Transcript CENTRAL BANK

CENTRAL BANK
General functions
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Issuance of currency
- The Central Bank normally has complete control over this function. However
in some countries commercial banks also issue notes e.g. Northern Ireland and
Scotland. This can lead to a problem where such notes are not recognised
elsewhere in the UK
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Management of Exchange Rates
- The Central Bank has power to (artificially) influence the exchange rate of a
currency. For example if a currency e.g. sterling is deemed too weak, the
Central Bank (Bank of England) could use other reserve currencies such as
euros and dollars to buy sterling on the foreign exchange markets. This
would increase the demand for sterling and thereby its price
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Management of Gold Reserves
- Though it is a relic of the past when commodity money was used Central
Banks still have gold in their reserves which they are entrusted to guard safely
CENTRAL BANK (con)
Government Bank
• Holder of Government account
- just as a commercial bank acts for the public, the Central Bank acts for the
Government holding (and managing) its very large account
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Management of Debt
- The Government will generally require to borrow money which can be raised
through the issuing of various types of government securities (gilts). The
Central Bank generally manage this function though for some years now in
Ireland it has been carried out by a specialist body - the NTMA (National
Treasury Management Agency).
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Advises on economic policy
- A considerable amount of research into economic developments in the
economy is carried out by the Central Bank. It then advises the Government
(usually advocating prudence and caution) in its conduct of economic policy.
This advice (in Ireland) is contained in the Central Bank Bulletin (published
each quarter).
CENTRAL BANK (con)
Bankers Bank
• Licensing and supervising authority
- In order to operate a bank must obtain a license that is issued by the Central
Bank which can be taken away in the case of misconduct. Also the Central
Bank is generally entrusted with the day to day supervision of the financial
system. In Ireland another special body - which is however closely associated
with the Central Bank - has been set up for this purpose. It is called the
Financial Services Regulatory Authority
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Holds Deposits of Financial Institutions
- Banks hold their own accounts with the Central Bank. At the end of each day
they settle up their own debts with each other through cheques drawn on these
accounts (clearing accounts).
Also for security reasons they need to minimise the amount of cash kept on the
premises. So most of this cash is held for safe keeping with the Central Bank
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Sets reserve requirements
- Though vital for meeting customer requirements, the holding of cash is not
profitable for banks. Thus there is a need for reserve ratios whereby they are
legally required to hold a certain percentage of their reserves in cash. This
ratio is set by the Central Bank.
CENTRAL BANK (con)
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Provides Lending Facility
- The Central Bank also provides a lending facility for the banks which
enables them to obtain additional liquidity if in danger of running short of
cash. The "Bank Rate" is the rate of interest charged by the Central Bank for
this purpose and can represent an important use of monetary policy.
Though the Central Bank can act as "lender of last resort" in a dire
emergency, normally this is not exercised
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Applies Additional Measures when Required
- The Central Bank can call for additional deposits to be made with it (for
example when too much credit is extended). Also in certain cases it may
impose penalty restrictions on banks for extending too much credit.
MONETARY POLICY
Central Bank Responsible for Monetary Policy: Key elements –
1.
Control of money supply. It is important to control the amount of money in
circulation. Though putting extra money into circulation can stimulate economic
activity, too much money can lead to inflation
2.
Changing the interest rate. Interest rates throughout the financial sector are closely
related to each other. Therefore if The Central Bank lowers its own rate this usually
leads to a general reduction in interest rates which stimulates economic activity
(through additional investment and consumer spending)
3.
Managing the exchange rate. The value of the exchange rate with other currencies is
very important as it affects trade. For example due to the recent rise of the euro
against the dollar, it is now cheaper to import goods from the US (and to visit there on
holiday). However it is more expensive to sell goods into the US market. Though the
Central Bank can affect the exchange rate, it generally does not intervene in this
manner
4.
Other measures. Formerly credit controls were widely used in Ireland, though with
the single financial market in Europe these are no longer used. However other
measures such as reserve ratios and banking legislation can also impact on monetary
policy.
EUROPEAN CENTRAL BANK
Since 1998 all national Central Banks are part of the European system.
This federal arrangement is referred to as the European System of Central
Banks (ECSB) with decisions taken by an executive board - referred to as the
European Central Bank (ECB)
Most of the traditional functions of national Central Banks are now controlled
by the ECB.
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Currency i.e. the Euro is now issued through the ECB; our national Central
Bank then acts as an agent for the ECB in printing notes and minting coins for
the Irish economy
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The power to control exchange rates for Eurozone countries has now ceased
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The terms (interest rate) on which lending to other banks is now set is through
the European Central Bank. Therefore the ECB can control the overall amount
of credit extended
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The European Central Bank also controls the reserve ratio of the banks
EUROPEAN CENTRAL BANK (con)
However the national Central Bank still can play a regulatory role though this now
exercised through The Financial Services Authority of Ireland
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The National Central Bank still acts a banker to the Government.
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However the amount which can be lent out (and the manner in which
borrowing takes place) is again controlled at a European level
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So overall now the role of the national Central Banks (within the EMU) is to
carry out the policy that has been agreed at a European level
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In other words independent monetary policy - with respect to money supply,
interest rates or exchange rates - has now ceased for Eurozone countries