European Union Studies Center,
CUNY, May 13 2014
Comparison of ECB and Fed
Georges Pineau, ECB permanent representative in Washington DC
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Outline
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Remit – Purposes and Functions
Monetary Policy – Objectives and Instruments
Unconventional Monetary Policy (UMP)
Governance – Independence, Accountability, Transparency
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Remit – Purposes and Functions (i)
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Context dependent
Fed and ECB created in 1913 and 1998, respectively
Sveriges Riksbank (1668) and Bank of England (1694)
Banque de France (1800) and Deutsche Bundesbank (1957)
Oldest CBs created as government bankers (war financing)
Fed initial remit focused on banking/financial stability
Monetary policy mandate enhanced in 1933 (FOMC)
ECB initial narrow mandate (monetary policy) enlarged this
year (Single Supervisory Mechanism - SSM)
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Remit – Purposes and Functions
(ii)
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Similarities: monetary policy; banknotes; FX operations; FX
reserves (management); financial stability/systemic risk;
financial market infrastructure oversight; provision of financial
services (payment systems); statistics; international monetary
cooperation
Differences: government fiscal agent (NCBs); banks
supervision/regulation (NCBs); banks consumer protection
(NCBs)
Shades: exchange rate regime/system (without prejudice to
price stability in EA); FX reserves (Eurosystem holds and
manages assets, including gold; split between UST and Fed)
Post crisis: Fed: DFA (2010) strengthened role in financial
stability/systemic risk (stress tests, FSOC); consumer
protection (Consumer Financial Protection Bureau)
ECB: financial stability/systemic risk (ESRB, Dec 2010) and
Banking Union (SSM in November 2014)
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Monetary Policy – Objectives and
Instruments (i)
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Different objectives broadly unaffected by the crisis
Fed: maximum employment, stable prices and moderate long
term interest rates; 2% inflation objective set in January 2012;
no fixed goal set for maximum employment but estimates in
FOMC Summary of Economic Projections; macroeconomic
forecasts and financial risk analysis inform decisions
ECB: price stability (primary) and support the general
economic policies of the EU (secondary); quantitative definition
set below 2% in 1998, revised in 2003 to below but close to
2%; two pillar strategy including economic (quarterly staff
macroeconomic projections) and monetary analysis (monetary
aggregates/monthly; bank lending surveys/quarterly)
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Monetary Policy – Objectives and
Instruments (ii)
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Different conventional monetary policy (CMP) instruments
before and during the crisis
Fed: Fed fund rates target (policy rate); overnight Fed funds
rate (operating target); reserve requirement (low, nonremunerated until 2008); counterparties (primary dealers c.
20); collateral (UST and GSEs); open market operations
(mainly outright); standing facilities (discount window);
interest on excess reserves (2008), term deposit facility
(2010), reverse repo (2013)
ECB: MRO (policy rate); EONIA - euro overnight index average
(operating target); RR (higher, remunerated); counterparties
(2500 banks); collateral (very broad private and sovereign);
OMO (repo, reverse repo); standing facilities (MLR, deposit);
debt certificates
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Unconventional Monetary Policy – (i)
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Unconventional monetary policy (UMP) instruments used
during the crisis
Fed: forward guidance (2003) initially qualitative, time
contingent, state contingent, thresholds; liquidity provision
with broader set of collateral and counterparties; 3 LSAP from
2008 to 2014, as part of balance sheet policy to address
impairment of financial market segments and binding ZLB
ECB: enhanced credit support (Oct 2008) with fixed rate/full
allotment and 1 year LTRO; SMP (May 2010) – impairment of
financial market segments; 3 year LTRO (December 2011) banks term funding; OMT (Sep 2012) - perceived
redenomination risks; forward guidance (Jul 2013) – ZLB and
short term rates volatility; other measures (CBPP, collateral
framework, RR)
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Unconventional Monetary Policy (ii)
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Long term interest rates decomposed into:
Expectations about future monetary policy rates (forward
guidance)
Plus risk premia, including:
Term premium (LSAP)
Liquidity premium (LSAP, LTRO)
Credit premium: impairment of transmission of policy stance
(SMP); perceived redenomination risk (OMT)
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Unconventional Monetary Policy (iii)
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Impact on future short term rates (forward guidance)
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Unconventional Monetary Policy (iv)
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Impact on risk premia (term and liquidity/credit)
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Unconventional Monetary Policy (v)
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ECB and Fed have used their balance sheets to accommodate
deleveraging by private sector - NFC/HH/FI – (leverager of last
resort); sovereign also contributed to preventing
contractionary deleveraging
Given differences in financial structures, ECB used
collateralized lending to banks (bank-centric) and Fed used
outright purchases of securities (market-centric)
No single risk-free yield curve in the EA and smaller wealth
effects (equity, housing) than in the US
CMP and UMP used in parallel and sequentially by ECB and
Fed, respectively
Balance sheet expansion/contraction: endogenous (ECB) and
exogenous (Fed)
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Unconventional Monetary Policy (vi)
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Different initial conditions and policy responses reflected in
balance sheet size
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Unconventional Monetary Policy (vii)
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Differences in financial structure and sectoral deleveraging
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Unconventional Monetary Policy (viii)
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Sectoral leveraging and deleveraging in the EA
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Unconventional Monetary Policy (ix)
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Bank liquidity provision/absorption through Eurosystem (T2
balances)
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Unconventional Monetary Policy (x)
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Leverager of last resort together with sovereign
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Unconventional Monetary Policy (xi)
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Changes in EA sovereign debt investor base during the crisis
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Governance
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Independence: Fed “independent within the government”;
number of legislative acts adapting the Fed’s tasks over last
100 years; 1951 Fed-Treasury Accord seen as major step;
ECB’s independence defined in international treaty; recent
significant change in mandate with SSM
Accountability: Fed accountable to Congress (testimony,
report) and GAO (operational efficiency not policy
effectiveness); ECB accountable to EP (testimony, report);
greater accountability for SSM (inter-institutional agreement
with EP, summary proceedings of SB meetings); ECB
accountable to ECA (operational efficiency)
Transparency: press conferences (ECB: monthly; Fed:
quarterly); economic projections (ECB: staff; Fed: FOMC
members); minutes (ECB: detailed minutes released after 30
years; Fed: summary minutes after 3 weeks – since 2004;
transcripts after 5 years); ECB accounts of GovC meetings
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under preparation
Conclusions
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Different historical and institutional contexts
Broader remit of the Fed but difference to be reduced with
enlarged scope of activities (SSM) for the ECB by the end of
this year
Dual monetary policy mandate of the Fed and focus on price
stability for the ECB
Convergence on definition of price stability with lasting
differences on use of CMP tools (e.g. broader set of collateral
and counterparties)
Use of different UMP instruments reflecting specific financial
market structures and institutional features
Convergence in the area of independence, accountability and
transparency, with deviations accounted for by institutional
differences
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References
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FRS: Purposes and Functions
ECB Working Paper # 1528 (The ECB non-standard monetary
policy measures; the role of institutional factors and financial
structure; Philippine Cour-Thimann and Bernhard Winkler)
ECB Occasional Paper # 107 (The collateral frameworks of the
Eurosystem, the Federal Reserve System and the Bank of
England and the financial market turmoil)
ECB Occasional Paper # 135 (The use of the Eurosystem
monetary policy instruments and operational framework since
2009)
ECB Monthly Bulletin Article July 2013: Eurosystem collateral
framework throughout the crisis
ECB Occasional Paper # 117 (Extraordinary measures in
extraordinary times: public measures in support of the financial
sectors in the EU and the US)
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