Monetary Policy: Central Banks, ECB, and Financial System Operations

Monetary Policy Instruments and Central Bank Functions

Central banks in a modern economy have several key functions:

• Issuance of Legal Money: The creation of banknotes.
• State Banker: Providing treasury services and managing government debt.
• Bank of Banks: Custody of liquid reserves and lending to financial institutions.

The Bank of Spain, as a delegation of the ECB, lends to commercial banks to implement monetary policy and address liquidity issues.

• Supervision of the financial system, including intervention in poorly managed institutions.
• Management of foreign exchange reserves and gold.
• Central risk information and balances, assessing client loan history.

The European System of Central Banks (ESCB)

With the creation of the Economic and Monetary Union (EMU) and the euro, central banks have transferred some powers to the European Central Bank (ECB). The ECB and national central banks form the ESCB.

Monetary Policy Operations in the Euro Area

Monetary policy operations are distinct from standing facilities. Operations are how the ESCB applies its policy, while standing facilities are a last resort for financial institutions to balance their books.

Liquidity Operations

Operations can either inject or absorb liquidity. Main refinancing operations have these features:

• Loans with a 1-week term, repeated weekly.
• Variable rate auctions.

Asset-backed securities are no longer paid by the ECB.