assignment on central bank

Module 13: Monetary Policy

The federal reserve system and central banks, learning objectives.

• Explain the structure and organization of the U.S. Federal Reserve
• Discuss how central banks impact monetary policy, promote financial stability, and provide banking services

Structure and Organization of the Federal Reserve

In order to help financial systems operate smoothly and to reduce the likelihood of financial crises, most modern nations have a central bank . The oldest central bank is the Bank of England. Other prominent central banks include the Bank of Japan, and the European Central Bank, which is the central bank for the member countries of the European monetary system. In the United States, the central bank is called the Federal Reserve—often abbreviated as “the Fed.” This section explains the organization of the U.S. Federal Reserve   System   and identifies the major responsibilities of a central bank.

The Federal Reserve , unlike most central banks, is semi-decentralized. At the national level, it is run by a Board of Governors, consisting of seven members appointed by the President of the United States and confirmed by the Senate. Appointments are for 14-year terms and they are arranged so that one term expires January 31 of every even-numbered year. The purpose of the long and staggered terms is to insulate the Board of Governors as much as possible from political pressure so that policy decisions can be made based only on their economic merits. Additionally, except when filling an unfinished term, each member only serves one term, further insulating decision-making from politics. Policy decisions of the Fed do not require congressional approval, and the President cannot ask for the resignation of a Federal Reserve Governor as the President can with cabinet positions.

The Federal Reserve is more than the Board of Governors. The Fed also includes 12 regional Federal Reserve banks, each of which is responsible for supporting the commercial banks and economy generally in its district. The Federal Reserve districts and the cities where their regional headquarters are located are shown in Figure 2. The commercial banks in each district elect a Board of Directors for each regional Federal Reserve bank, and that board chooses a president for each regional Federal Reserve district. Thus, the Federal Reserve System includes both federally and private-sector appointed leaders.

Figure 1. The Twelve Federal Reserve Districts. There are twelve regional Federal Reserve banks, each with its district.

One member of the Fed’s Board of Governors is designated as the Chair. For example, from 1987 until early 2006, the Chair was Alan Greenspan. From 2006 until 2014, Ben Bernanke held the post. The next Chair, Janet Yellen, held the position from 2014 to 2018, and now Jerome Powell heads the organization.

WHO HAS THE MOST IMMEDIATE ECONOMIC POWER IN THE WORLD?

Figure 2.  Janet L. Yellen was the first woman to hold the position of Chair of the Federal Reserve Board of Governors. (Credit: Board of Governors of the Federal Reserve System)

What individual can make financial market crash or soar just by making a public statement? It is not Bill Gates or Warren Buffett. It is not even the President of the United States.

Figure 3.  Chair of the Federal Reserve Board, Jerome Powell.

The answer is the Chair of the Federal Reserve Board of Governors. In early 2014, Janet L. Yellen, shown in Figure 1, became the first woman to hold this post. Yellen has been described in the media as “perhaps the most qualified Fed chair in history.” With a Ph.D. in economics from Yale University, Yellen taught macroeconomics at Harvard, the London School of Economics, and at the University of California at Berkeley before becoming the President of the Federal Reserve Bank of San Francisco between 2004–2010.

In February 2018, Yellen was succeeded as Fed Chair by Jerome Powell, a lawyer and investment banker.

The Fed Chair is first among equals on the Board of Governors. While he or she has only one vote, the Chair controls the agenda, and is the public voice of the Fed, so he or she has more power and influence than one might expect.

Visit the Federal Reserve Board website to learn more about the current members of the Federal Reserve Board of Governors. You can follow the links provided for each board member to learn more about their backgrounds, experiences, and when their terms on the board will end.

What Does a Central Bank Do?

The Federal Reserve, like most central banks, is designed to perform three important functions:

• To provide banking services to commercial banks and other depository institutions, and to provide banking services to the federal government.
• To promote stability of the financial system
• To conduct monetary policy

We will discuss the first function here. The other two functions are sufficiently important that we will explain them on their own pages.

The Federal Reserve is sometimes called a “banker’s bank.” The reason for this is that the Fed provides many of the same services to banks as banks provide to their customers. For example, all commercial banks have an account at the Fed where they deposit reserves. In fact, most of a commercial bank’s reserves are not held on the premises; rather, they are held at their regional Federal Reserve bank. Banks can also obtain loans from the Fed through the “discount window” facility, which will be discussed in more detail later. Additionally, the Fed is responsible for check processing. When you write a check, for example, to buy groceries, the grocery store deposits the check in its bank account. Then, the physical check (or an image of that actual check) is returned to your bank, after which funds are transferred from your bank account to the account of the grocery store. The Fed is responsible for each of these actions.

On a more mundane level, the Federal Reserve ensures that enough currency and coins are circulating through the financial system to meet public demands. For example, each year the Fed increases the amount of currency available in banks around the Christmas shopping season and reduces it again in January.

Finally, the Fed is responsible for assuring that banks are in compliance with a wide variety of consumer protection laws. For example, banks are forbidden from discriminating on the basis of age, race, sex, or marital status. Banks are also required to disclose publicly information about the loans they make for buying houses and how those loans are distributed geographically, as well as by sex and race of the loan applicants.

Watch Mr. Clifford at the Federal Reserve building in Washington D.C. as he gives an overview of the Federal Reserve System and how it works.

You can view the transcript for “The Federal Reserve System- Quick Overview” here (opens in new window) .

Contribute!

Improve this page Learn More

• The Federal Reserve Banking System and Central Banks. Provided by : OpenStax College. Located at : https://cnx.org/contents/[email protected]:Pv64glf4@3/The-Federal-Reserve-Banking-Sy . License : CC BY: Attribution . License Terms : Download for free at http://cnx.org/contents/[email protected]
• Jerome Powell. Provided by : Wikipedia. Located at : https://en.wikipedia.org/wiki/Jerome_Powell . License : Public Domain: No Known Copyright
• Macro 4.5- The Federal Reserve System- Quick Overview. Authored by : ACDCLeadership. Located at : https://www.youtube.com/watch?v=qXhXnwDANXo . License : Other . License Terms : Standard YouTube License

• Search Search Please fill out this field.
• Monetary Policy
• Federal Reserve

What Is a Central Bank, and Does the U.S. Have One?

What Is a Central Bank?

A central bank is a financial institution given privileged control over the production and distribution of money and credit for a nation or a group of nations. In modern economies, the central bank is usually responsible for the formulation of monetary policy and the regulation of member banks.

Central banks are inherently non-market-based or even anti-competitive institutions. Although some are nationalized, many central banks are not government agencies, and so are often touted as being politically independent. However, even if a central bank is not legally owned by the government, its privileges are established and protected by law.

The critical feature of a central bank—distinguishing it from other banks—is its legal monopoly status, which gives it the privilege to issue banknotes and cash. Private commercial banks are only permitted to issue demand liabilities, such as checking deposits .

Key Takeaways

• A central bank is a financial institution that is responsible for overseeing the monetary system and policy of a nation or group of nations, regulating its money supply, and setting interest rates.
• Central banks enact monetary policy, by easing or tightening the money supply and availability of credit, central banks seek to keep a nation's economy on an even keel.
• A central bank sets requirements for the banking industry, such as the amount of cash reserves banks must maintain vis-à-vis their deposits.
• A central bank can be a lender of last resort to troubled financial institutions and even governments.

Investopedia / Zoe Hansen

Understanding Central Banks

Although their responsibilities range widely, depending on their country, central banks' duties (and the justification for their existence) usually fall into three areas. 

First, central banks control and manipulate the national money supply. They influence the sentiment of markets as they issue currency and set interest rates on loans and bonds. Typically, central banks raise interest rates to slow growth and avoid inflation; they lower them to spur growth, industrial activity, and consumer spending. In this way, they manage monetary policy to guide the country's economy and achieve economic goals, such as full employment .

Most central banks today set interest rates and conduct monetary policy using an inflation target of 2-3% annual inflation.

Second, they regulate member banks through capital requirements, reserve requirements (which dictate how much banks can lend to customers, and how much cash they must keep on hand), and deposit guarantees, among other tools. They also provide loans and services for a nation’s banks and its government and manage foreign exchange reserves .

Finally, a central bank also acts as an emergency lender to distressed commercial banks and other institutions, and sometimes even a government. By purchasing government debt obligations, for example, the central bank provides a politically attractive alternative to taxation when a government needs to increase revenue.

Example: The Federal Reserve

Along with the measures mentioned above, central banks have other actions at their disposal. In the U.S., for example, the central bank is the Federal Reserve System , aka "the Fed". The Federal Reserve Board (FRB), the governing body of the Fed, can affect the national money supply by changing reserve requirements. When the requirement minimums fall, banks can lend more money, and the economy’s money supply climbs. In contrast, raising reserve requirements decreases the money supply. The Federal Reserve was established with the 1913 Federal Reserve Act.

When the Fed lowers the discount rate that banks pay on short-term loans , it also increases liquidity . Lower rates increase the money supply, which in turn boosts economic activity. But decreasing interest rates can fuel inflation, so the Fed must be careful.

And the Fed can conduct open market operations to change the federal funds rate . The Fed buys government securities from securities dealers, supplying them with cash, thereby increasing the money supply. The Fed sells securities to move the cash into its pockets and out of the system.

A Brief History of Central Banks

The first prototypes for modern central banks were the Bank of England and the Swedish Riksbank, which date back to the 17 th century. The Bank of England was the first to acknowledge the role of lender of last resort . Other early central banks, notably Napoleon’s Bank of France and Germany's Reichsbank, were established to finance expensive government military operations.

It was principally because European central banks made it easier for federal governments to grow, wage war, and enrich special interests that many of United States' founding fathers—most passionately Thomas Jefferson—opposed establishing such an entity in their new country. Despite these objections, the young country did have both official national banks and numerous state-chartered banks for the first decades of its existence, until a “free-banking period” was established between 1837 and 1863.

The National Banking Act of 1863 created a network of national banks and a single U.S. currency , with New York as the central reserve city. The United States subsequently experienced a series of bank panics in 1873, 1884, 1893, and 1907 . In response, in 1913 the U.S. Congress established the Federal Reserve System and 12 regional Federal Reserve Banks throughout the country to stabilize financial activity and banking operations. The new Fed helped finance World War I and World War II by issuing Treasury bonds .

Between 1870 and 1914, when world  currencies  were pegged to the  gold standard , maintaining price stability was a lot easier because the amount of gold available was limited. Consequently, monetary expansion could not occur simply from a political decision to print more money, so  inflation  was easier to control. The central bank at that time was primarily responsible for maintaining the convertibility of gold into currency; it issued notes based on a country's reserves of gold.

At the outbreak of World War I, the gold standard was abandoned, and it became apparent that, in times of crisis, governments facing  budget deficits  (because it costs money to wage war) and needing greater resources would order the printing of more money. As governments did so, they encountered inflation. After the war, many governments opted to go back to the gold standard to try to stabilize their economies. With this rose the awareness of the importance of the central bank's independence from any political party or administration.

During the unsettling times of the  Great Depression  in the 1930s and the aftermath of World War II, world governments predominantly favored a return to a central bank dependent on the political decision-making process. This view emerged mostly from the need to establish control over war-shattered economies; furthermore, newly independent nations opted to keep control over all aspects of their countries—a backlash against colonialism. The rise of managed economies in the Eastern Bloc was also responsible for increased government interference in the macro-economy. Eventually, however, the independence of the central bank from the government came back into fashion in Western economies and has prevailed as the optimal way to achieve a liberal and stable economic regime.

Central Banks and Deflation

Over the past quarter-century, concerns about deflation have spiked after big financial crises. Japan has offered a sobering example. After its equities and real estate bubbles burst in 1989-90, causing the Nikkei index to lose one-third of its value within a year, deflation became entrenched. The Japanese economy, which had been one of the fastest-growing in the world from the 1960s to the 1980s, slowed dramatically. The '90s became known as Japan's Lost Decade .

The Great Recession  of 2008-09 sparked fears of a similar period of prolonged deflation in the United States and elsewhere because of the catastrophic collapse in prices of a wide range of assets. The global financial system was also thrown into turmoil by the insolvency of a number of major banks and financial institutions throughout the United States and Europe, exemplified by the collapse of Lehman Brothers  in September 2008.

The Federal Reserve's Approach

In response, in December 2008, the Federal Open Market Committee (FOMC) , the Federal Reserve's monetary policy body, turned to two main types of unconventional monetary policy tools: (1) forward policy guidance and (2) large-scale asset purchases, aka quantitative easing (QE) .

The former involved cutting the target federal funds rate essentially to zero and keeping it there at least through mid-2013. But it's the other tool, quantitative easing, that has hogged the headlines and become synonymous with the Fed's easy-money policies. QE essentially involves a central bank creating new money and using it to buy securities from the nation's banks so as to pump liquidity into the economy and drive down long-term interest rates. In this case, it allowed the Fed to purchase riskier assets, including mortgage-backed securities and other non-government debt.

This ripples through to other interest rates across the economy and the broad decline in interest rates stimulate demand for loans from consumers and businesses. Banks are able to meet this higher demand for loans because of the funds they have received from the central bank in exchange for their securities holdings.

Other Deflation-Fighting Measures

In January 2015, the European Central Bank (ECB) embarked on its own version of QE, by pledging to buy at least 1.1 trillion euros' worth of bonds, at a monthly pace of 60 billion euros, through to September 2016. The ECB launched its QE program six years after the Federal Reserve did so, in a bid to support the fragile recovery in Europe and ward off deflation, after its unprecedented move to cut the benchmark lending rate below 0% in late-2014 met with only limited success.

While the ECB was the first major central bank to experiment with negative interest rates , a number of central banks in Europe, including those of Sweden, Denmark, and Switzerland, have pushed their benchmark interest rates below the zero bound.

Results of Deflation-Fighting Efforts

The measures taken by central banks seem to be winning the battle against deflation, but it is too early to tell if they have won the war. Meanwhile, the concerted moves to fend off deflation globally have had some strange consequences: 

• QE could lead to a covert currency war: QE programs have led to major currencies plunging across the board against the U.S. dollar. With most nations having exhausted almost all their options to stimulate growth, currency depreciation may be the only tool remaining to boost economic growth, which could lead to a covert currency war .
• European bond yields have turned negative: More than a quarter of debt issued by European governments, or an estimated $1.5 trillion, currently has negative yields . This may be a result of the ECB's bond-buying program, but it could also be signaling a sharp economic slowdown in the future.
• Central bank balance sheets are bloating: Large-scale asset purchases by the Federal Reserve, Bank of Japan, and the ECB are swelling balance sheets to record levels. Shrinking these central bank balance sheets may have negative consequences down the road.

In Japan and Europe, the central bank purchases included more than various non-government debt securities. These two banks actively engaged in direct purchases of corporate stock in order to prop up equity markets , making the BoJ the largest equity holder of a number of companies including Kikkoman, the largest soy-sauce producer in the country, indirectly via large positions in exchange-traded funds (ETFs ).

Modern Central Bank Issues

Currently, the Federal Reserve, the European Central Bank, and other major central banks are under pressure to reduce the balance sheets that ballooned during their recessionary buying spree.

Unwinding, or tapering these enormous positions is likely to spook the market since a flood of supply is likely to keep demand at bay. Moreover, in some more illiquid markets, such as the MBS market, central banks became the single largest buyer. In the U.S., for example, with the Fed no longer purchasing and under pressure to sell, it is unclear if there are enough buyers at fair prices to take these assets off the Fed's hands. The fear is that prices will then collapse in these markets, creating more widespread panic. If mortgage bonds fall in value, the other implication is that the interest rates associated with these assets will rise, putting upward pressure on mortgage rates in the market and putting a damper on the long and slow housing recovery.

One strategy that can calm fears is for the central banks to let certain bonds mature and to refrain from buying new ones, rather than outright selling. But even with phasing out purchases, the resilience of markets is unclear, since central banks have been such large and consistent buyers for nearly a decade.

Federal Reserve System. " Federal Reserve Act ."

Federal Reserve System. " Open Market Operations ."

Macrotrends. " Nikkei 225 Index - 67 Year Historical Chart ."

Federal Reserve Bank of St. Louis. " Federal Funds Effective Rate (FEDFUNDS) ."

Federal Reserve System. " Quantitative Easing and the "New Normal" in Monetary Policy ."

European Central Bank. " Annual Report 2016 ."

European Central Bank. " Asset Purchase Programmes ."

European Central Bank. " Going Negative: The ECB’s Experience ."

Bloomberg. " ‘Why Am I Holding This?’ Saying Bye to Europe’s Negative Yields ."

Barron's. " Kikkoman Corp ."

• The Impact of Interest Rate Changes by the Federal Reserve 1 of 30
• What Is a Central Bank, and Does the U.S. Have One? 2 of 30
• Federal Reserve System (FRS): Functions and History 3 of 30
• U.S. Treasury vs. Federal Reserve: What’s the Difference? 4 of 30
• Prime Rate vs. Discount Rate: What's the Difference? 5 of 30
• The Fed's Tools for Influencing the Economy 6 of 30
• Federal Funds Rate: What It Is, How It's Determined, and Why It's Important 7 of 30
• Forces That Cause Changes in Interest Rates 8 of 30
• What Happens If Interest Rates Increase Too Quickly? 9 of 30
• Do Lower Interest Rates Increase Investment Spending? 10 of 30
• How Does Money Supply Affect Interest Rates? 11 of 30
• Interest Rates Explained: Nominal, Real, and Effective 12 of 30
• How Negative Interest Rates Work 13 of 30
• Monetary Policy Meaning, Types, and Tools 14 of 30
• How the Federal Reserve Manages Money Supply 15 of 30
• What Is Quantitative Easing (QE), and How Does It Work? 16 of 30
• Fiscal Policy vs. Monetary Policy: Pros and Cons 17 of 30
• How the Federal Reserve Devises Monetary Policy 18 of 30
• How to Prepare for Rising Interest Rates 19 of 30
• How to Invest for Rising Interest Rates 20 of 30
• How Are Money Market Interest Rates Determined? 21 of 30
• Open Market Operations vs. Quantitative Easing: What’s the Difference? 22 of 30
• Interest Rate Risk Between Long-Term and Short-Term Bonds 23 of 30
• How Higher Interest Rates Impact Your 401(k) 24 of 30
• How Interest Rates Affect the U.S. Markets 25 of 30
• Average Credit Card Interest Rate for April 2024: 24.37% APR 26 of 30
• The Most Important Factors Affecting Mortgage Rates 27 of 30
• How Interest Rates Work on Car Loans 28 of 30
• These Sectors Benefit From Rising Interest Rates 29 of 30
• How Banks Set Interest Rates on Your Loans 30 of 30

• Terms of Service
• Editorial Policy
• Privacy Policy
• Your Privacy Choices

Central Bank and It’s Functions

A central bank plays an important role in monetary and banking system of a country.

It is responsible for maintaining financial sovereignty and economic stability of a country, especially in underdeveloped countries.

“A Central Bank is the bank in any country to which has been entrusted the duty of regulating the volume of currency and credit in that country”- Bank of International Settlement.

It issues currency, regulates money supply, and controls different interest rates in a country. Apart from this, the central bank controls and regulates the activities of all commercial banks in a country.

ADVERTISEMENTS:

Some of the management experts have defined central bank in different ways, which are as follows:

According to Samuelson, “Every Central Bank has one function. It operates to control economy, supply of money and credit.”

According to Vera Smith, “The primary definition of Central Bank is the banking system in which a single bank has either a complete or residuary monopoly of note issue.”

According to Kent, “Central Bank may be defined as an institution which is charged with the responsibility of managing the expansion and contraction of the volume of money in the interest of general public welfare.”

According to Bank of International Settlement, “A Central Bank is the bank in any country to which has been entrusted the duty of regulating the volume of currency and credit in that country.”

Bank of England was the world’s first effective central bank that was established in 1694. As per the resolution passed in Brussels Financial Conference, 1920, all the countries should establish a central bank for interest of world cooperation. Thus, since 1920, central banks are formed in almost every country of the world. In India, RBI operates as a central bank.

Central banks differ from the commercial banks in various ways, which are shown in Table-2:

Functions of Central Bank :

The central bank does not deal with the general public directly. It performs its functions with the help of commercial banks. The central bank is accountable for protecting the financial stability and economic development of a country.

Apart from this, the central bank also plays a significant part in avoiding the cyclical fluctuations by controlling money supply in the market. As per the view of Hawtrey, a central bank should primarily be the “lender of last resort.”

On the other hand, Kisch and Elkins believed that “the maintenance of the stability of the monetary standard” as the essential function of central bank. The functions of central bank are broadly divided into two parts, namely, traditional functions and developmental functions.

These functions are shown in Figure-4:

The different functions of a central bank (as discussed in Figure-4) are explained as follows:

(a) Traditional Functions:

Refer to functions that are common to all central banks in the world.

The traditional functions of the central bank include the following:

(i) Bank of issue:

Possesses an exclusive right to issue notes (currency) in every country of the world. In the initial years of banking, every bank enjoyed the right of issuing notes. However, this led to a number of problems, such as notes were over-issued and the currency system became disorganized. Therefore, the governments of different countries authorized central banks to issue notes. The issue of notes by one bank has led to uniformity in note circulation and balance in money supply.

(ii) Government’s banker, agent, and advisor:

Implies that a central bank performs different functions for the government. As a banker, the central bank performs banking functions for the government as commercial banks performs for the public by accepting the government deposits and granting loans to the government. As an agent, the central bank manages the public debt, undertakes the payment of interest on this debt, and provides all other services related to the debt.

As an advisor, the central bank gives advice to the government regarding economic policy matters, money market, capital market, and government loans. Apart from this, the central bank formulates and implements fiscal and monetary policies to regulate the supply of money in the market and control inflation.

(iii) Custodian of cash reserves of commercial banks:

Implies that the central bank takes care of the cash reserves of commercial banks. Commercial banks are required to keep certain amount of public deposits as cash reserve, with the central bank, and other part is kept with commercial banks themselves.

The percentage of cash reserves is deeded by the central bank! A certain part of these reserves is kept with the central bank for the purpose of granting loans to commercial banks Therefore, the central bank is also called banker’s bank.

(iv) Custodian of international currency:

Implies that the central bank maintains a minimum reserve of international currency. The main aim of this reserve is to meet emergency requirements of foreign exchange and overcome adverse requirements of deficit in balance of payments.

(v) Bank of rediscount:

Serve the cash requirements of individuals and businesses by rediscounting the bills of exchange through commercial banks. This is an indirect way of lending money to commercial banks by the central bank. Discounting a bill of exchange implies acquiring the bill by purchasing it for the sum less than its face value.

Rediscounting implies discounting a bill of exchange that was previously discounted. When owners of bill of exchange are in need of cash they approach the commercial bank to discount these bills. If commercial banks are themselves in need of cash they approach the central bank to rediscount the bills.

(vi) Lender of last resort:

Refer to the most crucial function of the central bank. The central bank also lends money to commercial banks. Instead of rediscounting of bills, the central bank provides loans against treasury bills, government securities, and bills of exchange.

(vii) Bank of central clearance, settlement, and transfer:

Implies that the central bank helps in settling mutual indebtness between commercial banks. Depositors of banks give checks and demand drafts drawn on other banks. In such a case, it is not possible for banks to approach each other for clearance, settlement, or transfer of deposits.

The central bank makes this process easy by setting a clearing house under it. The clearing house acts as an institution where mutual indebtness between banks is settled. The representatives of different banks meet in the clearing house to settle inter-bank payments. This helps the central bank to know the liquidity state of the commercial banks.

(viii) Controller of Credit:

Implies that the central bank has power to regulate the credit creation by commercial banks. The credit creation depends upon the amount of deposits, cash reserves, and rate of interest given by commercial banks. All these are directly or indirectly controlled by the central bank. For instance, the central bank can influence the deposits of commercial banks by performing open market operations and making changes in CRR to control various economic conditions.

(b) Developmental Functions:

Refer to the functions that are related to the promotion of banking system and economic development of the country. These are not compulsory functions of the central bank.

These are discussed as follows:

(i) Developing specialized financial institutions:

Refer to the primary functions of the central bank for the economic development of a country. The central bank establishes institutions that serve credit requirements of the agriculture sector and other rural businesses.

Some of these financial institutions include Industrial Development Bank of India (IDBI) and National Bank for Agriculture and Rural Development (NABARD). These are called specialized institutions as they serve the specific sectors of the economy.

(ii) Influencing money market and capital market:

Implies that central bank helps in controlling the financial markets Money market deals in short term credit and capital market deals in long term credit. The central bank maintains the country’s economic growth by controlling the activities of these markets.

(iii) Collecting statistical data:

Gathers and analyzes data related to banking, currency, and foreign exchange position of a country. The data is quite helpful for researchers, policymakers, and economists. For instance, the Reserve Bank of India publishes a magazine called Reserve Bank of India Bulletin, whose data is useful for formulating different policies and making macro-level decisions.

Related Articles:

• Top 12 Functions of the Central Bank | Banking
• Difference between Central Bank and Commercial Bank
• Difference between a Central Bank and Commercial Bank
• Top 10 Functions of Central Bank according to De Kock

• Corporate Finance Assignment Help
• Stock Valuation Assignment Help
• Insurance Assignment Help
• Financial Planning Assignment Help
• Managerial Finance Assignment Help
• Econometrics Assignment Help
• Financial Engineering Assignment Help
• Quantitative Finance Assignment Help
• Financial Market Analysis Assignment Help
• Auditing and Assurance Assignment Help
• Capital Markets Assignment Help
• Bond Valuation Assignment Help
• Mergers and Acquisitions Assignment Help
• Financial Forecasting Assignment Help
• Financial Markets Assignment Help
• Investment Banking Assignment Help
• Portfolio Management Assignment Help
• Financial Modeling Assignment Help
• Financial Reporting Assignment Help
• Banking Assignment Help
• Financial Mathematics Assignment Help
• Public Finance Assignment Help
• Valuation Methods Assignment Help
• Applied Finance Assignment Help
• Corporate Taxation Assignment Help
• Capital Asset Pricing Model (CAPM) Assignment Help
• Financial Counselling Assignment Help
• Financial Technology Assignment Help
• Personal Investment Planning Assignment Help
• Financial Services Assignment Help
• Business Finance Assignment Help

The Role of Central Banks in Financial Markets: A Comprehensive Theoretical Analysis

In the intricate world of finance, central banks serve as the backbone, wielding immense influence over economic stability and the seamless functioning of financial markets. For university students like you, comprehending the multifaceted roles of central banks is paramount, especially when tackling finance assignments. This in-depth discussion aims to provide you with a detailed theoretical understanding of central banks' functions, with a particular focus on monetary policy, interest rate decisions, and the management of systemic risks. Armed with this knowledge, you will be well-equipped to excel in your banking assignment .

Monetary Policy: The Cornerstone of Central Banking

Monetary policy is the strategic framework through which central banks manage the money supply and interest rates to achieve specific economic goals. These objectives primarily revolve around maintaining price stability, ensuring full employment, and fostering sustainable economic growth.

Central banks employ various tools to enact their monetary policy, each with its unique implications:

Tools of Monetary Policy

The tools of monetary policy are essential for central banks to influence an economy's money supply and interest rates. Open market operations involve buying or selling securities, while the discount rate influences bank borrowing. Reserve requirements set the minimum reserves banks must hold. These tools shape financial markets and economic conditions, making them crucial for analysis in finance assignments.

• Open Market Operations: Open market operations are a fundamental tool of central banks in shaping monetary policy. When central banks buy government securities, they inject money into the economy, reducing interest rates. Conversely, selling securities withdraws money, raising interest rates. This mechanism directly affects bond prices and yields, making it essential for finance assignments. Students may need to analyze the impact of open market operations on bond valuations, portfolio strategies, and interest rate risk management. Understanding how central banks utilize open market operations is crucial for effectively solving finance assignments related to fixed-income securities and monetary policy.
• Discount Rate: The discount rate, set by central banks, is a key tool influencing financial markets. When central banks raise the discount rate, it becomes more expensive for commercial banks to borrow funds, leading to higher lending rates throughout the financial system. Conversely, lower discount rates can stimulate borrowing and lending activities. This concept is pivotal for finance students as they often analyze how central banks' discount rate decisions impact banks' borrowing costs, lending behavior, and overall credit availability, making it an essential element in solving finance assignments related to interest rate dynamics and bank operations.
• Reserve Requirements: Reserve requirements are a vital tool in the toolkit of central banks to influence the money supply and lending activities of commercial banks. By adjusting these requirements, central banks can either stimulate or restrict lending. Understanding reserve requirements is crucial for finance students as they often analyze how changes in these regulations can impact the banking sector, liquidity in financial markets, and the broader economy. In finance assignments, students may need to assess the implications of altered reserve requirements on bank profitability, lending practices, and monetary policy transmission mechanisms, making this a key topic for theoretical study.

Impact of Monetary Policy on Financial Markets

Understanding the impact of central banks' monetary policy decisions is essential for solving finance assignments. When central banks alter interest rates or conduct open market operations, it triggers a ripple effect across financial markets:

• Bond Markets: Bond markets are highly sensitive to central bank monetary policy decisions. When interest rates rise, bond prices typically fall, and when rates drop, bond prices tend to rise. This inverse relationship between interest rates and bond prices is fundamental in finance. Assignments often require analyzing the impact of central bank policies on bond valuations and assessing interest rate risk. Moreover, central banks' influence on the yield curve and yield spreads can affect bond market dynamics, making it essential for students to grasp these concepts when solving finance assignments involving fixed-income securities.
• Equity Markets: Central banks' monetary policies have a significant impact on equity markets. Lower interest rates tend to boost stock prices, making equities more attractive relative to fixed-income investments. This relationship is crucial for finance assignments involving stock valuation, portfolio management, and investment strategies. Understanding how central bank decisions can stimulate or dampen investor sentiment and influence market dynamics is key to analyzing the equity market's response to changes in monetary policy. Students often need to evaluate the implications of these policy shifts when solving finance assignments related to stocks and equities.
• Forex Markets: Forex (foreign exchange) markets are heavily influenced by central bank actions. Interest rate differentials between countries, driven by central bank rate decisions, play a pivotal role in currency exchange rates. When one country's central bank raises rates while another lowers them, it can trigger shifts in exchange rates. Students tackling finance assignments often need to analyze the impact of these rate differentials on currency pairs, understand how central banks use forex intervention, and assess exchange rate risk. A solid understanding of central banks' role in forex markets is crucial for effective problem-solving in international finance assignments.

Solving Your Finance Assignment

To solve your finance assignment, you may need to apply this knowledge by:

• Analyzing the impact of a hypothetical central bank decision on bond prices or stock market performance.
• Evaluating how changes in interest rates can affect the value of financial instruments in a given scenario.
• Assessing the implications of central banks' monetary policies on currency exchange rates.

By grounding your analysis in the theoretical understanding of central banks' monetary policy tools and their effects on financial markets, you will be better prepared to excel in your finance assignments.

Interest Rate Decisions: A Crucial Determinant of Market Dynamics

Central banks wield significant influence over short-term interest rates, which subsequently affect the entire interest rate structure within an economy. The central bank's key policy rate (e.g., the federal funds rate in the United States) serves as a benchmark for other interest rates.

Impact of Interest Rate Decisions on Financial Markets

The dynamics of financial markets are intricately tied to central banks' interest rate decisions. For your assignments, it's essential to grasp the following:

• Bond Markets: Bond markets are acutely sensitive to central bank interest rate decisions. When central banks raise interest rates, bond prices tend to decline, as new bonds offer higher yields, diminishing the attractiveness of existing bonds. Conversely, rate cuts can boost bond prices. For students, comprehending this relationship is fundamental when analyzing bond valuation, yield curves, and duration. Assignments often require assessing the impact of interest rate changes on bond portfolios, making a strong understanding of central banks' role in bond markets essential for effective problem-solving in finance coursework.
• Equity Markets: Central banks' interest rate decisions significantly impact equity markets. Lower interest rates tend to stimulate investment in stocks as they make alternative fixed-income investments less attractive. Finance assignments often require students to evaluate how shifts in interest rates can affect stock prices, assess portfolio strategies in response to monetary policy changes, and analyze the relationship between central bank actions and equity market performance. A strong comprehension of these dynamics equips students with the tools needed to excel in assignments related to equity valuation, portfolio management, and investment strategies.
• Forex Markets: Foreign exchange (forex) markets are intricately linked to central bank actions. Central banks determine their respective countries' interest rates, influencing the interest rate differentials that drive currency exchange rates. When one country's central bank raises rates relative to another's, it can lead to currency appreciation. This dynamic is crucial for finance students as they often analyze forex markets in assignments, assessing how central bank policies impact exchange rates, currency risk management, and international trade scenarios. A thorough grasp of central banks' roles in forex markets empowers students to excel in finance assignments related to global economic factors and currency movements.

To tackle your finance assignment successfully, you can:

• Predict the effects of potential interest rate changes on various financial assets, such as bonds, stocks, and currencies.
• Analyze how a central bank's forward guidance might impact investor behavior and market expectations.
• Evaluate the implications of interest rate differentials between countries on exchange rate movements.

By leveraging your theoretical understanding of central banks' role in setting interest rates and their consequences, you'll be well-prepared to excel in your finance assignments.

Management of Systemic Risks: Safeguarding Financial Stability

Systemic risks are threats to the stability of the entire financial system rather than isolated to individual institutions. Central banks play a pivotal role in identifying and mitigating these risks.

Central Banks in Financial Crises

Central banks play a pivotal role in mitigating financial crises, serving as the lender of last resort. Their intervention is essential to prevent systemic collapse. During the 2008 global financial crisis, central banks worldwide injected capital into struggling financial institutions to stabilize markets. Understanding this role is crucial for finance students as assignments frequently involve analyzing the central banks' actions during crises, assessing their impact on financial institutions, and evaluating the overall efficacy of crisis management policies in safeguarding financial stability and restoring market confidence.

Macroprudential Policies

Macroprudential policies are regulatory measures implemented by central banks to safeguard financial stability and prevent systemic risks. These policies include capital adequacy requirements, stress testing, and limits on risky activities. In finance assignments, students delve into the effectiveness of these measures, evaluating their ability to strengthen financial institutions and the broader system. Analyzing macroprudential policies allows students to gain insights into the regulatory framework that underpins the stability of financial markets, making it a critical area of study for understanding and solving complex financial problems in their assignments.

Solving finance assignments requires a comprehensive understanding of central banks' roles in monetary policy, interest rate decisions, and systemic risk management. By mastering these concepts, you'll be equipped to analyze complex scenarios, evaluate the impact of central bank actions on financial markets, and make informed financial decisions. Whether you're assessing the effect of interest rate changes on bond portfolios, analyzing forex market dynamics, or evaluating crisis management strategies, the theoretical knowledge gained from this discussion will be invaluable in successfully tackling finance assignments and achieving academic excellence. In your finance assignment, you may be required to:

• Analyze the role of central banks as lenders of last resort during a hypothetical financial crisis scenario.
• Evaluate the effectiveness of macroprudential policies in safeguarding financial stability.
• Assess the potential impact of systemic risks on financial institutions and the broader economy.

By comprehending the theoretical underpinnings of central banks' roles in managing systemic risks, you'll be well-prepared to address complex scenarios and issues in your finance assignments.

In conclusion, central banks are the linchpin of financial markets, wielding substantial influence through monetary policy, interest rate decisions, and the management of systemic risks. As a university student pursuing finance studies, mastering these theoretical aspects of central banking is essential for excelling in your finance assignments. By delving deep into the intricacies of central banks' operations and their ripple effects on financial markets, you are equipping yourself with a formidable arsenal of knowledge to tackle complex financial problems. Armed with this understanding, you can confidently approach your finance assignments, applying your expertise to analyze and solve intricate financial challenges. With determination and the insights gained here, you are well on your way to success in your finance studies and future career. So, go ahead and use this knowledge to solve your finance assignment with confidence and finesse.

Post a comment...

Assignment Report on Central Bank

Introduction

Bangladesh Bank has been entrusted with all the traditional central banking functions including the sole responsibilities of issuing currency, keeping the reserves, formulating and managing the monetary policy and regulating the credit system of Bangladesh with a view to stabilizing domestic and external monetary value and promoting and maintaining a high level of production, employment and real income in the country. The bank acts as the banker to the government and accepts government deposits, cheques and drafts, and undertakes collection of cheques and drafts drawn on other banks. The government deposits all its cash balances with the Bangladesh Bank free of interest. The bank transfers government funds from one place to another as requested by the government and its agencies.

The purchase, sale and rediscount of bill of exchange and promissory notes drawn on and payable in Bangladesh are also included in the activity of the bank. The bank acts as the lender of last resort for the government as well as for the country’s scheduled banks.

Bangladesh Bank exercises its wide range of power in credit control through different types of traditional and non-traditional methods. In addition to bank rate and open market operations, it uses a number of other weapons. It can vary the minimum reserve requirements of scheduled banks whenever circumstance so warrant. Being responsible for maintaining external value of Bangladesh currency, the bank also handles the exchange control. It ensures that all foreign exchange inflows are accounted for, and surrendered to the authorized dealers. It allocates and rations foreign exchange in line with the set priorities. Bangladesh Bank is empowered to manage the country’s international reserves, which represent aggregate of its holding of gold, foreign exchange, SDR and reserve position in the IMF. The bank also acts as the representative of the government in different international agencies and other forums such as World Bank, IMF, Asian Clearing Union, ADB, etc.

What is mean by OMO

Definition of – OMO:

The buying and selling of government securities in the open market in order to expand or contract the amount of money in the banking system. Purchases inject money into the banking system and stimulate growth while sales of securities do the opposite.

Explains – OMO:

Open market operations are the principal tools of monetary policy. (The discount rate and reserve requirements are also used.) The U.S. Federal Reserve’s goal in using this technique is to adjust the federal funds rate–the rate at which banks borrow reserves from each other.

  Classification of OMO defensive

Asset: Any item of economic value owned by an individual or corporation, especially that which could be converted to cash. Examples are cash, securities, accounts receivable, inventory, office equipment, real estate, a car, and other property. On a balance sheet, assets are equal to the sum of liabilities, common stock, preferred stock, and retained earnings.

At first we classify assets into tangible assets and intangible assets. Definition and explanation are given below:

Tangible asset : Assets having a physical existence, such as cash, equipment, and real estate; accounts receivable are also usually considered tangible assets for accounting purposes. In short, it is the opposite of intangible asset.

Intangible asset : Something of value that cannot be physically touched, such as a brand, franchise, trademark, or patent. In short, it is the opposite of tangible asset. All the tangible assets are described below with examples.

Trademark (™) : A distinctive name, symbol, motto, or design that legally identifies a company or its products and services, and sometimes prevents others from using identical or similar marks. Distinctive design, graphics, logo, symbols, words, or any combination thereof that uniquely identifies a firm and/or its goods or services, guarantees the item’s genuineness, and gives it owner the legal rights to prevent the trademark’s unauthorized use. A trademark must be (1) distinctive instead of descriptive, (2) affixed to the item sold, and (3) registered with the appropriate authority to obtain legal ownership and protection rights.

Copyrights (©) : It is a legal monopoly that protects published or unpublished original work (for the duration of its author’s life plus 50 years) from unauthorized duplication without due credit and compensation. Copyright covers not only books but also advertisements, articles, graphic designs, labels, letters (including emails), lyrics, maps, musical compositions, product designs, etc. According to the major international intellectual-property protection treaties(Berne Convention, Universal Copyright Convention, and WIPO Copyright Treaty) five rights are associated with a copyright: the right to: (1) Reproduce the work in any form, language, or medium. (2) Adapt or derive more works from it. (3) Make and distribute its copies. (4) Perform it in public. (5) Display or exhibit it in public. To acquire a valid copyright, a work must have originality and some modicum of creativity

Patents : Limited legal monopoly granted to an individual or firm to make, use, and sell its invention, and to exclude others from doing so. An invention is patentable if it is novel, useful, and non-obvious. To receive a patent, a patent application must disclose all details of the invention so that others can use it to further advance the technology with new inventions. Patentable items fall under four classes (1) Machine: apparatus or device with interrelated parts that work together to perform the invention’s designed or intended functions, (2) Manufacture: all manufactured or fabricated items, (3) Process: chemical, mechanical, electrical or other process that produces a chemical or physical change in the condition or character of an item, and (4) Composition of matter: chemical compounds or mixtures having properties different from their constituent ingredients.

Goodwill : It is an intangible asset which provides a competitive advantage, such as a strong brand, reputation, or high employee morale. In an acquisition, goodwill appears on the balance sheet of the acquirer in the amount by which the purchase price exceeds the net tangible assets of the acquired company. In other words, it is assumed value of the attractive force that generates sales revenue in a business, and adds value to its assets. Goodwill is an intangible but saleable asset, almost indestructible except by indiscretion. It is built painstakingly over the years generally with (1) heavy and continuous expenditure in promotion, (2) creation and maintenance of durable customer and supplier relationships, (3) high quality of goods and services, and (4) high quality and conduct of management and employees. Goodwill includes the worth of corporate identity, and is enhanced by corporate image and a proper location. Its value is not recognized in account books but is realized when the business is sold, and is reflected in the firm’s selling price by the amount in excess over the firm’s net. In well established firms, goodwill may be worth many times the worth of its physical assets. GAAP require the firm’s purchaser to write off (amortize) the amount paid as goodwill over a period (usually 10 to 30 years) for financial reporting purposes.

Brand : It is an identifying symbol, words, or mark that distinguishes a product or company from its competitors. Usually brands are registered (trademarked) with a regulatory authority and so cannot be used freely by other parties. For many products and companies, branding is an essential part of marketing. Unique design, sign, symbol, words, or a combination of these, employed in creating an image that identifies a product and differentiates it from its competitors. Over time, this image becomes associated with a level of credibility, quality, and satisfaction in the consumer’s mind (see positioning). Thus brands help harried consumers in crowded and complex marketplace, by standing for certain benefits and value. Legal name for a brand is trademark and, when it identifies or represents a firm, it is called a brand. Royalty Compensation, consideration, or fee paid for a license or privilege to use an intellectual property (brand, copyright, patent, process) or a natural resource (fishing, hunting, mining), computed usually as a percentage of revenue or profit realized from the use.

Franchise : A form of business organization in which a firm which already has a successful product or service (the franchisor) enters into a continuing contractual relationship with other businesses (franchisees) operating under the franchisor’s trade name and usually with the franchisor’s guidance, in exchange for a fee.

  Instruments used in OMO

Central banks implement a country’s chosen monetary policy. At the most basic level, this involves establishing what form of currency the country may have, whether a fiat currency, gold-backed currency (disallowed for countries with membership of the International Monetary Fund), currency board or a currency union. When a country has its own national currency, this involves the issue of some form of standardized currency, which is essentially a form of promissory note: a promise to exchange the note for “money” under certain circumstances. Historically, this was often a promise to exchange the money for precious metals in some fixed amount. Now, when many currencies are fiat money, the “promise to pay” consists of the promise to accept that currency to pay for taxes.

A central bank may use another country’s currency either directly (in a currency union), or indirectly (a currency board). In the latter case, exemplified by Bulgaria, Hong Kong and Latvia, the local currency is backed at a fixed rate by the central bank’s holdings of a foreign currency.

In countries with fiat money, the expression “monetary policy” may refer more narrowly to the interest-rate targets and other active measures undertaken by the monetary authority. A central bank , reserve bank , or monetary authority is an institution that manages a nation’s currency, money supply, and interest rates. Central banks also usually oversee the commercial banking system of their respective countries. In contrast to a commercial bank, a central bank possesses a monopoly on increasing the nation’s monetary base, and usually also prints the national currency, which usually serves as the nation’s legal tender. [1] [2] Examples include the European Central Bank (ECB), the Federal Reserve of the United States, and the People’s Bank of China.

Functions of a central bank may include:

• Implementing monetary policies.
• determining Interest rates
• controlling the nation’s entire money supply
• the Government’s banker and the bankers’ bank (“lender of last resort”)
• managing the country’s foreign exchange and gold reserves and the Government’s stock register
• regulating and supervising the banking industry
• setting the official interest rate – used to manage both inflation and the country’s exchange rate – and ensuring that this rate takes effect via a variety of policy mechanisms

What is the central bank Objective is using OMO?

An open market operation (also known as OMO ) is an activity by a central bank to buy or sell government bonds on the open market. A central bank uses them as the primary means of implementing monetary policy. The usual aim of open market operations is to control the short term interest rate and the supply of base money in an economy, and thus indirectly control the total money supply. This involves meeting the demand of base money at the target interest rate by buying and selling government securities, or other financial instruments. Monetary targets, such as inflation, interest rates, or exchange rates, are used to guide this implementation. [1] [2]

Since most money now exists in the form of electronic records rather than in the form of paper, open market operations are conducted simply by electronically increasing or decreasing ( crediting or debiting ) the amount of base money that a bank has in its reserve account at the central bank. Thus, the process does not literally require new currency. However, this will increase the central bank’s requirement to print currency when the member bank demands banknotes, in exchange for a decrease in its electronic balance.

When there is an increased demand for base money, the central bank must act if it wishes to maintain the short-term interest rate. It does this by increasing the supply of base money. The central bank goes to the open market to buy a financial asset, such as government bonds, foreign currency, gold, or seemingly nonvolatile (until the 2008 financial fallout) MBS’s [3] (Mortgage Backed Securities). To pay for these assets, bank reserves in the form of new base money (for example newly printed cash) are transferred to the seller’s bank and the seller’s account is credited. Thus, the total amount of base money in the economy is increased. Conversely, if the central bank sells these assets in the open market, the amount of base money held by the buyer’s bank is decreased, effectively destroying base money.

Methodology used by Bangladesh Bank

In 1989, the government adopted a comprehensive Financial Sector Reform Programme (FSRP), following which the country’s monetary policy assumed a new orientation towards promotion of market economy in a competitive environment. Bangladesh Bank started moving away from direct quantitative monetary control to indirect methods of monetary management since the beginning of 1990. Although, the fixation of target continued to remain as the central piece of exercise, the way to achieve it had been changed. Credit ceilings on individual banks and direct controls of interest rates were withdrawn. At present, the money supply is regulated through indirect manipulation of reserve money instead of credit ceiling. Major instruments of monetary control available with Bangladesh Bank are the bank rate, open market operations, rediscount policy, and statutory reserve requirement.

Bank rate Until 1990, the use of this instrument as the lending rate of the central bank for borrowings of the commercial banks to meet their temporary needs was virtually non-existent in Bangladesh. The rate was changed in a few occasions only to align it with the refixation of the rates of deposits and advances. Moreover, the existence of refinance facilities at rates lower than the bank rate substantially eroded its significance. However, since 1990, the instrument has been put in use to change the cost of borrowings for banks and thereby to affect the market rate of interest. Bank rate was gradually lowered from 9.75% in January 1990 to 5% in March 1994. It was raised to 5.75% from 10 September 1995 and further, to 7.5% and 8% from 19 May 1997 and 20 November 1997 respectively. The rate was lowered to 7% from 29 August 1999.

Open market operations (OMO) These involve the sale or purchase of securities by the central bank to withdraw liquid funds from the banking system or inject the same into that system. OMO allows flexibility in terms of both the amount and timing of intervention, which did not exist in Bangladesh before 1990. Bangladesh Bank introduced a 91-day Bangladesh Bank Bill, a market-based tool for monetary intervention, in December 1990.

Rediscount policy After the introduction of FSRP, the refinance facility was replaced by rediscount facility at bank rate to eliminate discrimination in access to central bank funds. Refinance facility is now available for agricultural credit provided by bangladesh krishi bank and for projects of Bangladesh Rural Development Board financed by sonali bank. Banks are advised to extend credit considering banker-customer relationship.

Statutory reserve requirement Cash reserve requirement (CRR) of the deposit money banks has a significant potential to regulate money supply through affecting money multiplier, while statutory liquidity requirement (SLR) is generally used to affect the lending capability of the bank. Bangladesh Bank used these two instruments very infrequently before 1990 and very often after 1990. The CRR and SLR were 8% and 23% respectively on 25 April 1991 and were reduced to 7% and 22% respectively on 5 December 1991.

Repo with Bangladesh Bank

Reverse Repo with Bangladesh Bank

Inter-Bank Repo

What is Repo?

Definition of Repo:

Repurchase agreement where a seller of a security agrees to buy it back from a buyer (investor) at a higher price on a specified date. These agreements are in effect loans (or short term swaps) between investors to sellers (the difference between the buying and selling prices being the investors’ earnings), and are used usually for raising short term finance by banks and corporations. Repos are used also by the central banks as instruments of monetary policy. To temporarily expand the money supply, a central bank decreases the discount rate (called repo rate) at which it buys back government securities from the commercial banks, to contract or maintain the money supply it increases the repo rate.

What is reverse Repo

Definition of reverse Repo:

A purchase of securities with an agreement to resell them at a higher price at a specific future date. This is essentially just a loan of the security at a specific rate. Also called reverse repurchase agreement.

How Bangladesh use these machinery to influence the reason of Commercial bank

The banking sector in Bangladesh comprises four types of banks, including nationalized Commercial banks (NCBs), government-owned specialized banks (DFIs), private Commercial banks (PCBs) and foreign commercial banks (FCBs). The Bangladesh Banking sector is dominated by NCBs in terms of asset value. However, since 2003 Market share of NCBs on the asset side declined substantially while that of PCBs Increased remarkably. Particularly, NCBs share declined to 41.7 percent of the total assets as against 45.6 percent in 2002 while PCBs share rose to 40.8 percent in 2003 as against 36.2 percent in 2002. Foreign commercial banks held 7.3 percent of the industry assets in 2003, showing a slight increase by 0.5 percentage point over the previous year. The NCBs’ dominance on the deposit side also was on a decline trend because of the rapid increase deposit from other banks. For example, despite the total deposits NCBs rose by 11.4 percent while their share in the deposit market decreased from 50.3 percent in 2002 to 46.0 percent in 2003. In contrast, PCBs’ deposits in 2003 accounted for 41.1 percent of the total industry deposit from 36.8 percent in the same period (NBB, 2003; 2004). In general, the performance of the banking sector in Bangladesh improved constantly with the passage of time. Table 1 shows the ratio of net non-performing loan to total loan for the period of 1997-2003. Ironically, government-related banks, with large asset share and an extensive network, always have the highest rate of non-performing loans. One possible reason is that government banks, such as NCBs have to allocated credit through 3 directed lending programs to certain economic sectors dictated by the government (NBB, 2001). In contrast, FCBs, despite their modest share in total industry’s asset, always maintained the lowest rate of non-performing loans amongst commercial banks in Bangladesh (Table 1). Perhaps, international experiences technology and advantage help FCBs outperformed their domestic counterparts in this category.

Recommendation for important of the methodology of OMO

Step 1: Identifying the Evidence

To ensure that DynaMed provides the best available evidence, an extensive set of current literature is monitored daily. Systematic Literature Surveillance is conducted using many journals, journal review services, systematic review collections, guideline collections and other sources considered relevant to a point-of-care clinical reference. For a comprehensive list of sources, see DynaMed Content Sources. These sources are derived from systematic evaluation of which sources and search strategies provide the greatest yield for identifying the most valid, relevant evidence (meeting criteria for step 2) included in DynaMed .

Step 2: Selecting the Best Available Evidence

Each article is assessed for clinical relevance and each relevant article is further assessed for validity relative to existing DynaMed content. The most valid articles are summarized, the summaries are integrated with DynaMed content, and overview statements and outline structure are updated based on the overall evidence synthesis. Article selection is completed by editors with clinical expertise and training in scientific analysis.

Step 3: Critical Appraisal

Abstracts in research publications often do not accurately reflect the methodological quality and results found in full-text articles. Article summaries in other publications often do not accurately reflect the methodological quality and results found in full-text articles.

Step 4: Objectively Reporting the Evidence

When reporting the evidence, DynaMed Editors consider all of the following questions:

• Were all relevant outcomes reported in the original article?
• What are the most relevant outcomes to report in the DynaMed topic?
• For relevant outcomes, what is the magnitude of effect? This may be represented by absolute rates and number needed to treat (NNT) or harm (NNH) abbreviations, or by absolute differences in continuous variables (e.g., mean decrease in 1.3 points on 0-10 visual analogy pain scale).
• Were the findings clinically significant?
• In the case of no statistically significant differences, were the findings robust enough to rule out clinically significant difference?
• Are there any methodological limitations sufficient to alter reliability of clinical conclusions?

Step 5: Synthesizing Multiple Evidence Reports

Evidence-based summarization of articles is necessary, but insufficient for a point-of-care reference. Understanding the best current evidence requires synthesizing multiple evidence reports.

Step 6: Basing Conclusions on the Evidence

Deriving overall conclusions and recommendations from the evidence synthesis is required for a comprehensive point-of-care reference. In DynaMed , multiple evidence reports of similar quality are organized such that the overall conclusions quickly provide a synthesis of the best available evidence.

Editors confirm that overviews are clinically useful and accurately match supporting data.

Step 7: Updating Daily

The final step in DynaMed’s evidence-based methodology is changing conclusions when new evidence alters the best available evidence. This step is crucial because new evidence is published every day. Having new evidence summaries handled separately from reviewed content in a manner requiring the clinician to search in two locations to synthesize the entire story would make finding the best available evidence more difficult.

As soon as new evidence is evaluated using the 6 steps governing systematic processing, it is added to the appropriate DynaMed topic(s) in context. This process allows immediate and comprehensive access to the best available evidence as it occurs.

  Conclusion

Bangladesh Bank the central bank and monetary authority of the country. It came into existence under the Bangladesh Bank Order 1972 (Presidential Order No. 127 of 1972) which took effect on 16 December 1971. Through this order, the entire operation of the former State Bank of Pakistan in the eastern wing was transferred to Bangladesh Bank.

The powers and functions of Bangladesh Bank are governed by various laws and acts including the Banker’s Books Evidence Act 1891, Insolvency Act 1920, Banking Companies Ordinance 1962, Bangladesh Bank Order 1972, Foreign Exchange (Regulation) Act 1986, Money Loan Court Act 1990, Banking Companies Act 1991, Financial Institutions Act 1993 and Rules 1994, Companies Act 1994 and Bankruptcy Act 1997. [S M Mahfuzur Rahman]

Bangladesh Bank took measures to monitor credit and monetary expansion keeping in view the price situation and international reserves position. Efforts were made to achieve the targeted growth of domestic credit and thereby, the money supply, through imposing ceilings on credit to the government, public, and private sectors. The major policy instruments available to Bangladesh Bank were to set credit ceiling on the banks and provide liberal refinance facility at concessional rate for priority lending. According to the national economic policy, the banks were to provide the desired volume of credit at an administered and low rate of interest. In that situation, Bangladesh Bank practically did not have any effective instrument for making adjustments in the growth of money supply or for transmitting market signals into changes in money supply. The monetary policy therefore, could not function in its true sense. As a result the banking system could not play its role as an effective financial intermediary.

Business Ethics

Processes of collective bargaining and negotiation, assignment on customer satisfaction survey of ncc bank ltd, event marketing strategies from the experts, conceptual framework, opinions on globalization, position vs time graphs, advanced software development, eskolaite: properties and occurrences, introduction to integrated marketing communications, latest post, cathodic modification, anodic protection (ap), new maps assist decision-makers in considering albedo when planting trees, experts fear that climate change will exacerbate the spread of infectious diseases, curbside pickup enhances organic waste composting and decreases methane emissions, key concepts of electromagnetic induction.

NY Fed Sees More Time Needed to Shrink Central Bank Holdings

FILE PHOTO: A man walks by the Federal Reserve Bank of New York Building in New York City, U.S., April 26, 2021. REUTERS/Shannon Stapleton/File Photo

By Michael S. Derby

NEW YORK (Reuters) - The Federal Reserve's effort to contract its balance sheet will likely run into 2025 before the process ends, with the endgame dependent on the financial system's need for liquidity, the Federal Reserve Bank of New York said in a report released on Wednesday.

"Future financial and economic conditions and their impact on the demand for reserves and the balance sheet are highly uncertain," the bank said in its annual report for the central bank's System Open Market Account, which holds the Fed's cash and bonds primarily to conduct monetary policy.

The Fed has been shrinking its bond holdings in a process called quantitative tightening, or QT, to reverse part of its massive asset buying begun at the onset of the coronavirus pandemic in the spring of 2020.

The aggressive purchases of Treasury and mortgage bonds, to stabilize markets and provide economic stimulus, led Fed holdings to more than double, topping out at $9 trillion by the summer of 2022. The QT process started later that year has brought Fed holdings down to about $7.5 trillion.

With the Fed's campaign of rate hikes almost certainly completed, Fed officials and markets have been debating when the central bank can stop QT. Fed officials are mulling a plan to significantly slow the bond runoffs of up to $95 billion per month, in a bid to extend the overall process and reduce the risk of unsettled markets.

Fed officials have given no guidance about the QT stopping point, beyond saying they would like financial sector liquidity at a level that allows for normal volatility and affords the central bank firm control over its rate target. Major banks surveyed by the New York Fed ahead of the March Federal Open Market Committee meeting were eyeing a February 2025 stopping point, with Fed holdings at $6.25 trillion.

The New York Fed report said that if banks seek a higher reserve level the Fed may be able to slow QT in the first half of this year, with QT stopping in early 2025 at a $6.5 trillion balance sheet. Under a lower reserves need scenario, QT could taper off in the first half of 2025 and possibly end mid-year with the balance sheet at $6 trillion, the report said.

"These projections illustrate possible paths for the portfolio and reserves associated with the dynamics that will likely prevail in the coming years," the report said.

Fed officials are watching a wide range of money market indicators to understand when liquidity levels are drawing tight and so far, they are not seeing any notable signs of scarcity in the financial system. Fed officials also believe there are no hard and fast metrics that will signal tightening liquidity.

As Fed officials move toward the end stages of QT they are doing so cautiously, so as not to repeat the end of the last period of QT, which saw the Fed withdraw too much cash from the financial system, spurring heavy market volatility.

LOSSES TALLIED

The New York Fed also reported on the outlook for its finances, revealing unrealized losses of $948 billion on its bond holdings last year. Net negative income that has led to a $163 billion paper loss so far, will continue through this year before the Fed expects to return to profitability next year.

Losses on Fed holdings do not affect Fed actions because the central bank is not selling its holdings. Meanwhile, Fed officials have stressed repeatedly the overall losses on operations do not affect their ability to accomplish the goals laid out for the central bank by Congress.

(Reporting by Michael S. Derby; Editing by Chris Reese, Richard Chang and Daniel Wallis)

Copyright 2024 Thomson Reuters .

Tags: United States

The Best Financial Tools for You

Credit Cards

Personal Loans

Comparative assessments and other editorial opinions are those of U.S. News and have not been previously reviewed, approved or endorsed by any other entities, such as banks, credit card issuers or travel companies. The content on this page is accurate as of the posting date; however, some of our partner offers may have expired.

Subscribe to our daily newsletter to get investing advice, rankings and stock market news.

See a newsletter example .

You May Also Like

7 best electric vehicle etfs to buy.

Tony Dong April 23, 2024

Best Beginner Investing Books

Julie Pinkerton April 23, 2024

Are There Any Tax-Free Investments?

Marguerita Cheng April 23, 2024

8 Best Defense Stocks to Buy Now

Wayne Duggan April 22, 2024

7 Best Energy ETFs to Buy Now

Tony Dong April 22, 2024

Small-Cap ETFs to Buy for Growth

Glenn Fydenkevez April 22, 2024

Oil Stocks Tied to Crude Prices

Wayne Duggan April 19, 2024

7 Best Dividend ETFs to Buy Now

Jeff Reeves April 19, 2024

Could Energy Costs Suppress Bitcoin?

Dmytro Spilka April 19, 2024

Best Tech ETFs to Buy

Coryanne Hicks April 19, 2024

15 Best Dividend Stocks to Buy for 2024

Ian Bezek April 19, 2024

Commodity Stocks to Buy for Dividends

Matt Whittaker April 18, 2024

ETF vs. Index Funds: What to Know

Tony Dong April 18, 2024

Best Actively Managed ETFs

Glenn Fydenkevez April 18, 2024

8 Top Nancy Pelosi Stocks to Buy

Wayne Duggan April 18, 2024

7 Best Manufacturing Stocks to Buy Now

Jeff Reeves April 17, 2024

What's a Self-Directed IRA?

Kate Stalter April 17, 2024

5 Cloud ETFs to Buy Now

Coryanne Hicks April 17, 2024

8 Best Stocks to Buy Now With $1,000

Wayne Duggan April 16, 2024

Mutual Funds vs. Stocks

Marc Guberti April 16, 2024

• Skip to main content
• Keyboard shortcuts for audio player

A Silicon Valley lender collapsed after a run on the bank. Here's what to know

A customer stands outside of the shuttered Silicon Valley Bank headquarters in Santa Clara, Calif., on March 10, 2023. The lender was taken over federal regulators on Friday, marking one of the largest bank failures since the 2008 Global Financial Crisis. Justin Sullivan/Getty Images hide caption

A customer stands outside of the shuttered Silicon Valley Bank headquarters in Santa Clara, Calif., on March 10, 2023. The lender was taken over federal regulators on Friday, marking one of the largest bank failures since the 2008 Global Financial Crisis.

A bank that caters to many of the world's most powerful tech investors collapsed on Friday and was taken over by federal regulators, becoming one of the largest lenders to fail since the 2008 Global Financial Crisis.

California's banking regulators shut down Silicon Valley Bank and put it into receivership under the Federal Deposit Insurance Corp. (FDIC).

That effectively gives control of the bank to the FDIC, which created a new entity to oversee it.

It's nothing personal: On Wall Street, layoffs are a way of life

Regulators announced the takeover after what was effectively a run on the bank. Depositors rushed to withdraw their money amid fears SVB wouldn't be able to meet redemption requests.

It was a collapse that sent shockwaves across the banking industry, hammering shares of other smaller and regional lenders.

Here's what to know about SVB.

What was Silicon Valley Bank?

Although it was not in the same league as, say, Goldman Sachs or J.P. Morgan Chase, Silicon Valley Bank, or SVB, punched above its weight during its 40-year history.

Based in Santa Clara, Calif., its clients included venture capital firms and startups, and it became a big player in the tech sector, successfully competing with bigger-name banks.

"They really developed a niche that was the envy of the banking space," says Jared Shaw, a senior analyst at Wells Fargo. "They are able to provide all the products and services any of these sophisticated technology companies, as well as these sophisticated venture capital and private equity funds, would need."

But it remained little known outside of tech circles — until this week.

People walk through the parking lot at the Silicon Valley Bank headquarters in Santa Clara, Calif., on March 10, 2023. The bank suffered a run on deposits that led to its collapse. Justin Sullivan/Getty Images hide caption

People walk through the parking lot at the Silicon Valley Bank headquarters in Santa Clara, Calif., on March 10, 2023. The bank suffered a run on deposits that led to its collapse.

So why is the bank in trouble now?

Silicon Valley's business boomed as tech companies did well during the pandemic. That filled the lender's coffers, and SVB had about $174 billion in deposits.

But in recent months, many of Silicon Valley Bank's clients had been withdrawing money at a time when the tech sector as a whole has been suffering.

SVB said earlier this week, that in order to make good on those withdrawals, it had to sell part of its bond holdings at a steep loss of $1.8 billion. Bonds and stocks have been hammered since last year, as the Federal Reserve has raised interest rates aggressively, and SVB also noted it wanted to pare down its bond portfolio to avoid further losses.

But that announcement spooked the bank's clients, who got worried about SVB's viability, and then proceeded to withdraw even more money from the bank — a textbook definition of a bank run.

That led to a major slump in SVB's shares. The bank's stock price fell by 60% on Thursday, and as its share price continued to sink overnight.

Trading was halted on Friday morning, and by midday, SVB had been taken over by the FDIC.

Traders working at the New York Stock Exchange (NYSE) on March 10, 2023 in New York City. Shares of Silicon Valley Bank slumped before it was taken over by the FDIC. Spencer Platt/Getty Images hide caption

Traders working at the New York Stock Exchange (NYSE) on March 10, 2023 in New York City. Shares of Silicon Valley Bank slumped before it was taken over by the FDIC.

What does this mean for other banks?

Though the problems appear to be isolated at SVB, the run on the bank sparked concerns about the banking sector as a whole. On Thursday, shares of all kinds of lenders, including the big banks, sagged. J.P. Morgan, Wells Fargo, and Bank of America were all down about 5%.

Investors feared that other lenders, especially smaller and regional ones, would suffer a similar surge in withdrawals and would struggle to meet the redemptions.

The troubles at SVB come as Wall Street had already been on edge. Earlier this week, Silvergate, a California-based bank that caters to the cryptocurrency industry, announced plans to unwind its operations.

Federal Reserve Chair Jerome Powell warns inflation fight will be long and bumpy

Yet by Friday, fears about the health of the broader banking sector had eased, even before the FDIC took over SVB.

Bank analysts at Morgan Stanley said in a note "the funding pressures facing" Silicon Valley Bank "are highly idiosyncratic and should not be viewed as a read-across to other regional banks."

"We want to be very clear here," they wrote. "We do not believe there is a liquidity crunch facing the banking industry."

Wells Fargo analyst Shaw also said other banks were hit by panic selling.

"It's really just a fear that has gripped the market, and is sort of self-perpetuating at this point," says Shaw.

What happens next?

The entity created by federal regulators to oversee SVB, the Deposit Insurance National Bank of Santa Clara, has quite a few things to sort out.

The FDIC said those with insured deposits with SVB, typically up to $250,000, would be able to access their money by no later than Monday.

The fate of those with deposits at SVB that exceed insurance limits is less certain, however, with the FDIC saying they will receive an "advance dividend" for a portion of their funds along with "certificates" accounting for their uninsured funds.

The regulator did not spell out what that would entail for these uninsured depositors.

Investors will also continue to monitor for any further impact on other banks. The Treasury Department said Secretary Janet Yellen discussed the situation at a meeting she convened with financial regulators.

"Secretary Yellen expressed full confidence in banking regulators to take appropriate actions in response and noted that the banking system remains resilient and regulators have effective tools to address this type of event," the statement said.

• silicon valley bank
• Jerome Powell
• venture capital
• Silicon Valley
• Private Equity
• Morgan Stanley
• Federal Reserve
• interest rates
• Wall Street