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Report on European Central Bank and International Monetary Fund Sources and Lending


Prepared by: Pir Muhammad Ali Shah EMBA (Public Sector - 5) Assignment Advance Corporate Finance

International Monetary Fund (IMF) ________________

The IMF, also known as the Fund, was conceived at a United Nations conference convened in Bretton Woods, New Hampshire, United States, in July 1944. The 44 governments represented at that conference sought to build a framework for economic cooperation that would avoid a repetition of the vicious circle of competitive devaluations that had contributed to the Great Depression of the 1930s. The IMFs responsibilities: The IMF's primary purpose is to ensure the stability of the international monetary systemthe system of exchange rates and international payments that enables countries (and their citizens) to transact with one other. This system is essential for promoting sustainable economic growth, increasing living standards, and reducing poverty. IMF financing provides member countries the breathing room they need to correct balance of payments problems. A policy program supported by IMF financing is designed by the national authorities in close cooperation with the IMF, and continued financial support is conditioned on effective implementation of this program. In an early response to the recent global economic crisis, the IMF strengthened its lending capacity and approved a major overhaul of the mechanisms for providing financial support in April 2009, with further reforms adopted in August 2010. In the most recent reforms, IMF lending instruments were improved further to provide flexible crisis prevention tools to a broad range of members with sound fundamentals, policies, and institutional policy frameworks. In low-income countries, the IMF doubled loan access limits and is boosting its lending to the worlds poorer countries, with interest rates set at zero through end-2011. Special Drawing Rights (SDRs): The IMF issues an international reserve asset known as Special Drawing Rights (SDRs) that can supplement the official reserves of member countries. Two

Fast Facts on the IMF

Membership: 187 countries Headquarters: Washington, D.C. Executive Board: 24 Directors representing countries or groups of countries Staff: Approximately 2,470 from 141 countries Total quotas: US$383 billion (as of 8/18/11) Additional pledged or committed resources: US$600 billion Loans committed (as of 8/18/11): US$282 billion, of which US$213 billion have not been drawn (see table) Biggest borrowers (amount agreed as of 8/18/11): Greece, Portugal, Ireland Biggest precautionary loans (amount agreed as of 8/18/11): Mexico, Poland, Colombia Surveillance consultations: Consultations concluded for 120 countries in FY2010 and for 88 countries in FY2011 as of 02/11/11 Technical assistance: Field delivery in FY2010192.5 person years Transparency: In 2009, over 90 percent of Article IV and program-related staff reports and policy papers were published Original aims: Article I of the Articles of Agreement sets out the IMFs main goals: promoting international monetary cooperation; facilitating the expansion and balanced growth of international trade; promoting exchange stability; assisting in the establishment of a multilateral system of payments; and making resources available (with adequate safeguards) to members experiencing balance of payments difficulties.

allocations in August and September 2009 increased the outstanding stock of SDRs almost ten-fold to total about SDR 204 billion (US$328 billion). Members can also voluntarily exchange SDRs for currencies among themselves. In a recent paper, IMF staff explores options to enhance the role of the SDR to promote international monetary stability. Resources: The IMFs resources are provided by its member countries, primarily through payment of quotas, which broadly reflect each countrys economic size. At the April 2009 G-20 Summit, world leaders pledged to support a tripling of the IMF's lending resources from about US$250 billion to US$750 billion. To deliver on this pledge, the current and new participants in the New Arrangements to Borrow (NAB) agreed to expand the NAB to about US$590 billion, which was approved by the Executive Board of the IMF on April 12, 2010 and became effective on March 11, 2011 following completion of the ratification process by NAB participants. When concluding the 14th General Review of Quotas in December 2010, Governors agreed to double the IMFs quota resources to approximately US$767 billion and a major realignment of quota shares among members. When the quota increase becomes effective, there will be a corresponding rollback in NAB resources. Historically, the annual expenses of running the Fund have been met mainly by interest receipts on outstanding loans, but the membership recently agreed to adopt a new income model based on a range of revenue sources better suited to the diverse activities of the Fund.

European Central Bank_____________________________

The creation of the euro and the European Central Bank is a remarkable and unprecedented event in economic and political history: creating a supranational central bank and leaving eleven countries without national currencies of their own. The experience at last confirms that one size fits all monetary policy is not suitable for Europe because cyclical and inflation conditions vary substantially among countries. Labor market policies also increase this problem in the future and may lead to more trade protectionism. Although some advocate the euro despite its economic problems because of its assumed favorable effects on European political cohesiveness, the article mainly focus on the sources and lending of European Central Bank (ECB). Brief History: The ECB was established in June 1998 and took full responsibility for the conduct of monetary policy only in January 1999. The creation of the ECB, and especially the adoption of the euro, was an important step in the attempt to promote economic and monetary integration among European countries. Capital subscription: The capital of the ECB comes from the national central banks (NCBs) of all EU Member States. It amounts to 10,760,652,402.58 (as of 29 December 2010). The NCBs shares in this

capital are calculated using a key which reflects the respective countrys share in the total population and gross domestic product of the EU. These two determinants have equal weighting. The ECB adjusts the shares every five years and whenever a new country joins the EU. The adjustment is made on the basis of data provided by the European Commission. Since the start of Stage Three of Economic and Monetary Union on 1 January 1999 the capital key has changed four times: a five-yearly update was made on 1 January 2004 and again on 1 January 2009; additional changes were made on 1 May 2004 (when the Czech Republic, Estonia, Cyprus, Latvia, Lithuania, Hungary, Malta, Poland, Slovenia and Slovakia joined the EU) and on 1 January 2007 (when Bulgaria and Romania joined the EU). Euro area national central banks: With effect from 29 December 2010, the ECB increased its subscribed capital from 5.76 billion to 10.76 billion. It was agreed that the euro area NCBs would pay the resulting additional capital contributions in three installments. They paid the first and second such installments on 29 December 2010 and 28 December 2011 respectively, while the final installment will be paid at the end of 2012. Following the second installment, the capital paid to the ECB by the euro area NCBs amounts to 6,363,107,289.36 and breaks down as follows:

Euro area NCBs contribution to the ECBs capital NCB Nationale Bank van Belgi/Banque Nationale de Belgique Deutsche Bundesbank Eesti Pank Central Bank of Ireland Bank of Greece Banco de Espaa Banque de France Banca d'Italia Central Bank of Cyprus Banque centrale du Luxembourg Central Bank of Malta De Nederlandsche Bank Oesterreichische Nationalbank Banco de Portugal Banka Slovenije Nrodn banka Slovenska Suomen Pankki Finlands Bank Total Capital key % Paid-up capital () 2.4256 18.9373 0.1790 1.1107 1.9649 8.3040 14.2212 12.4966 0.1369 0.1747 0.0632 3.9882 1.9417 1.7504 0.3288 0.6934 1.2539 69.9705 220,583,718.02 1,722,155,360.77 16,278,234.47 101,006,899.58 178,687,725.72 755,164,575.51 1,293,273,899.48 1,136,439,021.48 12,449,666.48 15,887,193.09 5,747,398.98 362,686,339.12 176,577,921.04 159,181,126.31 29,901,025.10 63,057,697.10 114,029,487.14 6,363,107,289.36

Non-euro area national central banks: The EUs ten non-euro area NCBs are required to contribute to the operational costs incurred by the ECB in relation to their participation in the European System of Central

Banks by paying up a small percentage of their share in the ECBs subscribed capital. Since 29 December 2010 their contributions have represented 3.75% of their total share in the subscribed capital. The capital paid to the ECB by the non-euro area NCBs amounts to 121,176,379.25 and breaks down as follows:
Non-euro NCBs contribution to the ECB capital Non-euro NCBs (Bulgarian National Bank) esk nrodn banka Danmarks Nationalbank Latvijas Banka Lietuvos bankas Magyar Nemzeti Bank Narodowy Bank Polski Banca Naional a Romniei Sveriges Riksbank Bank of England Total Capital key % Paid-up capital () 0.8686 1.4472 1.4835 0.2837 0.4256 1.3856 4.8954 2.4645 2.2582 14.5172 30.0295 3,505,013.50 5,839,806.06 5,986,285.44 1,144,798.91 1,717,400.12 5,591,234.99 19,754,136.66 9,944,860.44 9,112,389.47 58,580,453.65 121,176,379.25

The ECB is headed by an Executive Board made up of the President, Vice-President and four members nominated by eurozone countries. Decision-making is led by the Governing Council, which is made up of the Executive Board members plus the heads of the sixteen eurozone central banks. The system operates like a web, with the ECB at the centre setting monetary policy and the Eurozone central banks on the outside implementing it. Eurozone central bankers can advise on policy, but the final decisions rest with the ECB. The ECB also has relations with non-Eurozone EU members through the General Council, which brings together the President, Vice-President and the heads of the central banks of all EU member states. In May and June 2010, following problems with Greece's sovereign debt, the ECB bought 60 billion of eurozone governments bonds as part of an international rescue plan to restore confidence in the single currency. Whilst it was common for national central banks to buy government bonds, this was the first time that the ECB intervened in such a direct way.

a. b. c.

d. e. f. g.