4.5.3 the role of the central bank Flashcards
What does the central bank manage? [3]
- Currency
- Money supply
- Interest rates in an economy
What are some examples of central banks? [3]
- European Central Bank (ECB)
- the Bank of England
- People’s Bank of China
What rate does the central bank control?
The base rate, which ultimately controls the interest rates across the economy.
What services does the central bank provide to the Central Government? [4]
- It collects payments to the government and makes payments on behalf of the government
- Maintains and operates deposit accounts of the government
- Manages public debt and issues loans
- Advises the government on finance
What is the Bank of England considered to be?
The lender of last resort, meaning it is the banker to the banks.
What does it mean for the Bank of England to be the lender of last resort?
That if there is no other method to increase the supply of liquidity when it is low, then the Bank of England will lend money to increase the supply.
If an institution is risky or close to collapsing, the Bank might lend to them if they have no other way to borrow money.
What does the Central Bank being the lender of last resort aim to prevent?
A run on the bank.
What does a run on the bank mean?
When consumers withdraw their bank deposits in a panic because they believe the bank will fail.
Why will banks usually avoid borrowing from the lender of last resort?
Because it suggests the bank is experiencing a financial disaster.
What is the UK banking industry regulated by?
The Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA).
What does the FCA do?
Regulates financial firms to ensure they are being honest to consumers and they seek to protect consumer interests. They also aim to promote competition which is in the interests of consumers.
What does the PRA do?
Promotes the safety and stability of banks, building societies, investment firms and credit unions, and ensures policyholders are protected.
