independence. The EU Treaty and the Statutes of the ESCB are the legal basis. Since this is international law, it can only be modified with unanimity by all EU member states. In this respect, the position of the Fed is by far weaker. The Federal Reserve System is considered to be an independent
20 Gunnar Heinsohn and Otto Steiger, The Eurosystem and the art of central banking, Center for European Integration Studies, Working Paper, 2002 central bank. It is so, however, only in the sense that its decisions do not have to be ratified by the president or anyone else in the executive branch of government. The entire system is subject to oversight by the US Congress because the Constitution gives to Congress the power to coin money and set its value a power that, in the 1913 act, Congress itself delegated to the federal reserve. The Federal Reserve must work within the framework of the overall objectives of economic and financial policy established by the government, and thus the description of the System as independent within the government is more accurate. Consequently, unlike for the Eurosystem, the danger exists for the Fed that Congress could change the legal basis. Thus, the ESCB has a more secure institutional foundation than the Fed, which is a creation of Congress and whose structure can be changed at any time.
The Eurosystem has three types of instruments at its disposal: minimum reserves, open market operations and so called standing facilities. In the US, there are minimum reserves, open market operations and so called discount windows. In the Eurosystem, all esential decisions about the use of instruments are made by the Governing Council of the ECB. In the Federal Reserve System, the FOMC is only responsible for the open market operations. Decisions about the use of minimum reserves and the discount window are made by the Board of Governors.
The design of required reserves is similar in both systems. Credit institutions are required to hold minimum reserves at their central bank either as deposits on accounts with the central bank or as vault cash. The Eurosystem only allows the first alternative, whereas credit institutions in the USA can also fulfil their obligations with vault cash. Credit institutions are obliged to hold required reserves in relation to specific liabilities of their balance sheet. The Eurosystem also carries out open market operations, which are undertaken on the initiative of the Eurosystem. Traditionally, the term open market operations was used for purchase and sale of securities. The Eurosystem, however, uses this term in an enumerative way. The most important open market operations of the Eurosystem are the so-called main refinancing operations and the longer-term refinancing operations. The former are loans of a two-week term which are offered every week; the latter are loans with a term of three months. In contrast to the Eurosystem, the Fed still uses the term open market operations in the traditional way. Open market operations are only purchases and sales of bonds, which could take place either as outright operations or as repurchase agreements. Finally, the Eurosystem has at its disposal so-called Standing Facilities. These operations are carried out on the initiative of the credit institutions. They are designed simmetrically and provide or absorb liquidity with an overnight maturity. The marginal lending facility offers the oportunity to credit institutions to get liquidity overnight. The amounts are not limited if a credit institution has enough collateral. On the other hand, there is the deposit facility which enables credit institutions to deposit excess liquidity. The standing facilities shall facilitate the liquidity management of the credit institutions. Within the discount window, the Fed offers loans to credit institutions. The interest rate which is charged for this is traditionally called the discount rate. The discount window is in particular designed for credit institutions with liquidity problems. The use of the discount credit is combined with more intensive bank supervision on the part of the Fed. The central starting point for the instruments of both central banks is the money market. On the money market, the credit institutions trade funds at the central bank. Such transactions do not lead to a change of the amount of existing base money, they only cause a redistribution of the overall volume between the credit institutions. From the point of view of an individual bank, operations with the central bank and in the money market fulfil the same function. Both support the balancing of changing liquidity needs. Conclusions The institutional structure of the two central banks is rather similar but the main tasks and the legal status are different. Whereas the main task of the Eurosystem is clearly spelled out (price stability), the Fed has several tasks leading to some ambiguity. In this context, it is also important that the independent status of the Eurosystem is guaranteed by international law (EU Treaty), whereas the status of the Fed depends on Congress because the Constitution gives to Congress the power to coin money and to set its value. Regarding the instruments and operating procedures of monetary policy, there are similarities in the design of the minimum reserves and the operating target. In both cases, the overnight interest rate is the operating target of monetary policy. Apart from required reserves, the instruments of monetary policy are different. The differences in institutional and instrumental respect can be traced back to historical factors, legal problems of the change of existing arrangements and a different understanding of monetary policy. In this context, the Eurosystem has had the advantage of introducing all arrangements according to the knowledge of monetary policy and theory at the end of the 20th century. In sum, the Eurosystem must be classified as the superior system under efficiency aspects. 21
Summary
Hystory of European integration - 1951: ECSC - 1957: Treaties of Rome - 1986: Single Act - 1992: Maastricht Treaty - 1997: Amsterdam Treaty.
Hystory of monetary integration - 1968: Werner Report; - 1979: EMS established; - 1989: Delors report lays foundations for euro; - 1993: Maastricht Treaty.
Convergence criteria - inflation rate: price stability - public finances: budget discipline max. deficit 3% of GDP max. debt 60% of GDP - exchange-rate stability - convergence of interest rate
Stages of integration: - free trade area - customs union - common market - economic union - monetary union.
Decision-bodies of ECB: - Governing Council - Executive Board - General Council
21 Karlheinz and Franz Seitz, The Euro System and the Federal Reserve System compared: facts and challenges, Center for European Integration Studies, Working Papers, 2002 Microeconomic benefits (euro): - facilitates cross-border financial transactions - makes travelling easier for consumers - no time wasted changing money - no more exchange charges - easier to compare prices
Macroeconomic benefits (euro): - eliminates exchange-rate risk - strengthens the single market - encourages investment in the euro zone - promotes convergence of national economies.
Check out questions
1 How is the Federal Reserve System organized?
2 What is the main body of the Fed and how is this elected?
3 What is the FOMC and what is its composition?
4 What is the role of the Federal Reserve?
5 What are the instruments of monetary policy used by the Fed?
6 What kinds of facilities are offered by the Fed to the government agencies and to the depository institutions?
7 The regulation and supervision function supposes.
8 Lender of last resort means that:
9 State two benefits of the membership of Fed and/or Eurosystem.
10 Mention the convergence criteria of the EMU.
11 State the difference between the ESCB and the Eurosystem
12 Specify two common points between the Fed and the EU banking system.
13 When was the Euro introduced?
14 State two different points between Fed and EU banking system.
15 Mention the stages of integration prior to monetary and economic union.
16 What are the main features of the EU banking system?
17 What is understood by public finance discipline in case of EMU convergence criteria?
Choose the right answer(s).
18 Open market operations: a. are the main instrument used by the Fed to implement the monetary policy b. are foreign exchange operations c. mean buying and selling US Treasury securities d. are operations that influence the bank reserves.
19 The role of ECB is: a. to implement the monetary policy in the Eurosystem b. to implement the monetary policy throughout the EU c. to support the general policies of the EU d. to hold and manage the official foreign reserves of the member states e. to maintain price stability and sustainable economic growth.
20 The main bodies of the EU banking system are: a. The Governing Council, the Executive Board, the General Council b. The Board of Governors, the Board of Directors and the General Council c. The Board of Governors, the Executive Board, the General Council d. The Governing Council, the Executive Board, the Council of Governors of EU.
21 The countries that have not yet adopted the Euro are: a. Great Britain, Sweden, Norway b. Sweden, Denmark, England c. Denmark, Ireland, Great Britain d. Sweden, Great Britain, Ireland.
22 Convergence is related to: a. inflation, price stability, long- interest rate b. price stability, budgetary discipline, long-interest rate stability, exchange rate stability c. public deficit, budgetary deficit, public debt d. inflation criteria, interest criteria, public criteria.
References
1. Piata Financiara magazine, 2000-2002
2. Dumitru Miron, The Economics of European Integration, ASE Bucharest, 2002
3. Ligia Georgescu-Golosoiu, The Business of Banking, ASE Bucharest 2002-12-02
4. www.ecb.org, www.eu.int, www.fed.org
5. Center for European Integration Studies, Working Papers, www.zei.de