Master of economics,

Tulegenov Adlet Kalymkaidarovich

ORGANIZATIONAL STRUCTURE AND FUNCTIONS OF SUBDIVISIONS IN EUROPEAN SYSTEM OF CENTRAL BANKS

European System of Central Banks (ESCB) is an international bank system consisting of supranational European Central Bank (ECB) and National Central Banks (NCB) of the European Union country members.

The existence of this system is an integral part of formation process of the European Economic and Monetary Union.

By its structure it is somewhat similar to US Federal Reserve System consisting of 13 banks headed by The Bank of New-York and in general performing the role of the central bank.

The national central banks of Great Britain, Denmark, Greece and Sweden are members of the European System of Central Banks with a special status: they are not allowed to participate in decisions relating to the conduct of a single monetary policy for the Eurozone and implement such solutions [1].

Let's examine the organizational structure of the ESCB, the main objectives and principles of the structural units and the system as a whole.

The European System of Central Banks comprises of the European Central Bank and the National central banks of the countries - members of the Eurozone.

The ESCB and ECB Charter declares the independence of these organizations from other Union bodies, from country-member governments of EMU and any other authorities. It is quite consistent with a normal status of the central bank in the framework of a single country. Moreover a significant importance has a ‘general principle’ recorded in the special article of the Charter according to which the European System of Central Banks is controlled by the leadership ("decision-making bodies"), the European Central Bank and, above all, the Board of Governors.

The Board of Governors, supreme governing body includes members of Executive Management Board and NCB of only member-countries of European and Monetary Union.

The main functions of the Board of Governors are:

- adaptation of the regulations and decision making ensuring the goals of the European System of Central Banks;

- identification of key elements of EMU monetary policy, such as interest rates, the amount of minimum reserves of the National central banks, the development of specific instructions on its implementation.

In addition, the Board of Governors approves internal organization rules of European Central Bank and its governing bodies, acts functions of ECB consultant and determines the procedure of representation of the European System of Central Banks in the field of international cooperation.

Executive Management Board consists of President, Vice-President and four members selected among candidates having vast professional experience in the financial or banking sphere. They are appointed from country-members of EMU during the meeting of heads of governments of these countries at the suggestion of European Union after the Consultancy with the European Parliament and the ECB Board of Governors (for further elections). Executive Management Board shall conduct monetary policy in accordance with regulations and rules adopted by the ECB Board of Governors, thus govern NCB actions, taking on the necessary departmental instructions.

General Council, the third governing body of ESCB includes the President and Vice-President of the European Central Bank and Managers of National central banks of all European Union countries, regardless of their participation in the EMU. General Council has functions, which earlier have been fulfilled by the European Monetary Institute and that should be continued in the third stage of EMU plan [2].

The President of the European Central Bank is at the same time the Chairman of all three its governing bodies: Board of Governors, Executive Management Board and General Council; given that in the first two cases he has a casting vote in case of equal distribution of votes. In addition, the President represents the ECB in external organizations or appoints an authorized person for the role. With respect to third parties, he represents the ECB according to the legislation.

National central banks of country-members are integral parts of the European System of Central Banks and act in accordance with guidelines and instructions of the ECB.

The institute of mentors is widely and successfully used while organization the activity of the European Central Bank where each of six members of the Executive Management Board is in charge of a specific area of activity of the European Central Bank.

The ECB Board of Governors is authorized to develop credit and monetary policy and the Executive Management Board is authorized to implement it. To the extent feasible and rational, the European Central Bank has a right to use the resources of national central banks.

The European System of Central Banks is empowered to deny access to credit and monetary policy tools because of reliability concerns in case of rude and repeatedly violation of the contractor of its obligations. Some additional criteria are used while selecting members of specialized operations.

The main aim for creating the European System of Central Banks according the article 2 of the ESCB and ECB Charter is price stability.

In October, 1998 the ECB Board of Governors has specified the main aim of the EUM monetary and credit policy indicating that the notion of “price stability” provides the possibility of Harmonized Price Index increase for consumer goods up to 2% per annum, at the same time determining its structure in relation to consumer goods and services.

It was found that the prices stability shall be supported in a mid-term with the unacceptable price increases in excess of the quantities and deflation, i.e. prolonged decrease in their level reflected by the Harmonized Price Index for consumer goods. Establishing the price stability in the framework of EUM constitutes to principles by which National central banks of most countries were governed before joining the Union, by which continuity of implementing credit and monetary policy is ensured.

The responsibility of the European System of Central Banks and rules of the dialogue between the ESCB and the European international institutions also meet the independence requirements.

Members of the Executive Management Board shall be appointed by mutual agreement of the heads of states or Governments of the countries - members of EMU taking into account the recommendations of the Council of the European Union. The approval by the European Parliament is a prerequisite for the appointment of members of the Executive Management Board.

The ECOFIN Chairman and European Commission members can participate in Executive Management Board meetings without casting vote right with that the ECOFIN Chairman can make proposals for consideration of the Board of Governors.

On the basis of reciprocity the ECB President participates in ECOFIN meetings when topics affecting euro and the ECSB are discussed or legislative proposals related to the fields of its competence are discussed. [3]

The ECB shall send its annual report to the authorities of the European Community, the European Parliament, and members of its Executive Management Board are obliged to appear on a call in the competent Committee of the European Parliament.

Quarterly reports on the activities of the ESCB serve as a basis for quarterly negotiations with the European Parliament in the presence of the ECB President or, if necessary, the members of the Executive Management Board. In response to this regular and in-depth dialogue the ECB will introduce the European Parliament with its assessment of the economic situation and the price level view and allow explaining the ongoing policy of the ESCB.

Two members of the ECB and representatives of NCB are members of Economic and Financial Committee joining representatives of ministries of economy and finance and central banks of EU country-members.

The ECB Chairman and other Executive Management Board members can be heard by the European Parliament. Additionally, national legislation, as a rule, provides that heads of NCB will also be heard by national parliaments.

EU Court has powers for control over acts and missing of ECB.

The characteristic peculiarity of the ECB activity is that all the fundamental decisions made by a simple or qualified majority (2/3) provides "weighted" voting governors of the central banks, in which the "weight" (i.e. number of votes for each of them) is determined in accordance with the proportion of the country (its central bank) in the total capital of the ECB. This does not apply to members of the Executive Management Board each of which has only one vote.

The ECB can do common operations for central banks: credit granting, including lombard (on securities), financial institutions and operations in the open market with a variety of financial instruments denominated in any currency, including the currency of countries non- members of the EMU, as well as precious metals. The same operations can be implemented by National central banks guided by the general principles developed by the ECB.

ECB Charter provides for significant decentralization of activities of the European System of Central Banks so that this kind of operations such as repurchase agreements and foreign exchange interventions are carried out independently by the National central banks. Each of them can also independently determine which assets of commercial banks acceptable as collateral.

The European Central Bank and National central banks shall not be entitled to credit financing (in any form) of transnational (in the UES system), national, regional and local authorities and organizations operating on the basis of state law. However this does not apply to state-owned credit institutions which in this case are considered the same as private credit institutions.

The ECB and the NCBs may establish relations with central banks and financial institutions in other countries and international organizations and conduct with them all kinds of banking activities using all financial assets and currencies [4].

Few years ago a world famous economist Milton Friedman, Nobel prize winner pointed out the seriousness of the problem of interaction between national banks and the new central bank during the change-over to a single EU currency. According to him, the implementation of monetary union is not possible without the elimination of the national banks of France, Germany, Italy and other members. In the case of control by the European Central Bank through a committee of representatives of national banks various countries will inevitably defend its national interests, Friedman says.

However this kind of hypothesis contradicts the aim of creating the European Economic and Monetary Union. If the European Central Bank will become only the coordinating center of the EMU countries’ national banks without having the real financial gearing it can bear the full responsibility for monetary policy and foreign exchange market transactions as it is provided by the Treaty of Maastricht.

With clear and consistent supra-national character of the European Central Bank certain functions and field of activity are reserved to the National central banks of individual countries. We can assume that over time the balance in the ratio of the powers of supranational and national governing bodies of the European System of Central Banks will gradually shift towards the former.

List of references:

1. The European Central Bank pays its currency. Kommersant Daily, 17.11.2013.

2. Yu. Konstantinov. European Monetary Union: consequences for the CIS countries. Bank, No.13, 2007.

3. O. Cherkovets. European Union: Integration lessons, Economist, No.10, 2014.

4. V.V. Shmelev Market of Eurocurrencies and its financial tools. Money and credit, No.1, 2013.