Central Banks and Financial Market Regulation Flashcards
Central Bank
The financial institution in a country or group of countries, typically responsible for the printing and issuing of notes and coins, setting short-term interest rates, controlling monetary policy, managing the country’s gold and foreign currency reserves and issuing government debt.
Key Functions of Central Banks
Implementation of Monetary Policy
- The central bank takes action to influence the manipulation of interest rates, the supply of money and credit, and the exchange rate. In the UK, the Monetary Policy Committee (MPC) alters interest rates to control the supply of money. They are independent from the government, and the nine members meet each month to discuss what the rate of interest should be. Interest rates are used to help meet the government target of price stability, since it alters the cost of borrowing and reward for saving. The bank controls the base rate, which ultimately controls the interest rates across the economy.
Banker to the Government
- The central bank provides services to the Central Government. It collects payments to the governments and makes payments on behalf of the government. It maintains and operates deposit accounts of the government. The central bank also manages public debt and issues loans. The bank can also advise the government on finance, including the timing and terms of new loans.
Banker to the Banks - lender of the last resort
- The Bank of England is considered to be a lender of last resort. If there is no other method to increase the supply of liquidity when it is low, the Bank of England will lend money to increase supply. If an institution is risky or is close to collapsing, the Bank might lend to them. This is when they have no other way to borrow money. It can protect individuals who deposit funds in a bank and might otherwise lose them. It also aims to prevent a ‘run on the bank’, which is when consumers withdraw their bank deposits in a panic, because they believe the bank will fail. Usually banks will avoid borrowing from the lender of last resort, because it suggests the bank is experiencing a financial disaster.
Role in regulation of the banking industry
- Governments might regulate banks with regulation and guidelines. This helps to ensure the behaviour of banks is clear to institutions and individuals who conduct business with the bank. Some economists argue that the banks have a huge influence in the economy; if they failed it would have huge consequences. Therefore, it is important to regulate the banking industry.
