Chapter 16
Money, Banking, and
Financial Markets:
The Structure of Central
Banks: The Bank of Canada,
the Federal Reserve, and the
European Central Bank
Tim Berry, Humber College
©2010 McGraw-Hill Ryerson Ltd.
Structure of Central Banks:
The Big Questions
• How is the Bank of Canada structured and
what are its key objectives?
• How is the Federal Reserve organized to meet
its objectives?
• How is the European Central Bank organized?
• What are the differences and similarities
between these three central banks?
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The Bank of Canada:
History
• Prior to the creation of the B.O.C., bank
notes were issued by chartered banks and
the Dept. of Finance
• Under the gold standard there was no real
power in setting monetary policy
• Relatively no bank panics in Canada as
compared to the U.S. where Fed. Reserve
was created to reduce incidence of panics
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The Bank of Canada:
History
• When a Canadian bank ran into financial
trouble another bank took it over
• Canadian banks also tended to keep larger
reserves as a buffer in case needed
• Canadian banks continue to have a top world
reputation for stability
• The B.O.C. was established during the Great
Depression in 1934 , as a precautionary move
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The Bank of Canada:
Structure
• Created under the Bank Act of 1934
• CEO of the bank is the governor - appointed
by a board of directors and approved by the
Minister of Finance and federal cabinet
• Bank governor is appointed for a seven-year
term and acts with independence from the
elected government
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The Bank of Canada:
Key Objectives
• Bank’s focus is on three key areas:
1. Currency
2. Monetary policy
3. Financial system stability
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Assessing the Bank of Canada’s
Structure
•
•
•
•
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Independence from political influence
Decision-making by committee
Accountability and transparency
Clear statement of intentions
©2010 McGraw-Hill Ryerson Ltd.
The Federal Reserve System:
Origins
• 1870 to 1907:
- US had 21 financial panics
• Anatomy of 19th century bank panics:
– Crop Failure  Loan Default
– Loan default damaged rural bank
– Rural bank withdrew deposits from city bank
– Financial difficulties spread
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The Federal Reserve System:
Origins
• Panic of 1907 – must be a better way.
• Federal Reserve Created in 1914
• Europe:
– Post WWII: unstable inflation and exchange
rates
– Consensus moved toward monetary union
– 1999: Created European Central Bank
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The Federal Reserve System:
Structure
• Federal Reserve Banks
• Board of Governors
• Federal Open Market Committee
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The Federal Reserve System:
Federal Reserve Banks
• 12 Districts – much more complicated
organization and system compared to B.O.C.
• Each is a Private Non-Profit Organizations and
Chartered Banks
• Owned by commercial bank “members”
• Overseen by both
– Board of Directors
– Board of Governors in Washington
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The Federal Reserve System:
The Twelve Districts
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The Federal Reserve System:
What the Reserve Banks Do
• Perform same functions as Bank of Canada
• Government’s Bank
– Issue currency
– Maintain the Treasury’s account
– Manage the Treasury debt
• Bankers’ Bank
– Hold reserve deposits
– Operate the payments system
– Make discount loans at the discount rate
– Supervise and regulate financial institutions
– Collect data
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Federal Reserve System:
Structure and Policy Organization
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New York Fed Only:
•Auction Treasury
Securities
•Foreign Government
Services
•Monetary Policy
Operations
•Fedwire: Large Value
Interbank
•Funds Transfer System
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Federal Reserve Bank of NY:
The Gold Vault
• 250 million ounces
• Over $85 billion at
current market prices
• 10% of all the gold
that has ever been
taken out of the
ground
• One bar weights
about 400 ounces
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The Federal Reserve System:
The Board of Governors
• Structure
–Seven governors including a
chairman and vice-chairman
–Serve 14-year terms
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European Central Bank
• European Monetary Union began
January 1, 1999
• Euro notes and coins began circulation
January 1, 2002
• As of January 1, 2008, 15 of 27
countries in the European Union
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The European System
of Central Banks
On Jan 1, 2008
Cyprus and
Malta joined the
Eurosystem.
Has any other
country joined
since?
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European Central Bank:
Key Players
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European Central Bank:
Organizational Structure
• Executive Board and European Central
Bank in Frankfurt similar to the Board of
Governors
• National Central Banks
similar to the Federal Reserve Banks
• Governing Council formulates policy
similar to the FOMC
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Comparing ECB to B.O.C.
and The Federal Reserve
• ECB does not regulate financial institutions
– similar to B.O.C.
• ECB’s monetary intervention is
accomplished by all the National Central
Banks.
• ECB’s budget is controlled by the National
Central Banks
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The ECB’s Objective and Strategy
• The Treaty establishing the ECB state:
“The primary objective of the
European System of Central Banks
shall be to maintain price stability.”
Seems clear!
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The ECB’s Objective and Strategy
• Price stability is currently defined as
inflation of close to two percent but
not more than in a euro-area
measure called the Harmonized Index
of Consumer Prices, over the medium
term.
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Assessing the ECB’s Structure
• Independence from political influence
• Decision making by committee
• Accountability and transparency
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• In the 1990s the Japanese economy languished
• The Ministry of Finance (MoF) was blamed
• Until 1998, the MoF controlled the monetary
policy of the Bank of Japan
• Since 1998 the Bank of Japan has been
independent and
– Has an eight-member policy board
– Has the primary goal of price stability
– Communicates regularly to keep the public informed
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©2010 McGraw-Hill Ryerson Ltd.
Chapter 16
Money, Banking, and
Financial Markets:
The Structure of Central Banks:
The Bank of Canada,
the Federal Reserve, and the
European Central Bank
End of Chapter
Tim Berry, Humber College
©2010 McGraw-Hill Ryerson Ltd.