Federal Reserve and the ECB

FederalReserve and the ECB

TheFederal Reserve is the central bank that serves the United States ofAmerica. The European Central Bank is the central bank institutionthat serves the European Union and the institution that isresponsible to administer the Eurozone’s monetary policy. While thebanks have a number of similarities, the two financial institutionshave significant structural and functional differences. According toLangin (3), the two play the primary roles of the central banks butdiffer in specific functions. The discussion in this paper willcompare and contrast the two banks by exploring their structure andfunctions. Through the focus on their distinct advantages, this paperseeks to understand which of their banking system is more constrainedthan the other.

Thestructure of the Federal Reserve System is hierarchically organizedas per the regions that the bank covers. The bank is headed by anindependent board of governors called the Federal Reserve Board thatis appointed by the president (FederalReserve 1). Under the board is thetwelve member committee, the FederalOpen Market Committee, whichmanages the principle U.S monetary policy role of Open MarketOperation (Federal Reserve 1).The next part of the system is the Federal Reserve’s fiscal agents.These are twelve agents are banks located in the major cities in theunited states in a manner that divides the country into twelveFederal Reserve districts (Langin 4). The lower structure of theFederal Reserve System is the U.S private member banks and advisorycouncils (Federal Reserve 1).

Onthe other hand, the European Central Bank is an institutionalizedhierarchy that is headed by the executive board that implements themonetary policy (ECB 2). The executive board is headed by the bank’spresident, assisted by the vice-president and four members of theboard. The executive board is made by executives that heads all theoperations of the bank and instructs the national central banks (ECB2). After the executive board is the governing council, which is themain decision making organ of the Eurosystem institution (ECB 2). Thecouncil is composed of the governors of the national central banksand the six executive board members. The third body is the generalcouncil that deals with transactional matters that arise due to theadoption of the euro (ECB 2). They are also responsible for fixingthe exchange rate issues and oversee the adoption of the euro amongthe member states.

Thetwo banks have similar functions and objectives thatcharacteristically accrue to the institutions as the central banks.Both the European Central Bank and the Federal Reserve are taskedwith the sole responsibility of maintaining the price stability(Langin 3). However, the difference in the functionality arises interms of the scope and area of operation. While the European CentralBank maintains price stability within the Eurozone, the FederalReserve maintains price stability within the United States of America(Langin 3). To implement this function, the two banks define theprice stability parameters and the inflation levels that must be keptunder check.

Thetwo banks have the basic role of defining, implementing andmaintaining the monetary policy of the two regions. According toLangin (9), they provide the laws that are supposed to be followed bythe private banks as well as the national central banks to maintainthe money supply levels. At the same time, the Federal Reserve andthe European Central Bank are tasked with the function of regulatingthe foreign exchange operations. This helps the dollar in theAmerican case and the euro in the Eurozone case to be stable againstother currencies. Therefore, they keep foreign reserve among otherfunctions that relate to the stability of the currency. Moreover, thetwo banks are responsible for running the open market operations intheir respective regions.

However,the Federal Reserve System has advantages over the European CentralBank. One of the main advantages is the structural strength of theFederal Reserve that has been in existence since 1913 (FederalReserve 1). The Federal Reserve Systemhas a stronger structure with clear objectives and roles allocated toeach of the levels (Langin 3). In addition, the Federal Reserve hasno transitional challenges that the European Central Bank faces as itseeks to ensure that the member countries have successfully adoptedthe euro as the currency (ECB 2). Moreover, the Federal Reserve has alarger structure with more employees than the European Central Bank.

Anotheradvantage of the Federal Reserve is the authority of being the bankerto the United States other than the states (FederalReserve 1). This means that its decisionmaking is easier because it affects one country as a whole. This isan advantage over the European Central Bank, which has to makedecisions that impact on all the countries through their centralbanks.

However,their decision making is structured differently to make them suitablefor the varied scope of operations. On one side, the Federal Reservemakes its decisions and policies based on the federal open marketoperations committees (Langin 14). On the other hand, the EuropeanCentral Bank makes its decisions via the governing council. All inall the two banks perform the similar functions as they are centralbanks. The differences arise because of the structural differencesarising from their scope of operations and authority.

WorksCited

EuropeanCentral Bank, ECB. Economicand Monetary Union (EMU).Web,Accessed, April 7, 2015,&lthttp://www.ecb.europa.eu/ecb/history/emu/html/index.en.html&gt

FederalReserve, 2015. TheFederal Reserve Board.Web, Accessed, April 7, 2015,&lthttp://www.federalreserve.gov/pf/pf.htm&gt

Langin,Cedric. TheEuropean Central Bank and the Federal Reserve System – a GeneralComparison.Munich: GRIN Verlag, 2011, Print