Central Banking System

10 Key excerpts on "Central Banking System"

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  Banking on the Future

  The Fall and Rise of Central Banking

  • Howard Davies, David W. Green(Authors)
  • 2010(Publication Date)
  • Princeton University Press

    (Publisher)

  Indeed in more recent central banking legislation, notably in the EU, the possibility of extending credit to the government is usually explicitly excluded, for fear that a government under pressure would resort to the printing press. But in 2009 monetizing government debt, once interest rates had descended to zero, became a live policy option once again. The printing presses whirred into action on both sides of the Atlantic. The central bank does normally act as a banker to the commercial banks, providing payment and settlement services, though the way this is done varies greatly from country to country, and in some cases the central bank’s own operational role is modest. The same is true of financial regulation. Banking supervision began as the credit assessment of the central bank’s counterparties, but, as we have seen, it is no longer regarded as axiomatic that the central bank should be the bank supervisor. It may be that in some places, notably the United Kingdom, too rigorous a separation of the central bank from regu-lation was engineered, to the point where the Bank of England appeared, in 2007, to have lost interest in the financial system, even though it remained the Lender of Last Resort. And in the euro area the central pro-vision of liquidity through the ECB, with solvency support provided by national governments, often working through the national central banks (NCBs), began to look to be an unstable division of responsibilities. We shall have more to say on these points later. Monetary policy, on the other hand, does typically remain a core cen-tral bank function—and one that the bank carries out independently nowadays, rather than as an agent for the ministry of finance, though 18 WHAT IS CENTRAL BANKING AND WHY IS IT IMPORTANT? the setting of objectives, as distinct from the execution of monetary pol-icy, may remain with government.

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  Innovation and Independence

  The Reserve Bank of New Zealand

  • John Singleton, Arthur Grimes, Gary Hawke, Frank Holmes(Authors)
  • 2013(Publication Date)
  • Auckland University Press

    (Publisher)

  The benefits of central banking are several. First, currency issued by a central bank is safer for the public to hold than currency issued by a private financial institution. Should the private bank collapse, its currency would become worthless. There is little chance of a central bank collapsing, because the government and the taxpayers stand behind it. The only events likely to render currency issued by a central bank worthless are hyperinflation or the disintegration of the state.

  Second, a central bank may be in a position to strengthen the financial system, and thus reduce the likelihood and impact of a banking crisis.11 The failure of a significant proportion of the banking system would cause serious economic damage. Depositors would lose access to their accounts for an uncertain period, and many would have their account balances either wiped out or reduced. Businesses and households would not be able to obtain further credit.

  In addition to acting as a potential lender of last resort, a central bank is able to brace the financial system by overseeing and participating in the payment and settlement system, through which transactions are made between banks and between the clients of banks. It is important for this mechanism to work smoothly, and for any problems affecting an individual bank’s ability to settle its obligations to be contained before other banks and their clients are implicated.12

  Third, a well-conducted monetary policy generates macroeconomic benefits. The nature of these benefits, and the ways in which they might be achieved, have often been debated, and are worth considering in some detail.13 In the so-called Keynesian era, most economists believed that monetary policy could be used in tandem with fiscal policy to achieve general economic stability, incorporating full employment and a stable exchange rate, as well as price stability. Particularly in developing countries, it was also believed that central banks could assist economic development by financing agricultural, infrastructure, and industrial projects. At the same time, however, monetary policy was regarded as a less effective tool than fiscal policy. This view seemed to be confirmed by the Radcliffe Report on the British monetary system in 1959.14

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  The Financial System, Financial Regulation and Central Bank Policy

  • Thomas F. Cargill(Author)
  • 2017(Publication Date)
  • Cambridge University Press

    (Publisher)

  The arguments for central banks and their responsibilities being institutionalized as government entities outweigh the arguments for “free” banking; however, that does not mean that government institutions are problem-free. The rationale for a central bank is based on the presence of certain types of mar-ket failure inherent in a private banking system based on fractional reserves – the contagion and money supply problems. Hence, only a standalone non-profit cen-tral bank that has an economy-wide perspective can provide services to prevent the economic equivalent of counterfeiting. There are some functions performed by a central bank, such as check clearing and transfers of funds domestically and inter-nationally, that are shared with private entities and could be handled by the private sector, but the basic functions of controlling the nation’s money supply and provid-ing lender of last resort services can be adequately provided only by a central bank. Likewise, financial regulation and supervision need to be provided at the govern-ment level with an economy-wide perspective, but, in the case of this function, there is no inherent reason why these functions should be provided by the central bank. Over time government has redesigned the nation’s financial and monetary regime to make it easier for central banks to carry out their responsibilities. Today, the modern monetary system is pictured as an inverted pyramid ( Figure 11.1 ) that consists of three components: first, the base, which consists of central-bank-issued liabilities (currency and reserves) used as currency and reserves of depository insti-tutions; second, the reserve requirement; and, third, the nation’s money supply, 11.3 Why a Government Central Bank? 237 Part 3 : the money supply, M2 Part 2 : reserve requirements on checkable (transaction) deposits Part 1 : central bank fiat money: currency and reserves – referred to as base money, high-powered money or monetary base Figure 11.1.

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  Demystifying Global Macroeconomics

  • John E. Marthinsen(Author)
  • 2020(Publication Date)
  • De Gruyter

    (Publisher)

  Chapter 9 Central Banks Changes in a nation ’ s money supply can have significant effects on domestic inflation, interest rates, production, and employment. Often these effects spill over to other countries. Due to the potential impact that monetary policies have on macroeconomic variables that influence company performance, un-derstanding and anticipating their effects can pay huge dividends. For this reason, business managers and analysts throughout the world monitor the actions and decisions of central bankers, paying special attention to the U.S. Federal Reserve System (the Fed), European Central Bank (ECB), People ’ s Bank of China (PBOC), Bank of England, and Bank of Japan (BOJ), due to the size of their financial systems. This chapter starts by discussing the difference between financial regulation and monetary policy. It then moves on to explain the tools that central banks use to control their domestic money supplies. We will find that these tools are generic, in the sense that the same basic set is used (or can be used) by any central bank. In Chapter 8, “ Money Creation, ” we learned that M2 equals the monetary base times the M2 money multiplier, which is insightful because a nation ’ s money sup-ply varies only if one or both of these variables changes. 1 This chapter explains the direct powers that central banks have over these two monetary variables and, therefore, the indirect ways in which they affect their nations ’ M2 money supplies and financial markets. The power to change a nation ’ s monetary base is an impor-tant one, which is why a very helpful guideline is introduced which answers virtu-ally any question concerning when and if a nation ’ s monetary base has changed. The chapter ends with a brief discussion of timing issues and how they can com-plicate a central banker ’ s job of effectively managing the money supply.

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  Financial Competition, Risk and Accountability

  British and German Experiences

  • S. Frowen, F. McHugh, S. Frowen, F. McHugh(Authors)
  • 2016(Publication Date)
  • Palgrave Macmillan

    (Publisher)

  Central banks may feel obliged to stabilise markets by interventions, but they never know for certain whether what they are defending is a manifestation of market equilib- rium or not. And by means of official statements or by selling and buying operations central banks may give speculative transactions an unwanted lead. Should they intervene? How? On their own or jointly with other central banks? What in any case are the implications for monetary policy? The role of central banking I shall concentrate on the past policies and operations of the Deutsche Bundesbank. I shall then proceed to outline what Europe and the world might justifiably expect from the European System of Central Banks (ESCB), and we will ask whether the Federal Reserve’s Policy has been influenced by the new global environment. I will conclude with some remarks regarding the international monetary system and the implications of the financial crisis in Asia. The traditional role of central banking, expressed plainly, is to provide the country concerned with central-bank money and to safe- guard the purchasing power of the domestic currency. If we accept this, a central bank has a foremost inward-looking responsibility, supplemented by reasonably outward-looking responsibilities. Impli- cations of this state of affairs on the exchange markets have to be born in mind as well as the spreading of financial tremors. Until the final breakdown of the Bretton Woods system in early Spring 1973, German monetary policy was repeatedly undermined by Norbert Kloten 191 an unwanted influx of foreign currency, specifically of US$. On the one hand, the undervaluation of the deutsche mark by the official US$ parity stimulated the export drive and the propensity to invest, but on the other hand was a source of overheating, overemployment and price rises difficult to control effectively by demand management.

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  Reconceptualising Global Finance and its Regulation

  • Ross P. Buckley, Emilios Avgouleas, Douglas W. Arner(Authors)
  • 2016(Publication Date)
  • Cambridge University Press

    (Publisher)

  ii The Changing Face of Central Banking 7 Reconceptualizing Central Banking: From the Great Inflation to the Great Recession and Beyond Donato Masciandaro introduction The history of central banks is rich in modifications to their role and functions. In the last thirty years – before the 2008 crisis – the mandate of central banks has been progressively narrowed. In a large number of countries, the central bank mandate has been focused on the area of monetary policy with a particular focus on the goal of price stability. This narrowing of the mandate has been accompanied by changes in their governance arrangements. These arrangements emphasize the importance of central bank independence from the political process. The crisis posed new challenges for modern central banking where monetary policy is conducted by an independent central bank following an interest rate rule approach to stabilize inflation and output gaps while being less involved in pursu- ing banking stability. A significant number of reforms are taking place, which concern in particular the central bank’s role in the structure of supervision. In 2010, the U.S. legislature passed the Dodd Frank Act, rethinking the role of the FED in the reshaping of the structure of financial supervision. Even if during the discussion of the bill U.S. lawmakers debated the possibility of restricting some of the FED’s regulatory powers, as well as increasing political control over the central bank, the Dodd Frank Act actually ended up increasing the responsibilities of the FED as prudential supervisor. In Malaysia, the 2009 Central Bank Law provided an opportunity for more involvement in supervision for the central bank. In the current evolution of the Basel Capital Accord, the activation of counter- cyclical prudential measures has been put in the hands of central banks.

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  The Evolution of Central Banking: Theory and History

  • Stefano Ugolini(Author)
  • 2017(Publication Date)
  • Palgrave Macmillan

    (Publisher)

  How will central banking be evolving in the future? A number of important issues are currently open: among others, the future of payment systems, the development of macroprudential regulation, the possible dis- appearance of cash, as well as the status of monetary policy in a world with very low equilibrium interest rates. Underlying these specific issues, how- ever, there exist two more fundamental questions. The first one has to do with the relationship between monetary authori- ties and fiscal authorities. Before the crisis, the consensual “philosophy” held that optimal policymaking could be implemented only if the central bank was turned into a fully independent agency. In a sort of “Olympian isola- tion”, central bankers would have been able to deliver monetary stability by focusing exclusively on macroeconomic variables and the management of expectations. Although this framework has not been formally changed yet, several substantial alterations have occurred since the crisis. On the one hand, central bankers have been thrown upon them the burden of actively defending financial stability, something that was previously understood to be extinguished for good by the “financial innovations” of the recent decades. On the other hand, the large-scale “unconventional” interventions have appeared to dangerously blur the lines between monetary policy and fiscal policy. Will the “new normal” be a return to the domination of Treasuries over central banks—as it had been the case before the 1980s? The second and related, yet more subtle, question has to do with the legitimacy of central banks as organizations entrusted with the provision of crucial economic functions like financial stability and monetary stabil- ity. Today, central banks are independent agencies which make part of the public sector. Yet this particular institutional arrangement is actually very recent from a historical viewpoint—and potentially fragile.

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  Monetary Policy, Capital Flows and Exchange Rates

  Essays in Memory of Maxwell Fry

  • William Allen, David Dickinson(Authors)
  • 2002(Publication Date)
  • Taylor & Francis

    (Publisher)

  4    Recent Developments in Central Banking Some Special Features of the Monetary Policy Committee and of the European System of Central Banks Charles Goodhart Introduction

  Regime changes are always exciting, and grist for analysis by the interested commentator. There have been several such regime changes in Central Banking during the last few years, a most exciting period for someone like myself, not only in my capacity as a professional observer of Central Banking but now also as a participant. The Chancellor’s initiatives in his first month in office in 1997, to give the Bank of England operational independence, and then subsequently to centralize all financial supervision, including the supervision of banks, in a Financial Services Authority (FSA), caused the most abrupt changes to the functions and structure of the Bank, probably since its foundation. But, of course, the extent and scale of this regime change, though in my view the most important economic developments of the incoming Labour government, have been dwarfed by the move to a single currency, the euro, with its associated European System of Central Banks (ESCB) within the euro area.

  There are, of course, many facets of both these institutional changes that one could discuss, and one can also undertake compare-and-contrast exercises, not only for the Bank of England and the ESCB, but also, for example, with the Bank of Japan, which has again recently undergone important institutional changes, several of which are similar to those in the UK. Indeed, there has been a veritable flood of institutional change in the last decade partly carried along on a tide of academic enthusiasm for independent Central Banks and further encouraged by the apparent success of such independent Central Bankers in achieving price stability during a decade in which world growth has, I believe, recovered somewhat from previous decades, despite Asian alarums and excursions.

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  Central Banks at a Crossroads

  What Can We Learn from History?

  • Michael D. Bordo, Øyvind Eitrheim, Marc Flandreau, Jan F. Qvigstad(Authors)
  • 2016(Publication Date)
  • Cambridge University Press

    (Publisher)

  3.2 Tools and Competence Being able to meet assigned and clear objectives relies on having an appropriate set of policy tools. These tools need to be effective in their impact on the final objective. But, as importantly, the central bank needs to be competent in its control of these instruments. There are many factors that bear on the effectiveness of tools and the competence of central banks. Here we focus on three: the structure of the financial system; the staffing model of central banks; and the process of decision-making. Stable money and credit relies on a strong and stable financial sector. Financial instability weakens the strength and stability of the monetary and financial transmission mechanism. A broken financial system risks rendering impotent standard monetary and financial policy transmission mechanisms, as the crisis illustrated only too clearly. That is one reason why central banks’ pursuit of financial stability is intimately linked to their pursuit of price stability. The monetary and financial policy transmission mechanism is also shaped importantly by structural and technological changes. The evolution of the choice of monetary and regulatory policy tools can be seen as a reflection of those changes. For much of the nineteenth and some of the twentieth centuries, only a small share of firms and households had access to financial capital and bank loans. With credit and financial markets under-developed, interest rates and bank regulatory policies would have had limited effect on demand and inflation. In these circumstances, direct control of the money supply – for example, through metallic currency standards or exchange rate arrangements – was a more effective means of affecting monetary and credit control. As banks grew in scale during the twentieth century, and financial markets were progressively liberalised, other means of monetary and credit control became more effective.

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  Open Issues in European Central Banking

  • L. Smaghi, D. Gros(Authors)
  • 2000(Publication Date)
  • Palgrave Macmillan

    (Publisher)

  1. WHO IS IN CHARGE OF THE EUROSYSTEM? Introduction Who is responsible for the euro? The obvious answer should be the European Central Bank (ECB), but things are not so simple. The ECB is just one component of a broader entity, the Eurosystem, which comprises also the National Central Banks (NCBs) of the - initially 11 - countries that have adopted the euro.' The main tasks of the Eurosystem are to define and implement the monetary policy of the Eurozone, conduct foreign exchange operations, hold and manage the foreign exchange reserves of the member states that have adopted the euro and promote the smooth operation of the payment system (see Article 3 of the Statute in Annex II). This first chapter examines the Eurosystem and the appropriateness of its structure for the efficient management of the euro. Does the way in which the Eurosystem has organized itself really matter? At first sight, the question seems of little relevance for monetary analysis, but this is not the case. The internal organization of the Eurosystem, in fact, has implications that go far beyond simple considerations of efficiency. Important issues and priorities are imbedded in the way in which the decision-making process and the implementation of monetary policy have been organized in Europe. As will be discussed below, the evident lack of clarity on several issues will create serious problems for the conduct of the single monetary policy in the years to come. The questions addressed in this chapter have been raised in other contexts. The history of central banks, in particular those with a federal structure such as the Federal Reserve System in the United States or the Bundesbank in Germany, shows that organizational matters have broader implications, in particular on the way in which 5 6 Open Issues in European Central Banking policies are decided and enacted. They are often a source of conflict, which leads to structural evolution and new developments in central banks.

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