Introduction to Finance

European Central Bank (ECB)
conducts monetary policy for the European coun-
tries that belong to the European Monetary Union and also have adopted the euro as their com-
mon currency. Eleven European countries joined in 1999 and Greece was admitted in 2001. 
Euro notes and coins were offi
cially introduced at the beginning of 2002, and all 12 individual 
national currencies were withdrawn as legal tender by July 1, 2002. The number of “eurozone” 
members has recently increased to 19 countries. The ECB, which is headquartered in Frank-
furt, Germany, is responsible for controlling infl ation and for managing the value of the euro 
relative to other currencies. The ECB structure is somewhat similar to the U.S. Fed’s in that 
the national central banks of the euro countries operate much like the 12 Federal Reserve 
District Banks. Like the Fed BOG, the governing council of the ECB includes governors from 
some of the national central banks. Each national central bank is responsible for managing 
payment systems and furnishing currency and credit in its home country.
LEARNING ACTIVITY
Go to the European Central Bank’s website, http://www.ecb.int, and fi nd information on 
how that bank is structured and how it operates.
European Central Bank (ECB) 
conducts monetary policy for the 
European countries that adopted the 
euro as their common currency
Applying Finance To...
• Institutions and Markets 
Depository institutions, commercial 
banks, S&Ls, savings banks, and credit unions comprise the banking sys-
tem. The Fed is the U.S. central bank, which supervises and regulates 
the banking system. The Fed, along with depository institutions, cre-
ates and transfers money. Monetary policy actions of the Fed aff ect the 
primary fi nancial markets for debt obligations, infl uencing the availabil-
ity of bank loans and the interest rates that must be paid on those loans. 
• Investments 
Securities markets, both primary and secondary, are 
also aff ected by Fed actions. An increase in reserve requirements will 
restrict the amount of individual savings that would be available to make 
loans. Other Fed actions may cause banks to raise loan interest rates, and 
cause the economy to slow down and security prices to decline. When 
the Fed raises the discount rate, banks react to protect their profi t mar-
gins by raising their lending rates to individuals and businesses.