European Central Bank (ECB): Definition

Glossary

What is the European Central Bank?

The European Central Bank (ECB) is a central bank responsible for implementing monetary policy for the euro area. The ECB, together with all national central banks of the member states, forms the European System of Central Banks (ESCB). Along with the national central banks that use the euro as their currency, the ECB forms the Eurosystem. You can find more information on the ECB website.

Not a BUX investor yet? Create your account

What does the abbreviation ECB stand for?

The abbreviation ‘ECB’ stands for European Central Bank. In news, reports, and official communications, you usually see ‘ECB’ or ‘the ECB’ because it is shorter and more recognisable.

The history of the European Central Bank

Although the ECB has existed since 1 June 1998, the first step was taken back in 1988: the decision to realise an Economic and Monetary Union (EMU). The goal was to ensure the free movement of capital within Europe, a common monetary authority, and a common monetary policy throughout the euro area.

On 1 January 1999, the euro was introduced as an ‘accounting currency’ and in 2002 as a physical currency, with euro banknotes and coins. The idea was simple: if multiple countries use one currency, you also need one central bank to monitor the rules. Since then, the ECB has played a central role in the eurozone. You can find the ECB in Frankfurt am Main (Germany).

What does the European Central Bank do?

The primary task of the ECB is to keep prices stable, together with national banks. However, the organisation has more tasks, namely:

• Determining interest rates for loans to commercial banks in the eurozone;
• Managing the money supply and inflation;
• Managing foreign exchange reserves in the eurozone;
• Buying and selling foreign currency to keep exchange rates stable;
• Checking whether national governments supervise financial markets and institutions;
• Ensuring the smooth functioning of payment systems;
• Guaranteeing a safe European banking system;
• Giving permission to euro countries to issue banknotes;
• Monitoring price developments and evaluating them.

What is the goal of the ECB?

The main goal of the European Central Bank is price stability. The organisation achieves this by keeping inflation in the eurozone at two per cent per year. Please note: not all countries in the European Union use the euro currency as a means of payment.

On the other hand, the ECB also helps to keep the European financial system healthy and strong. This means the organisation contributes to safe commercial banks, allowing you to keep your (savings) money safely at the bank.

Which banks fall under the ECB?

The ECB supervises large European banks through European banking supervision. This supervision falls under the so-called Single Supervisory Mechanism (SSM).

Simply put, it means the ECB monitors the largest and most important banks in the eurozone. National central banks, such as De Nederlandsche Bank (DNB), cooperate and often supervise smaller banks. Together, they ensure the European banking system remains strong to reduce the risk of banking problems.

What is the difference between the ECB and DNB?

Although DNB and the ECB work closely together, they are not the same. Take a look at the table below.

The difference between the ECB and DNB

Not a BUX investor yet?
Create your account in a few minutes and start building your wealth.

Investing involves risks. You can lose your investment.

All views, opinions, and analyses in this article should not be read as personal investment advice and individual investors should make their own decisions or seek independent advice. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication.