11 Central Banking Flashcards
(35 cards)
money and their functions
Money = an asset generally accepted for business transactions
and used as a legal tender or for repaying debts.
three key functions of money:
1 a medium of exchange,
2 a unit of account,
3 a store of value
wealth
the total collection of pieces of property that serve to store value.
income
is a flow of earnings per unit of time (but money =
stock
Monetary aggregates (3)
- M1 (narrow money) = currency + deposits on current accounts at banks
- M2 (intermidiate money) = M1 + term deposits at banks + other deposits at banks
- M3 (broad money) = M2 + short-term securities of non-banks in domestic currency
the most stable - M3
the most liquid - M1
Commercial bank´s balance sheet
- Assets: cash, claims on CB, securities, loans, other assets
- Liabilities: deposits, interbank market, capital
main functions of central bank (3)
Three main functions:
1. granting credits to government institutions,
2. the management of government accounts
3. the issuance of banknotes and coins, arose later as the need for centralization of currency issuance occurred
how CB have been founded? (3)
- Their conversion from a commercial bank (e.g. Sveriges Riksbank in 1697),
- The right to issue banknotes and coins (e.g. Banca D’Italia in 1926),
- The foundation of a new institution (e.g. Bank of England in 1694).
why CB play an important role on financial markets?
due to their close relationship with commercial banks, government institutions and other central banks
macro and microeconomic functions of CB (7)
- Macroeconomic functions
1. Issuance of banknotes & coins
2. Monetary policy
3. Foreign-exchange activities - Microeconomic functions
1. Regulation and supervision of banks
2. The bank of banks
3. The bank of the state
4. Representation of the state
Conventional instruments of CB (4)
1) open market operations (OMO)
2) mandatory minimum reserves
3) interest rates
4) other tools
Nonconventional instruments of CB (4)
1) open liquidity facilities,
2) credit facilities,
3) large-scale asset purchases,
4) forward guidance
(OMO)Classic Repo
a sale of securities followed by their future purchase
on balace sheets: claims on CNB (bank’s) to liabilities to banks (CNB’s)
(OMO)Reverse Repo
a purchase of securities followed by their future sale
on balace sheets: other assets (CNB’s) to interbank market (bank’s)
Mandatory minimum reserves
a part of a deposit that a commercial bank has to place in a central bank, are another tool of central banks.
In theory, central banks can influence banks through MMR, for example an increase in MMR may result in a lower multiplication of deposits.
However, in reality MMR plays an important role in an interbank payment system and liquidity management
Other tools of CB
- Automatic facilities (used for providing and depositing liquidity overnight)
➢ The deposit facility
➢ The marginal lending facility - Extraordinary facilities (introduced by the CNB in autumn 2008, extraordinary liquidity providing repo operations with two-week and three-month maturities aimed at fostering the functioning of the government bond market)
➢ Liquidity-providing repo operations (under special conditions)
example of quantitative easing. why was it used?
The Federal Reserve announced that it would buy $600 billion in Treasuries over the next eight months in a second round of “quantitative easing”.
The decision to pump more liquidity into the American economy to bring down longterm interest rates and spur growth prompted modest rises in stockmarkets around the world.
QE was activated because conventional monetary policies (low i.r.) were not enough
TARGET2
interbank payment system in the European Monetary Union (EMU)
Primary tasks of the CNB
Since 1993, the Czech National Bank (ČNB) has operated as the Czech Republic’s central bank.
- Its primary goal, set by Czech law, is to take care of price stability
In addition, the ČNB has a broad economic responsibility because the law says:
“If its primary goal is not affected, the ČNB supports an economic policy of the Czech government that will result in long-term sustainable economic growth.”
The mandate of the CNB (4)
1) to maintain price stability,
2) to maintain financial stability and see to the sound operation of the financial system in the Czech Republic,
3) to issue banknotes and coins, manage the circulation of currency and administer clearing between banks,
4) to supervise the entities operating on the financial market
Instruments of the CNB
1) Open market operations
2) Mandatory minimum reserves
3) Interest rates
4) Other tools
o Central banks use open market operations for steering interest rates in the economy. A repurchase agreement (repo) ranks as the most important tool used by the CNB
meaning of REPO under Czech laws
under Czech law a repo means a collateralized loan backed by securities (i.e. a repo is not a purchase and future sale of securities)
CNB inflation targeting today
2%
o Targets originally set for “net inflation”, since 2002 for headline inflation.
o From January 2006 the target set at 3% with a tolerance band of ±1%, since January 2010 the point target of 2% established.
o Inflation targeting prevails around the world
Exchange Rate Mechanism (ERM
System of fixed exchange rates.
ERM collapsed in early 1990s
Basic tasks of the Eurosystem (4)
- To conduct foreign exchange operations
- To define and implement monetary policy
- To promote the smooth operation of payment systems
- To hold and manage the official foreign reservs of the participating EU member states
