Role of Central Banks Flashcards
What is the role of a commercial bank
- To accept savings
- Lend to individuals and firms
- Allow payments between people and firms
- Financial intermediaries
What is the role of a investment bank
- Arrange share and bond issues
- Advice on raising finance and on mergers
- buy and sell assets on behalf of clients
- Act as market makers to make security trading easier
What is a hedge fund
Firms that invest pooled funds from investors in to multiple markets with hopes of receiving high returns
Private equity firms
They invest in businesses, buying part of the business to try help it to become successful to then sell it for profit
What is the shadow banking system
This is the unregulated activities of of financial institutions and unregulated financial intermediaries, lack of regulation and unknown size increase the risk of it causing financial crisis
What does liquidity refer to
How easily money can be spent
Narrow money
Notes and coins in circulation, these are very liquid
Broad money
Assets that are less liquid
What do banks have to balance and why
Liquidity and profitability because they must have some liquidity to be able to lend and repay savings, but they must retain some illiquid assets like shares and bonds because these are more profitable
What are the key functions of the central bank
- Implement monetary policy
- Banker to the government
- Help with regulation
- Banker to other Banks as the lender of last resort
How does the central bank act as the lender of last resort
Central bank can provide liquidity to banks that have temporary shortages to maintain financial stability in the country, they lend this with high interest to encourage banks to act more carefully in the future
When will the central bank take more emergency action
During times of systemic crisis when multiple banks are in trouble they will provide emergency liquidity assistance
Advantages of lender of last resort
- Helps prevent panic and run on the banks
- Helps ensure financial and banking stability
run on the bank
When many people withdraw their savings very quickly which causes the bank to run out of liquidity
disadvantages of lender of last resort
- Moral hazard
- Lead to banks not holding sufficient liquidity
- Unfair that the central bank will save these firms but not non financial firms