Being a central bank within the Eurosystem, the Bank of Finland implements the monetary policy of the ECB Governing Council with its counterparties, for example the Finnish banks.
The primary objective of the monetary policy of the European Central Bank is to maintain price stability. In a market economy, monetary policy decisions influence the price level through several different channels. This network of causes and consequences is called the monetary policy transmission mechanism.
In the first phase of monetary policy transmission, the Eurosystem regulates the terms and conditions governing the amount, price, maturity and timing of central bank funding granted to credit institutions acting as monetary policy counterparties. The terms of central bank funding have a crucial effect on the formulation of money market rates in interbank markets, as euro area credit institutions need central bank money in order to be able to satisfy the public's demand for euro banknotes and coins and to hold the required reserve with a Eurosystem national central bank. This method of interest steering is called the implementation of monetary policy.
In implementing monetary policy, the Eurosystem must be able to assess the liquidity needs of the banking system. Other principal monetary policy instruments in addition to the minimum reserves include the market operations conducted by national central banks and access to the Eurosystem standing facilities. The monetary policy instruments also include risk management related to central bank financing, which is a separate function from market operations. In the risk management process, the financial soundness of banks acting as, or applying to become, monetary policy counterparts is assessed and the collateral requirements for access to central bank financing defined.