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Financial Markets & Institutions > Central Banks > Flashcards

Central Banks Flashcards

1
Q

Where was the first CB

A

Sweden

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2
Q

Main function of central bank

A

Monetary stability (stable prices and confidence)

Also could be lender of last resort, finance government etc.

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3
Q

How was the Federal Reserve structure to avoid power concentration

A

Had 12 FR banks privately owned

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4
Q

Private vs public ownership of central banks:

Arguments for public ownership (3)

A

Central banks act in ultimate public interest. (Eval: theory of bureaucratic behaviour FC67)

Private ownership is profit driven, thus increasing risk taking (lend to riskier for more returns) and balance sheet issues.

GFC demonstrated profit targeting is extremely bad in the case of a financial crisis, in saving the financial sector.

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5
Q

Arguments for private ownership (3)

A

Guaranteed central bank independence

Restricts distribution of dividends per share

Private owners bail out CB in the case of losses, rather than coming from fiscal budget!

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6
Q

CB’s have taken on increasing responsibilities and thus have been granted more independence to follow through.

A
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7
Q

ECB came in 1998, why?

A

Handle transitional issues of the nations comprising the EU

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8
Q

Eurozone

A

An economic monetary union comprised of EU members that have adopted the Euro

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9
Q

How many member states initial states were part of the Eurozone (i.e adopted the Euro)

How many in 2017

A

11

In 2017 19/28

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10
Q

Do the Eurozone countries retain their own national central banks?

A

Yes, but not independent monetary policy

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11
Q

Eurosystem

A

The ECB and the NCBs of those states who adopted the Euro

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12
Q

European system of central banks

(NOTE: DIFFERENT FROM THE EUROSYSTEM)

A

Comprises the ECB and all NCBs of the EU members regardless of Eurozone or not (adopted Euro or not)

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13
Q

What can the non Eurozone member states do?

A

Since retained own currency not Euro, can conduct their own monetary policy unlike Eurozone countries !

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14
Q

Who is capital stock and balance sheet of ECB owned by

A

The CB of 27 EU members / NCBs

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15
Q

How are shares of NCBs in the total capital stock of the ECB weighted?

A

According to population and GDP

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16
Q

When does the ECB adjust the shares (2)

A

Every 5 years

When a new member joins

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17
Q

3 decision making bodies of the ECB

A

Governing council

Executive board

General council

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18
Q

Governing council responsibility

A

Monetary policy - price stability

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19
Q

Executive board responsibility

A

Day to day operations and management of ECB+Eurosystem

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20
Q

General council

A

Encourage cooperation between NCBs of the EU.

Advisory functions e.g accounting

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21
Q

How is voting rights split

A

5 largest economies get 4 rights. Remaining 14 countries share 11 voting rights.

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22
Q

What is important to note about the general council

(Hint: existence)

A

It is a transitional body said to not exist once all EU states adopt the Euro

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23
Q

3 objectives of ECB

A

Price stability (governing council as mentioned)

Support economic policies of Eurozone nations

Ensure independent and open market

(Maintain independence from governments also)

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24
Q

What is a side objective

A

Maintain independence from governments

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25
Q

The Bundesbank is the biggest NCB.

During the European sovereign debt crises, more than five bailouts were offered to the ailing European economies with the burden lying mostly on the Bundesbank.

What did the Bundesbank argue

A

Bundesbank argued financing of budget deficits violates the ECB’s independence from government, political, and financial influence

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26
Q

ECB’s first objective is price stability: how does it achieve this?

A

Target closely below 2% inflation by using 3 interest rates.

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27
Q

What 3 interest rates does the ECB use

A

Deposit facility rate

Refinancing rate

Marginal lending facility rate

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28
Q

Deposit facility rate (most imp since provides the bulk of liquidity)

A

Rate on tenders to banks and determines how much quantitive easing can lower bond yields.

(Since QE aims to boost economy through lower interest, so deposit facility rate looks to find the effect QE has on the interest rate on bonds!

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29
Q

Refinancing rate

A

Rate on overnight deposits in Eurosystem

30
Q

Marginal lending facility rate

A

Rate on overnight credit to banks from Eurosystem

31
Q

So that was the interest rates tho achieve price stability objective.

ECB’s conventional monetary policy instruments (3)

A

Open market operations

Standing facilities (deposit and marginal interest rate!)

Minimum reserve requirements for credit institutions e.g banks

32
Q

Unconventional measure of ECB (3)

A

Emergency liquidity assistance (ELA) - Provides liquidity and loans in emergency situations! (In the name)

QE - large scale asset purchasing to increase MS and stimulate economy

Negative interest rates

33
Q

Does the ECB undertake these monetary policies themselves?

A

No, assigns to NCBs e.g for QE they made 19 NCBs to buy the bonds.

34
Q

Now look at Federal Reserve System (FED)

Owned privately by 12 member banks as mentioned, to restrict power. How else is power constrained

A

FED subject to congress reviews.

35
Q

FED role

A

Oversee nation’s financial institutions and serve as their banker

36
Q

Why is the federal bank of New York significant (2)

(1/12 member banks comprising FED)

A

Most and Largest commercial banks in NY

NY Fed is involved in bond markets and FEM

37
Q

Structure of the FED (2)

A

Board of governors (FRB) - regulatory and supervisory over members

Open market committee (FOMC) - monetary policy (interest rates)

38
Q

ECB and the Fed comparisons

A

Both bind members (19 NCBs and 12 Fed reserve banks)

Both independent and decentralised

ECB makes decisions independent of political authorities, FED reports to congress

39
Q

Difference in objectives between ECB and Fed (2)

A

ECB - price stability

Fed - dual mandate i.e price stability and support macro objectives e.g growth (so as a results ignores temporary effect of price changes since deems unemployment more of a priority)

40
Q

Difference in budgets between ECB and Fed

A

Budget in FED controlled by board of governors

Budget in ECB controlled by NCB’s themselves

41
Q

Differences in monetary operations between ECB and Fed

A

ECB decentralised (NCBs execute)

FED centralised

42
Q

Differences in regulatory and supervisory requirements between ECB and Fed

A

ECB - individual countries supervise

Fed - board of governors do this as mentioned.

43
Q

Difference between ECB and Fed in financing fiscal deficits

A

Fed buys government bonds outright

ECB accepts them as collateral for new loans to the banking system

44
Q

So what are the key differences (5)

A

Primary Objectives (price stability vs dual mandate)

Budgets

Monetary operations

Supervision/regulatory obligations

In financing government deficits

45
Q

Now Bank of England: who is it accountable to

A

UK parliament (not the ECB since not part of Eu anymore - makes independent monetary policy!)

46
Q

Why does the BoE have less autonomy than the Fed

A

Because the inflation target is set by the government (chancellor)

Whereas Fed can set its own target

47
Q

Why is Brexit important

A

Because UK financial service sector contributed widely towards the EU e.g 75% of hedging products were from British IBs.

So the new relationship built with the EU is important in terms of financial and economic repurcussions

48
Q

Bank of Canada responsibilities

A

Monetary policy - low/stable inflation

Regulate/supervision of Canadian banks

49
Q

Bank Act amendment 1967

A

Ultimately gave monetary policy decisions to the government ; minister can issue policy that BoC must oblige

50
Q

BoC has a dual monetary policy framework (2)

A

Inflation target

Flexible exchange rate

51
Q

Bank of Japan - what was their main monetary policy tool

A

Bank credit growth quotas on commercial banks

52
Q

Was BoJ independent of government

A

Not until BoJ act 1997

53
Q

Monetary policy objectives of BoJ

A

Price stability

Financial sector stability - stable macro growth

54
Q

Weakness of BoJ

A

Doesn’t have autonomy over exchange rate, ministry of finance instructs them to buy/sell yen.

55
Q

People’s bank of China (PBOC) main objectives

A

Stability of currency and financial system

56
Q

Main tools ofPBOC

A

Interest rates

Reserve requirements (20%)

57
Q

Is PBOC independent

A

No, reports to standing committee of National peoples congress.

One of the least independent CBs

58
Q

PBOC lending and deposit rates in the past vs current

A

3% gap between deposit rate and loan rate, allowing banks to profit when deposits turn into loans. (Lending rates higher than saving rates!)

Now publishes benchmark rates of what’s expected, but banks can charge saving (deposit) rates whatever they like!
(Could give really bad saving rates!)

59
Q

Emerging market economies (EME)

How do their CB’s differ

A

Assume a more complex role

60
Q

How is their role more complex (4)

A

Reform financial infrastructure

Develop financial markets

Help with macro development (as shown in China’s PBOC obj!)

Financial inclusion policies - Manage FE reserves and policies to promote exports! (China has most FE reserves and huge exporter!

61
Q

EME CB’s pursue Financial inclusion policies

A

Enhance credit flow to export industries and employment intensive sectors

62
Q

Are EME CB’s often independent?

A

No , since they aim for development too, they have to coordinate with fiscal agents e.g government

63
Q

Should CBs be independent: what do theory and empirics say

A

Yes

64
Q

2 types of independence

A

Goal independence

Instrument independence

65
Q

Main reasons for independence

A

Avoid political manipulation e.g expansionary monetary policies which are reversed after election

Also politicians opt for independence when disagreement arises, to avoid public criticism. (Case in many EME’s)

66
Q

Reasons against independence

A

Macroeconomic stability best when monetary works with fiscal policy.

Central banks are not immune from political pressures

67
Q

Why are central banks not immune from political pressures, even if independent?

A

Theory of bureaucratic behaviour - believes bureaucracies still aim to maximise own welfare, so CB might pursue self interest to increase power and prestige at expense of public interest

(So doesn’t act in ultimate public interest then!)

68
Q

What have the trends shown regarding independence

A

Independence of CB has been increasing,

following the high correlation between macroeconomic+price stability and independence

69
Q

How are CB ensured to not deviate from socioeconomic goals

A

Most required to report to parliaments e.g China (congress), BoJ (minister of finance) , BoC (house of commons) etc.

70
Q

What are the most independent CB’s

A

Fed

ECB the most due to its political independence

Financial Markets & Institutions (18 decks)

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