Economics
Functions of Central Banks
Central banks have several key functions, including conducting monetary policy to regulate the money supply and interest rates, acting as a lender of last resort to provide liquidity to financial institutions, and overseeing the stability of the financial system. Additionally, central banks often issue currency, manage foreign exchange reserves, and supervise and regulate banks to ensure financial stability.
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10 Key excerpts on "Functions of Central Banks"
- Stefano Ugolini(Author)
- 2017(Publication Date)
- Palgrave Macmillan(Publisher)
This makes the functional approach actually easier to implement. To be honest, the definition of central banking functions is not fully uncontroversial either. Starting from Oliver Sprague’s early discussion, 46 many different lists of central banking functions can be found in the scholarly literature: some feature three, some five, some seven, some eight, some ten (plus) functions. 47 But not all of the proposed functions are equally rigorously defined, and “Occam’s razor” (the “law of parsimony”) 48 should be arguably set in motion in order to eliminate 45 Central Bank Governance Group (2009). 46 See Oliver Sprague’s chapter on central banks in the third (accrued) edition of Charles Dunbar’s Theory and History of Banking: Dunbar (1917, pp. iii and 85–86). 47 A partial survey of the literature can be found in Singleton (2011, pp. 4–5). 48 For a critical discussion on the epistemological relevance of “Occam’s razor”, see, for example, Walsh (1979). S. Ugolini 13 redundant categories. 49 To keep things as simple as possible (and to avoid the risk of having to express value judgements), the best strategy probably consists of referring to current standards. Nowadays, central bankers agree in acknowledging that they are entrusted two main (possibly con- flicting) tasks: securing financial stability and monetary stability. 50 The for- mer task consists of the provision of the microeconomic central banking functions: the management of the payment system, lending of last resort, and banking supervision. The latter task consists of the provision of the macroeconomic central banking functions: the issuance of money and the conduct of monetary policy. 51 1.2.2 The Roadmap The rest of this book is organized according to this functional grid. First, it deals with the microeconomic central banking functions: Chap. 2 is about the management of the payment system, while Chap.
eBook - PDF- Subrata Ghatak, José R. Sánchez-Fung(Authors)
- 2017(Publication Date)
- Red Globe Press(Publisher)
This means that the central bank will provide liquidity to banks and other financial agents when other sources dry up. The central bank usually provides such liquidity by discounting bills of exchange. The controller of credit The central bank usually regulates the amount and availability of credit in the economy. This task is important, to promote internal price stability. It has been frequently pointed out that, in developing countries, the economy behaves in a classical rather than a Keynesian way. This implies that the amount and rate of growth of the money and credit supply could exert a significant effect on prices. If one of the objectives of the central banks is to promote price stability, then clearly they have to act as careful controllers of money and credit. The central bank as a bankers’ bank The central bank acts as the commercial bankers’ bank. This means that the relation-ship between the central bank and the commercial banks is similar to that between commercial banks and members of the public. The central bank accepts deposits from the commercial banks and lends to them in times of need. It is obligatory for the commer-cial banks to maintain a certain proportion of their demand and time liabilities as cash balances. The central bank can regulate the credit supply to the economy by altering the cash reserve ratios. Promotion of external stability External stability means stability in the rate of exchange of the domestic currency vis-à-vis the foreign currencies in the international market. It is the task of the central bank to maintain orderly exchange rates and avoid sharp fluctuations in these rates. For example, in an era of flexible exchange rates, if the value of the national currency continues to fall sharply, the central bank may raise the bank rate (that is, the rate it charges for lending) to prevent such a decline, since an increase in the bank rate is likely to increase the inflow of foreign currencies.
- 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.
eBook - ePubFinancial Stability and Prudential Regulation
A Comparative Approach to the UK, US, Canada, Australia and Germany
- Alison Lui(Author)
- 2016(Publication Date)
- Routledge(Publisher)
Modern central banks are primarily occupied with monetary-policy matters (Bank for International Settlements 2009) since confidence in price stability and the currency is crucial for a healthy economy. With time, the combination of economic crises, wars and the breakdown of the gold standard transformed central banks from government banks into public agencies. This shift to a public-policy dimension meant that central banks are now working towards the interests of the financial system as a whole, rather than for commercial objectives. Like most concepts in finance, financial stability is not absolute and it changes with time. It has many facets, embracing rule-making, policy development and supervision. The lender-of-last-resort role is a way for central banks to sustain financial stability by assisting individual banks rather than monitoring liquidity for the general financial system. In exceptional circumstances such as the global financial crisis, the general liquidity and specific liquidity lending under the lender-of-last-resort principle merge. It is interesting to note that only 20 per cent of the 146 central banks have express objectives for financial stability and that around 50 per cent of the world’s central banks have more generic objectives regarding financial stability. Since the global financial crisis, the Reserve Bank of Australia, Federal Reserve, Bank of Canada, Bank of England and ECB have all had the wide objective of promoting, enhancing and contributing to financial stability. Macro-prudential regulation and supervision contribute to financial stability by involving the relevant regulatory authority in monitoring systemic risks holistically. Effective central-bank regulation is of practical importance because it can affect the quality of bank regulation and supervision (Koetter et al. 2014). The ultimate aim of macro-prudential regulation is to avoid macro-economic costs linked to financial stability (Galati and Moessner 2010)
eBook - ePub- INTERNATIONAL MONETARY FUND(Author)
- 1991(Publication Date)
- INTERNATIONAL MONETARY FUND(Publisher)
At this point, it is necessary to bring into sharper focus what essentially the central bank is supposed to do. What is its core function? In Ireland, as elsewhere, one must look principally to the legislation governing the bank’s role and operation. The Central Bank Act, 1942 (Section 6(1) and (2)) provides that the Central Bank has the general function and duty of taking such steps as it “may from time to time deem appropriate and advisable towards safeguarding the integrity of the currency …,” and that the Minister for Finance may, whenever he wishes, require the Governor or the Board to “consult and advise with” him in regard to the execution and performance by the Bank of its “general function and duty.”Of course, the bank has many other functions, which I have already described; however, safeguarding the integrity of the currency is the real justification for having a separate central banking institution. All other functions could in principle be carried out quite well by a ministry or department of the government, but maintaining the value of the currency domestically and externally is of such importance to the well-being of the economy that it is felt to be appropriate to give the task to an institution that can pursue it single-mindedly, without the danger of being thrown off course by some short-term economic or political objective.These considerations underscore the logical necessity for ensuring that the central bank is “independent.” It would be inconsistent to give the central bank the task of maintaining the value of the currency while interfering with its freedom of action in pursuit of that goal. Even then, the bank cannot hope to succeed in its task if the government pursues policies that are incompatible with monetary stability. Apart from the changing economic circumstances, and perhaps because of them, governments are prone to pursue policies from time to time that are expedient politically but harmful monetarily. And so the central bank must develop the art of marrying flexibility in responding to such economic and political circumstances with a single-minded dedication to the job it has been given. Inevitably, the bank will have encounters with government, but its success will be the more assured (1) if, because of the influence it has exercised on public opinion, for example, through the consistency of its policies and its published commentaries on economic matters, there is popular understanding of and support for the need to adhere to the principles and practice of sound monetary management, and (2) if the standing of the bank is such that the government would be reluctant to take issue with it publicly. In other words, the bank should be regarded as a consistent, dedicated, and effective organization whose dealings with the public are courteous and efficient (e.g., in dealing with inquiries as registrar of government stock issues, as administrator of exchange control regulations, as provider of currency notes and coin, or whatever).
eBook - PDFFinancial 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.
eBook - PDF- John E. Marthinsen(Author)
- 2020(Publication Date)
- De Gruyter(Publisher)
External pressures are also evident in the selection and appointment process of central bank members and have also played an essential role in central banker resignations. Table 9.1 lists the websites of 31 central banks around the world. Accessing them opens doors to a wealth of information about the history and structure of these central banks, their goals and functions, and their methods of implement-ing monetary policies and controls. Table 9.1: Central Banks around the World. COUNTRY CENTRAL BANK WEBSITE Algeria Bank of Algeria http://www.bank-of-algeria.dz/ Argentina Central Bank of the Republic of Argentina http://www.bcra.gov.ar/index_i.htm Australia Reserve Bank of Australia http://www.rba.gov.au/ Brazil Central Bank of Brazil http://www.bcb.gov.br/?english Canada Bank of Canada http://www.bankofcanada.ca China People ’ s Bank of China http://www.pbc.gov.cn/en/ /index.html Colombia Bank of the Republic of Colombia http://www.banrep.gov.co/ European Monetary Union European Central Bank http://www.ecb.int/home/ India Reserve Bank of India http://www.rbi.org.in/ Indonesia Bank of Indonesia https://www.bi.go.id/en/Default.aspx Iran Central Bank of the Islamic Republic of Iran http://www.cbi.ir/default_en.aspx Iraq Central Bank of Iraq http://www.cbi.iq/index.php?pid= TheCbi Israel Bank of Israel http://www.boi.org.il/en/ Japan Bank of Japan http://www.boj.or.jp/en/ Malaysia Bank Negara Malaysia http://www.bnm.gov.my/ 236 Chapter 9 Central Banks Conclusion A nation ’ s monetary base changes only if our imaginary horizontal line is crossed and the size of the central bank ’ s balance sheet changes. This chapter deepened our understanding of the tools that central banks use to control their nations ’ (or currency areas ’ ) money supplies and credit conditions. This under-standing provides an appreciation for how a central bank can influence a na-tion ’ s money supply via changes in the monetary base or money multiplier.
- Michael Brandl(Author)
- 2016(Publication Date)
- Cengage Learning EMEA(Publisher)
Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. 173 CHAPTER 8 Central Banks Thus, by examining the Fed’s balance sheet, we can understand how the Fed responded to the growing financial and economic crisis. As we will see in later chapters, these moves by the Fed were controversial. We will ponder the questions, Where these the right moves to make? How should things be done differently in the future? And, perhaps most important, What can be done to prevent such a crisis from ever happening again? In attempting to address these questions, it is important to remember that as powerful as the Fed is, it does not operate in a vacuum. Instead, the Fed functions in a truly global financial market. Thus, to fully appreciate the role of central banks in our global economy we must also understand the other major central banks around the world. In the next section we examine the Bank of Japan, the Bank of England, the European Central Bank, and the Bank of Canada. SECTION REVIEW Q1) What does it mean that the Federal Reserve is the “fiscal agent” of the US government? Q2) In what ways did the Fed’s balance sheet change in response to the global financial crisis? Q3) The main purpose of term auction lending was to: a. reduce the rate of inflation. b. increase market interest rates. c. reduce the amount banks borrow from the Fed. d. increase the level of liquidity in financial markets. Copyright 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
eBook - PDFCentral 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)
Perhaps for these reasons, central banks have for many years shied away from publishing a clear framework to underpin their financial stability objectives. For example, when last resort lending formed the fulcrum of central banks’ financial stability mandate, there was a reluctance to provide a clear description of its framework, in part to avoid the risk of moral hazard (Goodhart, 1999). But that has changed materially over the past decade or so, and in particular since the crisis, as central banks have published frameworks, often suitably flexed or augmented, for the provi- sion of liquidity insurance to the banking system. This evolution towards clearer frameworks can also be seen on the regulatory front. Informal methods of regulation, with rather imprecise objectives, have given way to formal statutory approaches with clear and The Evolution of Central Banks: A Practitioner’s Perspective 641 often measurable policy objectives. For example, the Financial Services Act (2012) in the United Kingdom gives the Bank of England a very clear set of statutory objectives for the supervision of financial firms and the financial sector as a whole, with distinct objectives for the micro-prudential and macro-prudential arms of policy. There is a clear link between these frameworks and the operational issue of whether policy should be pursued by following a policy rule or by exercising discretion. Rules require greater clarity about objectives and greater discipline about their implementation, whereas discretion may be more appropriate to a world of multiple and diffuse objectives. There is a large body of literature suggesting that when the objectives are price stability and economic growth, policy can be enhanced by central banks responding to deviations of these variables from their target paths.
eBook - PDFThe European Central Bank
The New European Leviathan?
- D. Howarth, Kenneth A. Loparo, Peter Loedel(Authors)
- 2004(Publication Date)
- Palgrave Macmillan(Publisher)
4 Managing Europe’s Money: the Organization, Powers and Functions of the ECB Introduction The aim of this chapter is to provide a brief overview of the organi- zation – including voting procedures – powers and functions of the ECB and the organization of the ESCB. We also take the opportunity to explore some of the main issues of concern and debate regarding the operation of the ECB and its relationship with other institutions, although we discuss the larger issues of the bank’s independence and problematic legitimacy in the following chapter. Despite the ECB’s statutory independence, our ‘Leviathan’ must operate as part of a constantly developing and controversial EMU ‘regime’ that has a substantial impact on the bank’s activities. One issue of debate con- cerns the role of the ECB over prudential supervision. The ECB argues in favour of transferring control over prudential supervision to NCBs on the grounds that, as part of the Eurosystem, the NCBs are more likely to be effective supervisors of banks which operate in an EU-wide/international market. We also examine the developing and often unclear role of the ECB in the context of four levels of co- ordination. The first is within the Eurosystem and the respective roles of the ECB and NCBs in the management of Europe’s money. The second level is in relation to other EU institutions, notably in the context of the ‘soft’ macroeconomic policy co-ordination managed by the Council of Ministers (the Eurogroup) and the co- ordination with the Council on external monetary policy. The third level is with other EU NCBs participating in the ERMII. Finally, there has been much disagreement regarding the co-ordination of the external representation of the Euro-Zone and the role of the ECB in international level cooperation. 87 D. Howarth et al., The European Central Bank © David Howarth and Peter Loedel 2005
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