In the ESCB Statute (articles 17 to 24)

In the ESCB Statute (articles 17 to 24) specifies the monetary policy instruments and operations, the implementation of which will allow the system to meet its objectives. The main instruments of the ESCB monetary policy: the conduct of open market operations, regulation of the discount rate by carrying out Deposit and loan transactions and establishment of minimum reserve requirements for credit institutions.
The main object of regulation in the conduct of these operations – liquidity of credit institutions, which directly affects the demand and supply of money in the economy, thereby significantly affecting the rate of inflation.

The same for all countries – participants of the “Euro-zone” conditions to undertake these operations provide information to the participants of the money market on main directions of monetary policy of the European economic and monetary Union and ensure its unity.

To the operations of LVS allowed credit institutions that meet the following qualification requirements: stability, effective governance, and broad operational capabilities. In the list of the credit institutions to fulfil minimum reserve requirements, consists of over 8 thousand credit institutions in the Eurozone, and more than 4 thousand of them have access to Deposit and loan operations, and around 3 thousand are involved in the refinancing operations.

Operations on the open market plays an important role in the monetary policy of the ESCB for the purpose of influencing interest rates, managing the overall liquidity of the money market and predict possible difficulties in the conduct of monetary policy. To conduct open market operations at the disposal of the ESCB are four financial instrument. The most important of these are refinancing operations, applicable on the basis of relevant agreements to resell loans or mortgaged loans. The ESCB may also carry out the issuance of debt certificates, foreign exchange and deposits for a limited period. We can also carry out operations based on standard tenders, emergency tenders or bilateral procedures.

Depending on the purpose, frequency and take the steps, the open market transactions carried out by the ESCB, can be divided into four main categories:

1. Main refinancing operations play a Central role in the regulation of interest rates, managing the liquidity volume in the market and explain the meaning of the ECB held monetary policy. These operations provide the bulk of refinancing to the private sector.

The distinctive features of the main refinancing operations are the following:

“work” in only one direction, in the direction of the transfer to the private sector for more liquid assets;
are held regularly every week;
usually have the maturity gap of two weeks;
operations are carried out decentralized through the National Central banks;
access to them is provided on the basis of standard tenders;
all contractors that meet the General criteria for participation in tenders, can submit applications for participation in them;
as collateral assets are accepted as the first and second categories.

2. Long-term refinancing operations are designed to provide the required level of long-term refinancing operations. They do not provide a means of managing interest rates and are based on current market rates, so the tenders are usually conducted on the basis of variable interest rates. Only under exceptional circumstances, the ESCB may carry out tenders on the basis of fixed interest rates. Using these operations, the ESCB does not intend to exert any pressure on the money market, and will act as a regular recipient of interest on loans. The volume of these transactions is limited and relatively small.

The distinctive features of long-term refinancing operations:

serve as a means of providing liquidity;
are held regularly each month;
usually have a maturity of three months;
are decentralized through the National Central banks;
conducted on the basis of standard tenders;
all contractors that meet the General criteria for participation in tenders, can apply for participation in them;
as collateral, in principle, can take the assets the first and second categories. However, with the consent of the Governing Council of the ECB National Central banks have the right to impose certain restrictions concerning both the amount and composition of collateral.

3. Reverse transactions “fine tuning” is performed with use of instrument reverse transactions (by means of additional return transactions, sales and purchases of assets as a simple forward transactions), in addition, the ESCB can accept deposits and carry out foreign currency transaction “swap”. The purpose of these operations is to influence the liquidity situation in the market and interest rates, particularly to smooth the impact of unexpected changes in the volume of market liquidity on interest rates. The potential importance of rapid action leads to the desire of the ESCB to maintain a high degree of flexibility in the choice of procedures and specific forms of this type of operations.

Reverse transactions “fine tuning” have the following features:

can be used for the provision and withdrawals of liquidity;




can be both regular and not regular;
have maturities of a priori, which is not regulated;
operations aimed at providing liquidity, usually conducted on the basis of quick tenders, although this does not exclude the possibility of using bilateral procedures;
operations aimed at absorbing liquidity, usually conducted through bilateral procedures;
usually delivery is decentralized through the National Central banks (in exceptional circumstances, the Governing Council of the ECB may adopt a decision to conduct a bilateral exchange operations directly by the ECB);
The ESCB may select a limited number of counterparties for the conduct of such operations;
as collateral assets are accepted as the first and second categories.

4. Structural reverse operations are the prerogative of the ESCB and are implemented through the issuance of debt certificates, reverse transactions, purchase and sale of assets as a simple striker. These transactions are conducted on the open market with the aim of adjusting the structural position of the ESCB in the private sector.

They are characterized by the following points:

performed for the purpose of providing liquidity;
are held regularly or not regularly;
Mature, which a priori is not regulated;
conducted on the basis of standard tenders;
delivery is decentralized through the National Central banks;
all contractors that meet the General criteria may apply to participate in this type of transactions;
as collateral assets are accepted as the first and second categories.

The assets include first class market debt instruments that meet the General criteria of reliability set by the ECB for the whole of the Euro zone. The second asset class is the market and non-market debt instruments, securities and non-marketable financial instruments, the reliability criteria established by the National Central banks in accordance with the requirements of the ECB.

From the point of view of reliability in the conduct of monetary policy differences between both classes there are no instruments (except that the assets of the second class are not used in EVS simple forward transactions). The bulk of assets (75%) used in the operations of EMS, represented by government securities; securities issued by credit institutions accounted for 18%, corporate sector – 4%; the remaining 3% of the issued national Central banks.

First rate on the main refinancing operations was set at 3%. Currently (since 11 October 2000). this value is 4.75%.

Have specific features, Deposit and loan operations of the ESCB, which play an important role in regulating the liquidity of banking institutions. The ESCB offers two permanent types of transactions:

“additional credit operations”, allowing credit institutions to engage marginal overnight loan NCB with the aim of achieving the required level of daily liquidity against the collateral of own assets with a predetermined interest rate (the interest rate in this case will be the maximum possible for a given market day loans);
“Deposit operations”, enabling banking institutions to place in the accounts of the NCB overnight deposits with interest at a predetermined interest rate (it should be noted that capitalize on this will be able a little – the interest rate will fall to a mark, the minimum possible for a given market).

These operations should be viewed in conjunction as a unified system through which credit institutions can Deposit their liquidity or, conversely, reduce it in the short term, on the conditions overnight.

Deposit and loan operations, the ECB conducted at the initiative of the banking institutions. When conducting anti-inflationary policy and the ESCB relies on a tool such as minimum reserve requirements for credit institutions. These requirements serve two related functions: the stabilization of money market interest rates and influence the structure of banking system liquidity. The mechanism of minimum reserve requirements leaves considerable possibilities for regulating the liquidity position of banks by market methods on a daily basis, allows for short term arbitrage operations and to maintain an appropriate level of profitability. This is achieved in that the reserve requirements of the ESCB to credit institutions must be made on the basis of average for the month, not daily position. In this case the corresponding month starts on the 24th calendar day of each month and ends on the 23rd day of the following month.

The system of minimum reserve requirements, functioning in the countries of the Euro zone, based on the following principles:

First, reserve requirements are applied to all credit institutions.

Second, the reserve requirement of each individual credit institution is established by applying reserve rates (currently 2%) to the obligations in the forms of: 1) overnight deposits; 2) deposits with agreed maturity or redeemable at notice with a term of up to two years; 3) similar in terms of maturity of debt securities; 4) securities of the money market.

Thirdly, when establishing the amount of reserve requirement stipulated the following procedure for calculations. If the credit institution is unable to submit a confirmation to the sum of liabilities in the form of debt securities with maturity up to two years and securities of the money market is permitted to apply the standard calculation based on 10% of the amount of the above commitments. In the calculation of the final reserve requirement, each credit institution may make a deduction from received, by law, result in the amount of 100 thousand euros. Stored on ESCB balances required reserves accrue interest at the average rate for main refinancing operations, i.e. in line with market conditions.

Fourth, the credit institution is entitled to apply to the National Central Bank member of the ESCB, for which he is resident, for permission to fulfil reserve requirements through an intermediary.

The ESCB carrying out a comprehensive anti-inflation policy has helped to ensure price stability during the transition to the single currency. From January to may 1999. in States of the Euro zone the growth rate of prices of consumer goods was 1% in annual terms, while in the U.S. is 2.1%, in Canada – 1.5% on average for the group of industrialized countries is 1.2%. The essential role of securities in the system, especially their active use as collateral, suggests that when conducting operations, priority is given to reliability. This creates a psychological climate of confidence in the money and financial markets, which objectively reduces inflationary expectations in the economy.