4.4.3: Role Of Central Banks

Question 1

What are the roles of central banks?

Answer 1

-Implementation of monetary policy.
-Banker to the government.
-Banker to the banks - lender of last resort.
-Regulation of the banking industry.

Question 2

How do central banks implement monetary policy?

Answer 2

-The bank alters the base rate of interest rates across the economy (to control the supply of money).
-Interest rates are used to help meet the government target of price stability, since it alters the cost of borrowing and reward for saving.

Question 3

How are central banks the banker to the government?

Answer 3

-Collects payments & makes payments on behalf of the government.
-Manages public debt and issues loans.
-The bank can also advise the government on finance, including the timing and terms of new loans.

Question 4

How do central banks regulate the banking industry?

Answer 4

-Banning market rigging.
-Maximum interest rates to prevent consumer exploitation & risky lending.
-Liquidity ratios (when banks are forced to hold a certain percentage of liquid assets).

Question 4

How are central banks the banker to the government?

Answer 4

-Preserves the stability of the banking & finance system. This is to ensure liquidity within the economy.
-Prevents a ‘bank run’ (when consumers withdraw their bank deposits in a panic under the assumption that the bank will fail).
-Protects deposits of bank customers.

Question 5

What are the bodies of financial regulation?

Answer 5

-FPC: identifies and reduces system risk, supports government
economic policy (macroprudential)
-PRA: ensures competition, ensures consumers have access to services,
minimises risk should a bank fail and ensures banks take responsible action.
-FCA: protects consumers, promotes competition and enhances the
integrity of the system by preventing market rigging.