ASSIGNMENT

ON
Course Title : Comparative Banking
Course Code : BIN-206
TOPIC : Chapter- 5 & 6
Bank of Japan & UK Banking System

Submitted To:
Md. Rakibul Islam Nirob
Assistant Professor
Dept. of Banking & Insurance
University of Rajshahi

Submitted By:
Group-6
Team Leader & All Members

1
 Ruksat Zahan
ID:2012437151
Md. Kawsar Hossain
ID:2010737153
Md. Abdullah Al Mamun
ID:2010137154
Prosanjit Kormokar
ID:2011037155
Md. Faysal Ahmed
ID:2010337156
Tabain Hossain
ID:2010537158
Maisa Basar
ID:2012337159
Roudra Sarker
ID:2010637160
Ashek Mahmud Dhrubo
ID:1810437136
Md. Kamrul Hasan
ID:1810837145

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 Bank of Japan (BOJ)
Question(1): Broadly discuss the evolution/ history of the Bank of Japan.
Answer: The Bank of Japan was established under the Bank of Japan
Act(promulgated in June 1882) and began operating on October 10,1882, as the
nation`s central bank. The Bank was reorganized on May 1,1942), promulgated in
February 1942. The Act of 1942 strongly reflected the wartime situation: stated the
objectives of the Bank as “the regulation of the currency, control and facilitation of
credit and finance, and the maintenance and fostering of the credit system,
pursuant to national policy, in order that the general economic activities of the
nation might adequately be enhanced.” The Act of 1942 was amended several
times after World War II. Such amended included the establishment of the policy
Board as the Bank`s highest decision-making body in June 1949. The Act of 1942
was received completely in June 1997 under the two principles of “independence”
and “transparency”. The revised act (the Act) came into effect on April 1 ,1998.

Question(2): Describe the objective of Bank of Japan.

Answer: The Bank of Japan is the central bank of Japan. It is a juridical person
established based on the Bank of Japan Act (hereafter the act), and is not a
government agency or a private corporation.
Objectives
The Act sets the Bank`s objectives
i)”to issue banknotes and to carry out currency and monetary control” and
ii)” currency to ensure smooth settlement of funds among banks and other financial
institutions, thereby contributing to the maintenance of stability of the financial
system.”
The Act also stipulates the Bank`s principle and monetary control as follows:

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“currency and monetary control by the Bank of Japan shall be aimed at achieving
price stability, thereby contributing to sound development of the national
economy.”
The Bank has also decided and made public its organizational principles, which
constitute the set of fundamental values to be respected by the Bank, as the central
bank of Japan. The officers and employees of the Bank must respect these
principles at all times in the conduct of business operations.

Question(3): Discuss functions of the Bank of Japan.

Answer:
1) The Bank in the daily lives of the people
The Bank currently issues Bank of Japan notes (hereafter, ”banknotes”) in four
denominations-10000 yen, 5000 yen, 2000 yen, and 1000 yen-and issues coins of
500 Yen Bicolor Clad Coin, 500 Yen Nickel-Brass Coin, 100, 50 ,10 ,5 and 1 Yen Coin.
Other services include ensuring the smooth receipt and payment of the
government`s funds (treasury funds), such as the payment of public pensions and
collection of national taxes.
2) The Bank`s operations as “a bank”
The Bank does not accept deposits from individuals or firms, but accepts deposits
from financial institutions that hold current accounts at the Bank (hereafter, “BOJ
account deposits. The Bank also conducts funds transfers related to lending, sales,
and purchases of bonds with counterparty financial institutions. In these respects,
the nature of the Bank`s banking operations is not very different from that of
private financial institutions` operations.
3) Issuing central bank money
Banknotes and BOJ account deposits are together referred to as central bank
money. Central bank money and coins are safe forms of money, with no change of
default, and they are important in daily payment and settlement. Transactions
between financial institutions, without any customer request, are also often settled
by the transfer of funds between BOJ account deposits.

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4) The central bank as the guardian of money
There are two conditions necessary to achieve public confidence in money. First,
the value of money must be stable. As for the stability of its value, there is stability
in terms of the internal value (price stability) and the external value (stability of the
foreign exchange rate). Second, arrangements for payment and settlement
(payment and settlement systems), including the circulation of money, and the
financial system must function smoothly and stably). If people are anxious about
the financial soundness of financial institutions at which they hold their accounts,
and suspect that the smooth conduct of payment and settlement may be disrupted,
the function of payment and settlement through deposit money may deteriorate.
In such a case, economic transactions may become stagnant. In an extreme case,
people may begin to use foreign money, instead of their own country`s money, to
make payments, and may even resort to barter transactions.

Question(4): Write on outline of the Bank of Japan`s Business Operations.

Answer: The following outlines the daily business operations of the Bank in four
categories :
1)Provision of cash, and of payment and settlement services;
2)Conduct of monetary policy;
3)Ensuring of financial system stability; and
4)Provision of government-related services.
1) Provision of cash, and of payment and settlement services
The Bank ensure smooth circulation of banknotes nationwide, while working to
manage the quality of banknotes and to prevent the use of counterfeit banknotes
in order maintain their cleanliness and safety. The Bank provides various payment
and settlement services for financial institutions using their BOJ account deposits.
Market operations- the Bank`s operational instruments for monetary policy and the
lender-of-last-resort provision of funds are examples of such transactions between
the Bank and financial institutional, and are settled through BOJ account deposits.
The Bank also provides settlement services related to Japanese government

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securities (JGSs) through the operation of the Japanese Government Bond (JGB)
Book-Entry System. The Bank introduced online delivery-versus-payment (DVP)
processing via a computer network (the Bank of Japan Financial Network system
[BOJ-NET] in order to facilitate smooth and efficient provision of payment and
settlement services through BOJ account deposits, and such services related to
JGSs. Moreover, the Bank accepts deposits from other central banks and
international organizations, and extends credit to them when necessary.
2)Conduct of monetary policy
Bank endeavors to conduct appropriate monetary policy in order to maintain in
medium-to-long-term price stability. An explanation of how monetary policy
contributes to price stability and the sound development of the national economy
is given below. At Monetary Policy Meetings (MPMs), held once or twice a month,
the Bank discusses and makes decisions regarding monetary policy, including the
guidelines for money market operations. The Bank of Japan Act requires
accountability as a counterpart to the autonomy of the Bank in monetary policy. In
addition, in order to accurately understand the economic and financial situation in
Japan, it is necessary to consider the economic and financial situation abroad, as
well as development in global markets. In this aspect, the Bank maintains a close
cooperative relationship with other central banks and international organizations,
such as through exchanges of information and opinions related to research and
studies.
3) Ensuring financial system stability
Financial system stability refers to the situation in which people can lend/borrow
or accept/pay money with confidence. To maintain this situation, it is the key
premise that financial institutions are appropriately manage the risks related
functions and soundly conduct their business. In order to ensure and strengthen
financial system stability, the Bank endeavors to identify actual business conditions
of financial institutions by conducting on-site examination and business activities if
necessary.
4) Provision of government-related services
I. As part of its banking services, the Bank accepts deposits from the
government and provides various services related to the payment and

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 receipt of the government`s money (treasury fund services), such as the
receipt of national taxes and payment for public works and pensions. The
Bank also provides services related to the issuance and settlement of JGSs.
The Bank also intervene in the foreign exchange market, as the agent of the
Japanese government.

Question(5): Briefly discuss types of Banks in Japan.

Answer: Japanese banking system has various types of banks:
1) City Bank
2) Trust Bank
3) Regional Bank
4) Tier 2 Regional Bank
5) Shinkin Bank
6) Credit Cooperatives Banks.
City Bank : City banks are nationwide institutions that provide comprehensive
banking services mainly to large corporate customers. These banks dominate most
segment of the domestic market, and are active internationally.
Trust Bank : These are licensed to carry both banking and trust activities. They focus
on activities in the real estate market as well as providing asset and wealth
management services to customers.
Regional Bank : These are medium sized institutions whose activities have a
regional focus. They are to local firms and households are strong with the bulk of
their lending going to small and medium sizes enterprises.
Tier-2 Regional Bank : This is the second association at regional banks. It was
initially established as mutual bank. But transformed into regional bank under the
1992 Banking act. Smaller than Regional Bank. Continued in their respective area.
Shinkin Banks or Credit associations : These are smaller than city and regional bank
and conduct their business operations within their respective local area. Provide
SME loans.

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Credit Cooperative : These are usually deposit taking cooperative banks that
specialize in SME financing. They can accept deposit and installment saving from
numbers. Firm also from local goat.

Question(6): Comparison between BOJ & BB.

Answer: Both Bangladesh Bank and Bank of Japan conduct their operations as
regular central bank. Those operations are formulating and implement monetary
policy, formulate and implement policies of foreign exchange market, work as an
advisor of the government, hold and manage foreign reserves, supervising banking
companies and financial firms, ensure secure and efficient payment system. But
Bank of Japan is a slight different from Bangladesh Bank in the aspect of deposits
from individual and firms. Bangladesh Bank doesn't accept deposits from individual
and firms but Bank of Japan accept deposits from individual and firms through
financial institutions as current deposits.
Financial institutions conduct fund transfer with other financial institutions via BOJ
account deposits. But Bangladesh Bank doesn't provide these kinds of account
services to financial institutions.
These are essential difference between BB and BOJ that is noteble.

Question(7): Give the chart Transmission Mechanism of Monetary Policy.

Answer

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Question(8): Write short notes :
I. CCP (central counterparty)
II. DVP (delivery versus payment)
III. SPDC (simultaneous processing of DVP and collateralization)
IV. PVP (payment versus payment)
V. RTGS (real-time gross settlement)
VI. STP (straight-through processing)
Answer:
CCP (central counterparty): A CCP is the entity that clears transactions, such as the
sale and purchase of securities contracted among many relevant counterparties.
The clearing is conducted by replacing rights and obligations between the seller and
the buyer with those between the seller and the central counterparty, and those
between the central counterparty and the buyer.
DVP (delivery versus payment): DVP is a link between a securities transfer system
and a funds transfer system that ensures that delivery occurs if, and only if,
payment occurs. It prevents the risk of payment for a transaction not being
conducted even though the JGSs are delivered, and vice versa.

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SPDC (simultaneous processing of DVP and collateralization) function: The SPDC
function enables financial institutions that purchase JGSs to receive intraday
overdrafts from the Bank by using the JGSs that the institutions receive from the
seller as collateral, and then to use the funds to pay for such JGSs. This function is
used to reduce the volume of liquidity necessary for settlement, and to conduct
smooth JGSs settlement on a DVP basis.
PVP (payment versus payment): In PVP, by placing certain conditions on the
transfer of both currencies to be settled, the transfer of one currency only occurs
if the transfer of the counterparty currency takes place. It eliminates a risk, for
example, of one party not being able to receive dollars even though it paid yen.
RTGS (real-time gross settlement): The RTGS system is a low systemic risk
settlement method in which, because each settlement is processed individually on
a real-time basis, the direct influence of failure of one settlement is limited only to
the counterparty. The concept paired with RTGS Is deferred net settlement.
STP (Straight-through processing): STP realizes seamless automated processing of
the ordering, execution, matching, clearing, and settlement of financial
transactions, such as securities transactions and foreign exchange transactions. STP
is facilitated by connecting business operation systems, using standardized
message formats.

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 UK Banking System
Question(1): Broadly discuss the evolution/history of UK banking system.
Answer: The banking system in the United Kingdom is regarded as the largest in
Europe. It is considered to be the fourth largest in the world. Banking in the UK is
highly developed with new sector driven by cutting edge technology and
innovation. It is also considered the largest financial center globally for crossing
border lending with a staggering 40 billion payments made in 2017 alone, the UK
banking sector has a deep banking penetration across the country. Banks in the
United Kingdom can be demonstrated by the fact that nearly the entire population
of the UK has a debit card and two third of the population is said to have a credit
card.
In England, bank notes were introduced in 1661. The currency was quickly followed
by the establishment of the Bank of England in 1694. This was the first of the central
banks and is still the banker for the English government. The BOE was originally
privately owned but was nationalized in 1946 and eventually became an
independent organization in 1998. The BOE issues all banknotes for England and
Wales and it is responsible for regulating bank notes issued by Scottish and
Northern Irish banks. As the forerunner to the modern banking system of the UK,
the BOE manages monetary policy and has its headquarters in the City of London.
Known sometimes as the ‘Old Lady of Thread needle Street’ the bank has become
a watchword for reliability and solvency. The phrase ‘safe as the Bank of England’
is still often quoted to describe solid and safe investments.
When banks first started issuing banknotes, the writing on the note was ‘promised
to pay the bearer the sum of ……. on demand’. Banks were deemed to be safe, and
to have enough in gold reserves to cover all the bank notes that were issued. In
practice this could never have come to pass, but fortunately not everyone wanted
their money at the same time. There were small commercial banks that issued their
own banknotes. However, as these were merged, the private bank notes eventually
disappeared and all currency was issued by the Bank of England. The only
exceptions were banks in Scotland and Northern Ireland. Even today, these two
countries issue their own notes. The Bank of England keeps safe all the gold
reserves of the UK and that of some other countries. It is the largest protector of
gold reserves in the world.
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Modern Banking
Banking in the UK as we know it today evolved after World War 1 when there were
a series of takeovers of private banks that resulted in the ‘Big Five’. These were
Barclay’s, Lloyd’s, the Midland (now HSBC), the National and Provincial and the
Westminster. In addition, there were local building societies and mutual savings
banks that were being started. This was to help ordinary people save money to pay
for a home of their own. During the 1960’s, the Big Five became the Big Four by
reason of mergers and takeovers of several regional banks like Martins and William
Deacons. The government introduced the National Giro-bank and eventually the
Post Office Savings Bank. All of these organizations were used for saving money and
some of them issued big and small loans.
Bank managers during this period were held in high regard and if you wanted to
borrow money or sometimes just open a bank account you had to be interviewed
by the manager. Many banks demanded references before an account could be
opened. In addition, you had to prove you were creditworthy just to get a
chequebook. Clearing cheques was a long winded process but this sped up with the
introduction of MICR (magnetic ink character recognition) which is used for all
cheques around the world. Domestic banking grew swiftly after the Second World
War, and there were different types of bank accounts available. These included
personal accounts, business accounts, current accounts (with a cheque book),
deposit accounts and savings account.

Question(2): Discuss Objective of UK Banking.

Answer : The primary objects or objectives of banking in the United Kingdom (UK)
generally revolve around providing financial services, facilitating economic growth,
and ensuring stability within the banking system. The specific objectives can vary
between different types of banks and financial institutions, but here are some
common objectives:
Provision of Banking Services: Banks in the UK aim to offer a wide range of financial
services to individuals, businesses, and other entities. These services typically
include deposit accounts, loans, mortgages, credit cards, foreign exchange,
investment products, and payment services.

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Financial Intermediation: Banks play a crucial role as intermediaries between
savers and borrowers. They gather deposits from individuals and businesses and
channel these funds to borrowers in the form of loans and credit. This process
supports economic growth by facilitating investment, entrepreneurship, and
consumption.
Risk Management: Banks in the UK are responsible for managing various financial
risks, including credit risk, liquidity risk, and operational risk. They employ risk
management practices to assess and mitigate these risks, ensuring the stability and
integrity of the banking system.
Customer Protection: Banks have a duty to safeguard the interests of their
customers. They are expected to maintain high standards of customer service,
protect customer deposits through deposit insurance schemes, provide secure
online banking, and comply with regulations related to consumer protection and
data privacy.
Compliance with Regulatory Frameworks: UK banks are subject to a
comprehensive regulatory framework established by regulatory bodies such as the
Bank of England, the Financial Conduct Authority (FCA), and the Prudential
Regulation Authority (PRA). Compliance with these regulations, including capital
adequacy requirements and anti-money laundering measures, is essential to
maintain the stability and trust in the banking system.
Financial Inclusion: UK banks strive to promote financial inclusion by ensuring that
individuals and businesses, irrespective of their background or financial status,
have access to basic banking services. This includes offering basic bank accounts,
facilitating affordable loans, and promoting financial education and literacy.
Profitability and Shareholder Value: While serving the interests of their customers
and the economy, banks also aim to generate profits and maximize shareholder
value. Profitability enables banks to invest in technology, infrastructure, and
innovation, ensuring their long-term viability and competitiveness.
It's important to note that the specific objectives and priorities of individual banks
may vary, as they can have different strategies, target markets, and business
models.

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Question(3): Discuss Functions of UK Banking.
Answer: The Bank of England’s primary functions are to maintain monetary stability
and oversee financial stability of the UK financial system. The bank also acts as the
lender of last resort and as the custodian of the official gold reserves in the United
Kingdom.
Monetary Stability: Monetary stability relates to maintaining stable prices and
confidence in the currency. The BoE has been tasked with the responsibility to issue
bank notes in the United Kingdom for over 300 years now. Also, as the central bank
of the UK, the Bank of England is responsible for maintaining confidence that the
currency in circulation is genuine.
The bank has delegated the role of formulating monetary policy to the Monetary
Policy Committee (MPC), a nine-member committee led by the Governor. Other
members include three deputy governors, the BoE’s chief economist, and four
members appointed by the Chancellor of the Exchequer. The MPC meets regularly
to discuss the need to alter the interest rate policy to achieve the inflation target.
It also monitors developments in the economy.
Financial Stability: Financial stability involves monitoring the financial system so
that there is confidence in the financial institutions, markets, and the overall
financial system. It also entails protecting the financial system against threats by
detecting them through surveillance and market intelligence functions, as well as
finding solutions when problems arise. Threats to the financial system include
bribery, corruption, counterfeiting, and money laundering.
The Financial Services Act of 2012 established two institutions to deal with financial
stability, i.e., the Financial Policy Committee (FPC) and the Prudent Regulation
Authority (PRA). The role of the FPC is to identify, monitor, and take action against
risks that threaten the resilience of the UK financial system. The PRA regulates
commercial banks, building societies, credit unions, insurers, and investment firms
in the UK.
Official Gold Reserves Custodian: The Bank of England acts as the official gold
reserves custodian for the UK and other countries. It is estimated that the bank
holds approximately 3% of all the gold mined in the history of the world. As of April
2014, the bank had nearly 400,000 gold bullion bars, valued at £142 billion.

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Lender of Last Resort: As the central bank of the UK, the Bank of England acts as a
lender of last resort for commercial banks that suffer a cash shortfall. This role helps
maintain liquidity and confidence in the financial system. In a famous example,
when Northern Rock Bank in the UK suffered severe financial hardships, it had to
borrow funds from the BoE.

Question(4): What are types of bank in UK ( briefly discuss )

Answer : The United Kingdom has several types of banks, including:
Retail Banks: These banks serve individual customers and provide services such as
savings and current accounts, loans, mortgages, and credit cards. Examples of retail
banks in the UK include Barclays, HSBC, Lloyds Banking Group (which includes
Lloyds Bank and Halifax), NatWest (part of the Royal Bank of Scotland Group), and
Santander UK.
Investment Banks: Investment banks provide services related to capital markets,
corporate finance, and investment management. They assist companies in raising
capital, underwriting securities, and offering advisory services. Some prominent
investment banks in the UK include Goldman Sachs, J.P. Morgan, Morgan Stanley,
and Deutsche Bank.
Challenger Banks: These are relatively new, digital-first banks that aim to offer
innovative and customer-centric banking solutions. They often operate solely
online or through mobile apps, providing a user-friendly and technologically
advanced banking experience. Examples of challenger banks in the UK include
Monzo, Starling Bank, and Revolut.
Building Societies: Building societies are financial institutions that focus on
providing mortgages and other financial services primarily to their members. They
are owned by their members and operate for their mutual benefit. Some well-
known building societies in the UK include Nationwide Building Society, Yorkshire
Building Society, and Coventry Building Society.
Private Banks: Private banks cater to high-net-worth individuals and offer
personalized and exclusive banking services. They provide services like wealth

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management, investment advice, and estate planning. Some prominent private
banks in the UK include Coutts & Co., Adam & Company, and C. Hoare & Co.
Central Bank: The Bank of England serves as the central bank of the United
Kingdom. Its primary responsibilities include setting monetary policy, issuing
currency, maintaining financial stability, and supervising banks and financial
institutions.
These are some of the main types of banks you can find in the United Kingdom. It's
worth noting that some banks may offer a combination of services and operate
across different sectors.

Question(5): Discuss the highlight of England banking system.

Answer:
Small number of large banks : One of the most important striking features of the
England commercial banking system is the small number of large banks with a
network of branches both at home and abroad. This is in sharp contrast to the
American commercial banking system where we can see a number of unit banks
with no branches at all, or at best, a very small number of branches operating in a
strictly limited area. Among these large banks, the London clearing banks deserve
special mention.
London bankers` clearing house : The London Bankers` Clearing House provides a
simple but effective way of dealing with the clearing of cheques. Each day, the head
office or the chief London office of each clearing bank sends to the Clearing House
cheques drawn on other banks which have been paid by customers at their
branches. The London Clearing House is divided into two parts, one dealing with
cheques drawn on ‘town’ branches and the other dealing with cheques drawn on
‘general’ branches. There are, of course, a number of banks in London which are
not members of the Clearing House. Cheques drawn on these banks are honoured
by direct presentation; these are known as ‘walk’ cheques.
Money transmission services : The role of the clearing banks providing money
transmission services is highly noteworthy. Virtually the entire transmission
services depend on the clearing banks, which also handle most non-cash payment.

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A distribution network exists to move bank notes from the Bank of England to and
from bank branches. After cash, the most important means of payment are
cheques. The Bankers’ Automated Clearing Services Ltd. Is handling most of the
credit clearing electronically. Among the money transmission and settlement of
debt services, credit transfer system called the ‘bank giro’ deserves special
mention.
International banking: The large network of overseas branches and
correspondents of English commercial banks is a peculiar feature which is not as
predominant in the case of any others country’s banking system. As a natural
corollary, these banks help a lot in the export trade of the country by providing the
necessary export trade of the country by providing the necessary export finance to
their constituents. They also collect information as to the integrity and
creditworthiness of the various parties engaged in foreign trade. The large network
of their branches and correspondents’ facilities the collection of this information.
A noteworthy features of the English commercial banks in this connection is that
they specialize in particular regions so as to avoid unhealthy competition among
themselves.
Merchant banking: Simultaneously with the extension of their activities overseas
by taking interest in international banking, the banks entered upon merchant
banking activities also. The growth and development of inter-bank and certificate
of deposit market in the late 1960s gave added momentum to these activities of
the part of banks. Originally there were certain hurdles against the banks operating
in these markets in their own names because of official liquidity controls.
Consumer Credit: The banks’ dealings in consumer credit have become more
pronounced since the late 1950s, when they began to take shareholding in finance
houses as a convenient means of participating in the growing market for
installment credit, which for a variety of reasons they were not well placed to enter
directly.
Sophisticated management techniques: The growing sophistication in company
management had its own impact in the English banking system also, which have
kept fully abreast of the developments. To meet the needs of the increased and
more diversified business, the banks have established formalized strategic planning

17
systems, embracing the direction of future business and the allocation of capital
and personal resources.

Question(6): Different types of rules and regulations regarding UK Banking-give

answer.
Answer: The rules and regulations regarding UK banking are primarily overseen by
several regulatory bodies and laws. Here are some key aspects:
1.Bank of England: The Bank of England is the central bank of the UK and is
responsible for monetary policy, financial stability, and the overall regulation of the
banking system. It sets interest rates, manages currency and reserves, and oversees
payment systems.
2.Prudential Regulation Authority (PRA) and Financial Conduct Authority (FCA):
The PRA and FCA are the main regulatory bodies for banking in the UK. They
regulate and supervise banks to ensure their stability, soundness, and compliance
with applicable rules. The PRA focuses on prudential regulation, including capital
requirements and risk management, while the FCA focuses on conduct regulation,
consumer protection, and market integrity.
3.Open Banking: Open Banking is a set of regulations that promote competition
and innovation in the banking sector.
4.Banking Act 2009: This legislation grants the UK government powers to stabilize
and support banks in times of financial crisis.

Question(7): What are the top 10 banks in the UK?

Answer: 1)HSBC Holding
2)Lloyds Banking Group
3)Royal Bank of Scotland Group
4)Barclays
5)Standard Charted

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 6)Santander UK
7)Nationwide Building Society
8)Schroders
9)Close Brothers Group plc
10)Conventry Building Society

Question(8): What is European system Central Bank and how does it differ from
conventional central bank ?
Answer: The European System of Central Banks (ESCB) is the central banking
system of the European Union (EU). It was established in 1998 by the
Maastricht Treaty and comprises the European Central Bank (ECB) and the
national central banks (NCBs) of the 27 EU member states.

The ESCB's primary objective is to maintain price stability in the euro area. It
does this by setting monetary policy and using a variety of tools, such as open
market operations and reserve requirements. The ESCB also plays a role in
promoting financial stability and ensuring the smooth functioning of the
payments system.

The ESCB differs from conventional central banks in a number of ways. First, it
is a supranational institution, which means that it is not subject to the control
of any individual EU member state. Second, the ESCB's monetary policy is
focused on the euro area as a whole, rather than on individual member states.
Third, the ESCB has a number of specific responsibilities, such as managing the
euro and issuing banknotes.

Here is a table that summarizes the key differences between the ESCB and
conventional central banks:

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 Feature ESCB Conventional
central bank

Legal status Supranational National institution

institution

Monetary policy Euro area Individual member

focus state

Specific Managing the euro, Setting monetary

responsibilities issuing banknotes, policy, regulating
promoting financial banks
stability

The ESCB is a unique institution that plays an important role in the European
economy. It is responsible for maintaining price stability in the euro area and
promoting financial stability. The ESCB's supranational status and its focus on
the euro area as a whole make it different from conventional central banks.

Question(9): Why controlling inflation is the major goal of European

central bank?

Answer : The European Central Bank (ECB) can use its policies to control
inflation, how much money is in circulation, and also how much money "costs",
in other words: interest rates. To keep inflation under control, central banks
supervise, regulate and intervene in the process of money creation, to ensure
there is enough money in the system to help the economy, but not too much
either.

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Monetary policy is very important. Citizens benefit greatly from a reliable,
stable currency that maintains its value. They must be confident that the euros
in their wallets and bank accounts will allow them to do their grocery shopping
tomorrow, and also in five years. Ensuring that price stability is the ECB's job.

The price stability sought by the ECB's monetary policy includes a 2% inflation
rate across all euro countries combined. This is because Europe’s economy
works best when prices are stable.

Inflation that is too low, with prices barely rising over time, is just as undesirable
as inflation that is too high, with large price increases.
Scholarly research and practice have shown that 2% inflation works best Europe’s
economy.
It is OK for inflation to be temporarily below or above the 2% target. After all, in
monitoring price developments the ECB looks at the medium term. Indeed, in the
short term, deviations from the inflation target are inevitable, for instance due to
events that impact the economy.
Moreover, companies and households does not respond immediately to changes in
monetary policy.
In addition, the medium-term focus provides room for maneuvers to consider the
cause of deviations and possible side effects of monetary measures.
Until 2022, inflation was below the 2% target. The aftermath of the COVID-19
lockdowns and the Russian war in Ukraine have pushed up prices significantly
since then. Inflation has run up far too high, which is why the ECB is intervening
by taking monetary measures.
The ECB has no direct influence on rising and falling prices, but it can use its
monetary policy to exert indirect influence on inflation. To support its monetary
policy, the ECB has a well-assorted toolbox. While each of these policy tools is
effective in its own way, together they reinforce each other's impact. The ECB
always considers possible side effects.
The reason that controlling inflation is the major goal of European Central Bank
are:

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 1. Price Stability : ECB keep prices stable by making sure that inflation – the
rate at which the overall prices for goods and services change over time –
remains low, stable and predictable. We are targeting an inflation rate of 2%
over the medium term. Our commitment to this target is symmetric: we view
inflation that is too low just as negatively as inflation that is too high.
2. To Assess the Euro Area Economy : Inflation indicates the current
condition of economy whether the economy is in recission or boom. Such as,
The indication for the fourth quarter of 2022 is that we are perhaps in
negative territory, but not very deep, with GDP expected to contract by
0.2%. The lead indicators we have are not good. ECB projections therefore
expect the euro area to fall into a mild recession in the last quarter of this
year and in the first quarter of 2023, when GDP is expected to contract by
0.1%
3. To Control Interest Rates : Inflation and interest rates tend to move in the
same direction, because interest rates are the primary tool used by European
Central Bank to manage inflation. Higher interest rates are generally a policy
response to rising inflation. Conversely, when inflation is falling and
economic growth slowing, central banks may lower interest rates to
stimulate the economy.
The European Central Bank (ECB) announced a 0.25% raise on 5 May,2023 ,
bringing the eurozone's key interest rate to 3.75% in a bid to curb inflation. The
latest announcement slows the pace of rate hikes after the ECB had raised the key
interest rate by 0.5% at its previous three opportunities.
Increasing interest rates is seen as a tool to combat inflation because it discourages
borrowing and therefore spending.
4. To Control Purchasing Power : High inflation is eroding the purchasing
power of individuals and families. As of August 2022, inflation has reached
or approached double-digit levels in the European Union (10.1%) and the
Euro area (9.1%), and surpassed 20% in several Baltic and Eastern European
Member States. As current inflation is driven mainly by soaring food and
energy prices, households in less wealthy EU countries or with low income
are impacted more strongly, due to higher relative spending on such
essential items.
A study confirms that the adverse social effects of inflation are significantly larger
in many Central and Eastern European Member States, especially among

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disadvantaged and vulnerable groups. Low-income households in these countries
may devote twice as high a share of their total budget to food and energy than their
high-income peers or wealthier households in other Member States. Consequently,
the increase in European households’ living cost as a result of inflation between
August 2021 and August 2022 was very uneven, and ranged between 7% and 30%
across different countries and income segments. Poorer households are at a double
disadvantage, which is deepening existing social gaps and inequalities across the
EU.
5. Controlling Underlying Inflation
Headline inflation continues to decline, but underlying inflation (excluding energy
and food) will remain persistent and uncomfortably above central bank targets
even by the end of next year. Recent and projected declines in energy prices will
feed into lower underlying inflation, but not enough to bring it down quickly.
This projection assumes that everything falls into place. The European Central
Bank and other monetary authorities will succeed in steadily bringing down
inflation. Any renewed bouts of financial stress will remain contained. There will
be no further escalation of Russia’s war in Ukraine and associated sanctions,
keeping energy prices in check. Broader geo-economics fragmentation, another
growth-reducing and inflation-increasing “stagflationary” risk, will also be kept at
bay. Yet things could get worse on all fronts—with growth, inflation, and financial
stability risks all complicating policy choices.
6. Inflation Risk : Take inflation, which could stay higher for longer. Energy
prices could spike again. Wage growth could pick up more than projected as
workers obtain greater compensation for recent purchasing power losses in
tight labor markets.
In turn, faster wage gains would make underlying inflation more persistent—a
material risk across much of Emerging European economies, where nominal wage
growth is in double digits. We also might still underestimate how much the two
back-to-back COVID and energy crises have damaged Europe’s productive
capacity and further heightened inflation risks.
While companies have found ways to improve energy efficiency in the past year,
persistently higher energy prices will reduce euro area output by more than 1
percent on average in the medium term, with larger losses in more energy-intensive
economies such as Germany or Italy.

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 7. To Monitor the Financial Stability
Financial stability conditions have deteriorated because of lower growth, higher
inflation and the tightening of financial conditions. ECB is concerned that markets
could underestimate the persistence of inflation. Euro area inflation has decreased
from 10.6% to 10.1%, but that is not enough Finally, banks have a solid capital
position and can withstand a shock. But ECB have a lot more doubts about non-
banks, notably hedge funds. Their level of leverage is huge, they have highly
illiquid assets and they have been accumulating risky assets. So, an abrupt increase
in rates could cause problems.
Finally for all of those reason it is the main reason of controlling inflation by
European Central Bank. To make the monetary policy, interest rate and financial
stability stable as well to make the country shock resistant from any upcoming
recession it is import to control inflation.

Prepared By:
All Members of Group-6

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