Explained: The European Central Bank (ECB)

The European Central Bank (ECB) is an institution of the European Union. Its seat is in Frankfurt am Main. It was first created in 1998 as a central bank for the eurozone (i.e. the countries of the European Union that use the euro as their currency). The ECB’s primary function was to cooperate with the national central banks of the Member States. This cooperation is known as the European System of Central Banks (ESCB). The ESCB’s objective is to maintain price stability in the eurozone. The tasks of ESCB are (i) to define and implement the monetary policy of the Union, (ii) to conduct foreign-exchange operations, (iii) to hold and manage the official foreign reserves of the Member States, and (iv) to promote the smooth operation of payment systems.

In 2013, the ECB was conferred with additional specific tasks concerning policies relating to the prudential supervision of credit institutions in the eurozone as part of the Single Supervisory Mechanism (SSM). The ECB now directly supervises the largest and most significant banks in Europe to ensure their safety and soundness. The ‘significance’ of a bank is determined by its size, its importance for the economy, and the significance of its cross-border activities. The other banks (the so-called less significant institutions) are subject to indirect supervision by the ECB. In this case the ECB is the supervisor of the supervisor (the so-called National Competent Authority, i.e. the prudential supervisory authority of the relevant Member State). The national regulator is responsible for the day-to-day supervision. Certain important decisions are merely prepared by the national authorities but ultimately adopted by the ECB also in the case of less significant institutions.

The tasks conferred on the ECB include the power to authorise credit institutions and to withdraw authorizations of credit institutions, to assess notifications of the acquisition and disposal of qualifying holdings in credit institutions, to ensure compliance with prudential requirements, to ensure compliance as regards governance arrangements, risk management processes, and internal control mechanisms, as well as to carry out supervisory tasks in relation to recovery plans and early intervention measures.

A competence not conferred on the ECB, however, is the issue of money laundering and countering terrorist financing, which remains the prerogative of national authorities as well as of the new Anti-Money Laundering Authority, a Union body that was established in 2024.