4.4.3 Role Of Central Banks ✅

Question 1

What are the key function of the bank? How do you remember this>

Answer 1

• Regulation of banking industry.
• Implementing monetary policy.
• Banker to banks.
• Banker to gov.
  RIBB

Question 2

Explain how gov implements monetary policy? Why is this done? How does the gov control the bank?

Answer 2

• Intrest rates.
• Money supply.
• Open market operations (selling gov securities).
• Reserve requirements for banks.
  Control inflation.
  It doesn’t bank doesn’t influence Monterey policy it is done in economy’s interest.

Question 3

Explain how the bank is the banker to the gov?

Answer 3

• Manages gov bank account (debt, management, payments)
• Helps fund operations/ gov bonds (open market operations).
• Fiscal advice.

Question 4

Explain how the central bank is the banker to banks?

Answer 4

• Last resort lender to financial institutions. (Provide emergency funds to liquidity issues).
• Ensure financial stability due to systemic risk if one bank dies so do others.
• Deposit insurance schemes prevent bank runs.

Question 5

How does the central bank regulate the banking industry?

Answer 5

• Set and enforce regulations including capital adequacy requirements + risk management standards.
• Stress tests to make sure banks have enough capital to deal with shocks.

Question 6

Examples of gov regulations?

Answer 6

• Banned market rigging.
• Max intrest rates.
• Liquidity ratios.

Question 7

What’s re the three key bodies of regulation?

Answer 7

• FPC = reduces systemic risk.
• PRA = banks (ensure they take responsibility).
• FCA = protects consumers/prevents market rigging.

Question 8

Example of gov reacting to bank failing?

Answer 8

Northern rock = guaranteed all deposits + provided loans to northern rock. (Prevent big bank run).