Question

List and discuss 3 differences and 3 similarities between how the Fed and ECB are structured and operate.

Answer 1

Since the latest financial crisis hit the global economy in 2008, central banks around the world have been trying to manage the situation and minimise its impact on their economies. Although financial crises tend to manifest in similar ways everywhere (high unemployment rates, low consumer spending, drop in GDP), the measures used by central banks to deal with such crises can vary widely. The central banks responsible for handling two of the world’s largest economies, the Federal Reserve (or “the Fed”) in the U.S. and the European Central Bank (ECB) in the European Union, appear to follow distinctly different monetary policies that employ diverse financial controls to manage crises

The key difference between the Fed and the ECB is that in times of recession the Fed buys U.S. government treasury bonds (treasuries), while the ECB loans funds to governments and commercial banks in European Member States. The Fed purchases treasuries of various maturities and purchases them with an obligation to be repurchased at the completion of the term of maturity. Generally speaking, the loans issued by the ECB are short-term (up to three months) and backed by collateral. The banks have to pay the money back to the ECB after the lending term ends.

The ECB’s main concern in dealing with the latest crisis has also been to ensure liquidity, as well as to repair its lending system to commercial banks. The ECB changed its regular monetary policy by increasing the maturity of its bank loans from three months to six months initially, and later to a year, and even three years. These loans have been made available on a full-allotment basis, meaning that banks have unlimited access to the liquidity of the central bank, when providing adequate collateral. Requirements on collateral, moreover, have been eased several times, giving commercial banks in Europe easier access to the ECB’s reserve money.