Transcript Chapter:02
Chapter:02
The Impact of
Government Policy &
Regulation on Banking
1
The Principal Reasons Banks Are Subject
to Government Regulations.
To protect the safety of the public’s savings.
To control the supply of money & credit in order to
achieve a nation’s broad economic goals.
To ensure equal opportunity & fairness in the public’s
access to credit & other vital financial services.
To promote public confidence in the financial system, so
that savings flow smoothly into productivity investment.
To avoid concentrations of financial power in the hands of
a few individuals & institutions.
To provide the government with credit, tax revenues &
other services.
To help sectors of the economy that have special credit
needs
2
The Central Banking System: Its Impact on the
Decisions & Policies if Individual Banks
Monetary Policy: Control over money,
credit & interest rates to achieve a nation’s
economic goals. The policy has two basic goals:
1. To promote “maximum” sustainable output &
employment. &
2. To promote “stability” in price level.
3
The Central Banking System: Its Impact on the Decisions & Policies if
Individual Banks---Contd
What do maximum sustainable output and
employment mean?
In the long run, the amount of goods and services
the economy produces (output) and the number of
jobs it generates (employment) both depend on
factors other than monetary policy. These factors
include technology and people's preferences for
saving, risk, and work effort. So, maximum
sustainable output and employment mean the
levels consistent with these factors in the long run.
4
The Central Banking System: Its Impact on the Decisions & Policies if
Individual Banks---Contd
What's so bad about higher inflation?
High inflation is bad because it can hinder
economic growth, and for a lot of reasons. For one
thing, it makes it harder to tell what a change in
the price of a particular product means. For
example, a firm that is offered higher prices for its
products can have trouble telling how much of the
price change is due to stronger demand for its
products and how much reflects the economywide rise in prices.
5
The Central Bank’s Principal Task: Making &
Implementing Monetary Policy
1.
The Open Market Operations Policy (OMO):
–
To reduce the money supply in the economy, Central bank sells
securities in the open market.
–
To increase the money supply, Central bank repurchase the
securities sold earlier from the market.
2.
The Discount Rate Policy: Discount rate is the rate at which the
central bank lends money to the scheduled banks or discounts the
bills of the commercial banks.
–
To reduce the money supply in the economy, Central bank raises
the discount rate.
–
To increase the money supply in the economy, Central bank
reduces the discount rate.
6
The Central Bank’s Principal Task: Making & Implementing
Monetary Policy----Contd
3.
Changing Reserve Requirements on Deposits & other Bank
Liabilities:
–
Raising reserve requirements, banks must set aside more of each
incoming deposits into required reserves, & less money is
available to support making new loans.
–
Lowering reserve requirement, releases reserves for additional
bank lending.
{What are bank reserves?
Banks and other depository institutions (for convenience, we'll refer to
all of these as "banks") keep a certain amount of funds in reserve to
meet unexpected outflows. Banks can keep these reserves as cash in
their vaults or as deposits with the Fed. In fact, banks are required to
hold a certain amount in reserves. But, typically, they hold even more
than they're required to in order to clear overnight checks, restock
ATMs, and make other payments. }
7
The Central Bank’s Principal Task: Making & Implementing
Monetary Policy----Contd
4.
Other Policy Tools:
a) Moral Suasion: The Central bank tries to bring
psychological pressure to bear on individuals &
institutions to conform the bank’s policies, using
telephone calls or letters to bankers, making speeches
explaining the Central bank’s policies, & testifying
before parliament to explain what the CB is doing &
to clarify it.
b) Margin Requirements: An investor buying certain
listed securities must use his or her own funds to
cover a specified percentage of the securities’
purchase price, the rest of that price may be
borrowed, using the purchased securities as collateral.
8
Impact of Fiscal Policy on Banks
Increases in government spending usually lead to increase
in business & households incomes, which increases both
bank deposit & loan demand, eventually accelerating the
pacer of economic activity - & perhaps inflation as well.
Increases in government spending must be financed by
added government borrowing, the tendency is to push
interest rates higher as government credit demands are
added to private credit demands, placing banks under
increased pressure to meet all of their customers’ funding
needs.
Decisions by parliament to raise taxes & reduce budget
deficits normally lead to decreases in Treasury borrowings
& eventually push interest rates lower. Private sector
incomes, bank deposits, & loan demand are also likely to
fall.
9
Prudential Regulations of Bangladesh Bank
(updated 31-12-2006)
1.
2.
3.
4.
5.
6.
7.
8.
Policy On Capital Adequacy Of Banks
Policy On Loan Classification And Provisioning
Corporate Governance In Bank Management
Restriction On Lending To Directors Of Private
Banks
Rules And Regulations For Appointment Of Chief
Executive And Advisor In Banks
Constitution Of The Board Of Directors And Fit And
Proper Test For Appointment Of Bank Directors
Constitution Of The Audit Committee Of Board Of
Directors
Disclosure Requirements For Banks
10
Prudential Regulations of Bangladesh Bank (updated 31-122006)------Contd.
9. Policy
10. Policy
On Single Borrower Exposure
For Rescheduling Of Loans
11. Policy For Loan Write Off
12. Large Loan Restructuring Scheme (LLRS)
13. Requirement For Obtaining Information On Large
Loan From Credit Information Bureau
14. Payment Of Dividend By Bank Companies
15. Loan Against Shares, Debentures Etc
16. Interest Rates On Deposit And Lending
17. Bank Charges
18. Bank Deposit Insurance Scheme
19. Guidelines On Managing Core Risks In Banking
20. Credit Rating
11