BUBA-A History of the Deutsche Bundesbank and Its Functions

DailyForex.com Team

The Deutsche Bundesbank, often abbreviated as Bundesbank or BUBA, is the German central bank, part of the European System of Central Banks (ESCB), where it is its most influential member. The Bundesbank became the first central bank to gain complete independence. The model is known as the Bundesbank Model, which contrasts with the New Zealand Model, under which central banks have government-set goals, for example, an inflation target.

What is the Bundesbank, and where is it Located?

The Bundesbank is the German central bank, one of the most respected globally, and remains located in Frankfurt, Germany, where the European Central Bank (ECN) also has its headquarters. Before the Euro, which saw the ECB, modeled after the Bundesbank model, take control of monetary policy, the Bundesbank interest rate policies had widespread impacts beyond German borders, as several countries unofficially used the Deutsche Mark or exchanged their currencies for it.

Today, the Bundesbank ensures the execution of ECB policies in Germany but enjoys a dominant role in its decision-making process. One reason is the leading role of Germany in the Eurozone, where it often accounts for the bulk of positive economic data. For example, when the Eurozone economy reports a monthly trade surplus, it is usually close to what Germany achieved, meaning the other countries ran deficits. Therefore, some view the ECB as an extension of the Bundesbank, giving Germany unofficial control of Eurozone monetary policy.

The Bundesbank system consists of the following nine regional headquarters:

  • Frankfurt – Hesse (federal headquarters)
  • Stuttgart - Baden-Wurttemberg
  • Munich - Bavaria
  • Berlin - City Berlin and Brandenburg
  • Hanover - Bremen, Lower Saxony, and Saxony-Anhalt
  • Hamburg - Hamburg, Mecklenburg-Vorpommern, and Schleswig-Holstein
  • Dusseldorf - North Rhine-Westphalia
  • Mainz - Rhineland-Palatinate and Saarland
  • Leipzig - Saxony and Thuringia

The Bundesbank - A Brief Historical Overview

  • In 1948, the Deutsche Mark replaced the Reichsmark, which became worthless following World War II
  • The Bank of German States, established according to laws of the Allied Military Government, was the first central bank governing the monetary policy of the Deutsche Market under a two-tier central bank system modeled after the US Federal Reserve System
  • The Central Bank Council was the supreme governing body of the two-tier system
  • In 1957, the German government passed laws to create the German Bundesbank, abolishing the two-tier structure, but the Central Bank Council remained, consisting of the heads of the Bank of German states, which lost their independence and became the regional headquarters of the Bundesbank, plus a board of directors based in Frankfurt
  • Following the reunification of Germany, the Deutsche Mark became the legal tender across Germany, with the Bundesbank responsible for monetary policy
  • The Bundesbank became known, trusted, and favored for its conservative approach to finance, keeping inflation contained, and promoting economic growth in Germany
  • In 1993, the Maastricht Treaty resulted in the European Economic and Currency Union (EECU), and central banks lost their sovereignty
  • In 2001, the ECB resumed all responsibilities of the Eurozone monetary policy, and the Bundesbank became a de facto regional headquarters, like all central banks, similar to how the Bundesbank displaced the Bank of German States

The Function of the Bundesbank

The primary function of the Bundesbank is the monetary policy of the Euro system, where its opinion and monetary policy carry the most significant weight.

Other functions of the Bundesbank include:

  • The Bundesbank is a note-issuing bank, meaning, among other things, it prints money, ensures its circulation, eliminates counterfeit notes, and publishes a weekly bulletin volume of cash circulation
  • The Bundesbank is the banker of commercial banks, supervising the German financial system, acting as the clearinghouse, and refinancing source while also supporting cross-border payments between domestic and foreign banks
  • The Bundesbank is the banker of German states, performing banking services for federal, state, and local authorities, the social security infrastructure of Germany, and securities transactions for the federal government
  • The Bundesbank maintains the non-Euro currency reserves of Germany, including the German gold reserves, the second largest behind the US

Noteworthy:

  • Unlike the US Federal Reserve or the Bank of England, the Bundesbank is not the lender of last resort and does not have to maintain the stability of the financial system

Bundesbank Conclusion

The Bundesbank remains the most dominant central bank in the European System of Central Banks (ESCB), and its primary function is the monetary policy of the Euro system. The Bundesbank lost its sovereignty with the introduction of the Euro, like all Eurozone central banks. Many consider the ECB an extension of the Bundesbank, as German fiscal and monetary policies generally set the tone for the ECB.

FAQ

How do you pronounce Deutsche Bundesbank?

The phonetic spelling of Deutsche Bundesbank is “deut-sche bun-des-bank.” Depending on geographic locations, some languages emphasize certain syllables more than others.

DailyForex.com Team
The DailyForex.com team is comprised of analysts and researchers from around the world who watch the market throughout the day to provide you with unique perspectives and helpful analysis that can help improve your Forex trading.

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