Transcript central bank - McGraw Hill Higher Education

Chapter 12
Roles and Services of
The Federal Reserve & Other Central
Banks Around The World
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 Learning Objectives 
• To explore the many roles and functions of the central banks
around the world.
• To see how and why the Federal Reserve System came to be
established as the U.S. central bank.
• To examine how the Federal Reserve System is organized to
carry out the many tasks it must perform.
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 Learning Objectives 
• To discover how important central bank independence from
the dictates of governments is in carrying out effective money
and credit policy.
• To understand the concept of legal reserves and how the
Federal Reserve System influences the level and growth of
legal reserves and, ultimately, deposits and loans.
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Introduction
• A central bank is a government agency that monitors the
operation of its financial system and controls the growth of the
nation’s money supply.
• Central banks are “bankers’ banks.” They communicate with
commercial banks and securities dealers in carrying out their
essential public policy functions.
• The U.S. central bank is the Federal Reserve System.
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The World’s Leading Central Banks
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The Roles of Central Banks




Control of the money supply, which is closely linked to
economic activity and price inflation
Stabilizing the money and capital markets, by fostering their
development and ensuring a stable flow of funds through them
Lender of last resort for financial institutions squeezed by
severe liquidity pressures
Supervisor of the banking system
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The Roles of Central Banks

Maintaining and improving the payments mechanism - a
smoothly functioning and efficient payments mechanism is
vital for business and commerce
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The Goals of Central Banking
• Central banking in the U.S. and in most other nations is
directed toward the goals of:


Achieving maximum sustainable output and
employment; and
Promoting stable prices.
• The recent emphasis has been on long-run price stability and a
growing list of nations have set inflation-rate targets or target
ranges.
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The Goals of Central Banking
• Through its influence over interest rates and the growth of the
money supply, the central bank is able to influence the
economy’s progress toward each of the goals.
• However, the goals often conflict and trade-offs have to be
accepted.
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The Channels Through Which Central Banks Work
Cost & availability of
credit
Policy
tools
of the
central
bank
Market
interest
rates
Size & growth
of the money supply
Market value
of the public’s
security holdings
Level &
growth
of
reserves
in the
banking
system
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Currency exchange
rates
Public expectations
regarding security
prices, interest rates,
currency prices,
money supply &
credit availability
Volume & growth
of borrowing &
spending
by the public on
domestic & foreign
consumer & capital
goods & services
Economic goals:
•A stable price level
and low inflation
•Sustainable
economic growth
•Maximum
employment
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History of the Federal Reserve System
• The U.S. was one of the last major nations in the Western
hemisphere to permanently charter a central bank.
• U.S. public officials were hesitant to do so for fear that a
central bank with great financial power will restrict the
availability of credit.
• However, a series of crises plagued the U.S. financial system
in the late 19th and early 20th centuries.
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Problems in the Early U.S. Banking System
• Prior to the Civil War, the states controlled the banking system
and many did a poor job.
• The high failure rate among poorly capitalized and illmanaged banks resulted in substantial losses for unlucky
depositors.
• The 1863 National Banking Act created a dual banking system,
but competition between federal and state bank regulatory
agencies sometimes led to actions detrimental to public
interest.
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Problems in the Early U.S. Banking System
• The new national bank notes proved to be unresponsive to the
nation’s growing need for a money or cash medium.
• The process of clearing and collecting checks was also too
slow and expensive, and many banks charged a check
redemption fee.
• There were recurring liquidity crises too, when the massive
sell-offs of bank-held securities led to panic selling by other
investors.
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Creation of the Federal Reserve System
• The Federal Reserve Act was signed in 1913. Twelve Federal
Reserve banks were chartered and they opened for business as
World War I began in Europe.
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The Early Structure of the Federal Reserve
• The first Federal Reserve System was quite different from the
Fed of today.
• The chief policy tool was the discount rate charged on loans of
reserves to eligible banks, and each Reserve bank had the
authority to set its own discount rate.
• The Federal Reserve banks were also given authority to issue
their own paper notes to serve as a circulating currency.
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The Early Structure of the Federal Reserve
• Hence, although a supervisory board of seven members had
been set up in Washington, D.C., the regional Reserve banks
possessed the essential monetary tools and made the key
policy decisions during the Fed’s early years.
• Then slowly, economic, financial, and political forces
combined to amend the original Federal Reserve Act and
remake the character and methods of the central bank.
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Goals and Policy Tools of the Fed
• The Great Depression brought about a concentration of power
within the Fed.
• The seven-member Board of Governors in Washington, D.C.,
became the central administrative and policymaking group.
• In addition, the Federal Open Market Committee was created
to oversee the conduct of open market operations, which
rapidly became the Fed’s main policy tool.
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How the Fed is Organized Today
Supervise
Board of Governors
(7 members appointed
by the president)
12 Federal Reserve banks
& 25 branch banks
(reserve bank presidents
appointed by Board of
Governors)
Supervise
3,200 member banks
of the system
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Serve
Serve
Federal Open Market
Committee
(12 voting members)
Supervise
Manager of the System
Open Market Account
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How the Fed is Organized Today
• In principle, the Board of Governors is independent of both
legislative and executive branches of the federal government.
• This independence is supported by terms of office much longer
than the president’s (up to 14 years), and by the fact that the
Fed is self-supporting.
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How the Fed is Organized Today
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How the Fed is Organized Today
• When the Federal Open Market Committee (FOMC) has
reached a consensus on the appropriate future course for
monetary policy, a directive is given to the manager of the
System Open Market Account (SOMA)
• The SOMA manager is a vice president of the Federal Reserve
Bank of New York.
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How the Fed is Organized Today
There is a Federal Reserve bank in each of the twelve districts.
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Federal
Reserve System
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How the Fed is Organized Today
• Each Reserve bank houses a research division that studies
regional economic and financial developments, and reports its
findings to the Board of Governors and to the FOMC.
• The Reserve banks also provide the securities needed for open
market sales, and take their pro rata share of security
purchases made by the Federal Reserve System.
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How the Fed is Organized Today
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Federal
Reserve System
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How the Fed is Organized Today
• The member banks of the Federal Reserve System consist of
national banks, which are required to join the system, and
state-chartered banks that agree to conform to the Fed’s rules.
• At year-end 2000, there are 2,230 national banks and just
under 1,000 state-chartered banks registered as members of the
Federal Reserve System, compared to more than 5,000
nonmember banks.
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Roles of the Federal Reserve System Today
• Collecting and clearing checks and other means of payment
(through an electronic network known as the FEDWIRE)
• Issuing currency and coin
• Maintaining a sound banking and financial system, by serving
as a lender of last resort (through the discount window of each
Reserve bank) and by supervising member banks
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Roles of the Federal Reserve System Today
• Serving as the Federal government’s fiscal agent, by holding
the Treasury’s checking account and by maintaining
reasonable stability in the government securities market
• Providing information to the public, through statistical releases
and research reports
• Carrying out monetary policy, through the use of various tools
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The Key Focus of
Central Bank Monetary Policy
• In regulating money and credit conditions to strengthen the
economy, most central banks target market interest rates.
• To impact market rates, central banks usually make use of their
control over the volume of reserves available to the banking
system.
• These reserves are the raw material out of which depository
institutions create credit and cause the money supply to grow.
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The Key Focus of
Central Bank Monetary Policy
• The total supply of reserves can be changed
- through open market operations,
- by making loans to depository institutions through the
central bank’s discount window, and
- by changing the legal reserve requirements applicable
to deposits held by depository institutions.
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Reserve Composition
• Legal reserves in the U.S. consist of the amount of deposits
each institution keeps with the Federal Reserve bank in its
district plus the amount of currency and coin held in its vault.
• Total legal reserves
= Required reserves + Excess reserves
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The Deposit Multiplier
• As a whole, the banking system can create more deposit
money by using its excess reserves to make loans and purchase
securities.
• The deposit multiplier indicates how many dollars of deposits
can result from an injection of new excess reserves into the
system.
• Transaction deposit multiplier
= Reserve requirement1on transaction deposits
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The Deposit Multiplier
• Maximum volume of new deposits and loans
= Deposit multiplier  Excess reserves
• In the real world however, leakages of funds from the banking
system greatly reduce the size of the deposit multiplier.
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The Deposit Multiplier
RRD
LA
EXR
= the required legal reserve ratio for transaction (demand) accounts
= the amount of additional currency and other liquid assets the public
wishes to hold for each dollar of new transaction deposits they receive
= the quantity of excess reserves depository institutions desire to hold for
precautionary purposes out of each dollar of new transaction deposits.
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The Money Multiplier
• Central bankers are usually more interested in a related
concept known as the money multiplier, which defines the
relationship between a measure of the money supply and the
size of the total reserve base available to depository
institutions.
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The Money Multiplier
• Recognizing the important link between currency and bank
reserves, economists have developed the concept of the
monetary base, which is simply the sum of legal reserves plus
the amount of currency and coin held by the public.
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Markets on the Net
• Bank of England at www.bankofengland.gov
• Bank of Japan at www.boj.ur.jp
• Board of Governors of the Federal Reserve System at
www.federalreserve.gov
• Center for the Study of Central Banks at
www.law.nyu.edu/centralbankscenter
• European Central Bank www.ecb.int
• Federal Open Market Committee at
www.federalreserve.gov/fomc
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Markets on the Net
•
•
•
•
Federal Reserve Services at www.frbservices.org
Federal Reserve Bank of New York at www.ny.frb.org
Federal Reserve Releases at www.federalreserve.gov/releases
Reserve Bank of New Zealand at www.rbnz.govt.nz
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Chapter Review
• Introduction to Central Banking
• The Roles of Central Banks in the Economy and Financial
System
-
Control of the Money Supply to Avoid Damaging Inflation
Stabilizing the Money and Capital Markets
Lender of Last Resort
Supervisor of the Banking System
Maintaining and Improving the Payments Mechanism
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Chapter Review
• The Goals and Channels of Central Banking
- Central Banks’ Goals
- Challenges in Achieving Central Bank Goals
- The Channels through which Central Banks Work
• History of the Federal Reserve System
-
Problems in the Early U.S. Banking System
Creation of the Federal Reserve System
The Early Structure of the Fed
Goals and Policy Tools of the Fed
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Chapter Review
• How the Fed is Organized Today
-
The Board of Governors
The Federal Open Market Committee
The Federal Reserve Banks
The Member Banks of the Federal Reserve System
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Chapter Review
• Roles of the Federal Reserve System Today
- The Clearing and Collection of Checks and Other Payments
Media
- Issuing Currency & Coin and Related Services
- Maintaining a Sound Banking and Financial System
- Serving as the Federal Government’s Fiscal Agent
- Providing Information to the Public
- Carrying Out Monetary Policy
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Chapter Review
• The Key Focus of Central Bank Monetary Policy: Interest
Rates, Reserves and Money
• Reserve Composition and the Deposit & Money Multipliers
- The Deposit Multiplier
- The Money Multiplier
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