Chapter 7 The Central Banking 7.1 origins of the central banks 7.1.1 reasons of the production of central bank ? to unite the currency ? clearing ? the lender of last resort ? financial supervision 7.1.2 the origin and development of central banks Only since the beginning of the twentieth century has the importance of the central banking gained wide Recognition. The Bank of England The Bank of England, founded in 1694, was originally a private business and it was nationalized. Other early central banks the Bank of France was established in 1800. the Bank of Netherlands was established in 1814 the Bank of Austria was established in 1817. 7.1.3 later central banks The Federal Reserve System was created in 1913. 7.2 The Role of Central bank Although they are called banks, they are special banks. Why? 7.2.1 nature of the central bank A central bank is so called because it occupies a central position in the monetary and banking structure of the country in which it operates. 7.2.2 characteristics of the central bank ?They are not primarily profit-seeking enterprises. ? They are subject to close control and participation by national governments. ?They carry on most of their transactions with other banking institutions rather than with the public. 7.2.3 functions of the central bank 发行的银行issuing banks control of Note Issues 银行的银行banker’s bank control of bank reserve 政府的银行state’s bank position as financial adviser 7.3 the problem of independence of central banks 7.3.1 the relationship of between central bank and government Four kinds of models ： 1. Central bank is directly responsible for the Congress, with quite strong independence. 中央银行直接对国会负责，具有较强独立 性，德国、美国等最为典型。 2. Central bank is subordinate to the treasury department in name, with relatively strong independence.中央银行名义隶属财政部， 但具有相对独立性，英国最为典型。 3. Central bank is subordinate to the treasury department, with comparatively weak independence.中央银行隶属财政部，独立性 较小，韩国以及1998年以前日本较为典型。 4. Central bank is subordinate to government, standing side by side with the Treasury Department中央银行隶属于政府，与财政部并 列，我国中央银行制度为该类型。 《人民银行法》确定中国人民银行依法对金融机构及其 业务实施监督管理，维护金融业合法稳健运行，并赋⑴审 批、监督管理金融机构；⑵监督管理金融市场；⑶发布有 关金融监督管理和业务的命令和规章等三项监管职权。 7.3.2The relationship between central bank and government. They have the same mission：developing the national economy. The duty of central bank is to serve for the benefits of the nation. Central bank is one part of the state’s system. Central bank is managed and supervised by the government. Legal relationship of responsibility In the US, The Constitution gives Congress the power “to coin money and regulate the value thereof ”. On this basis, in 1913 Congress created the Federal Reserve as the institution delegated to administer that responsibility on its behalf. Congress requires periodic accountability by the Federal Reserve and has the authority to amend the Federal Reserve Act any time it sees fit. 7.3.3 Relationship between central bank and ministry of finance The relationship between central bank and the ministry of finance is an important part of the relationship between central bank and government. 7.4 The instruments (tools) of the Central Bank The central bank exercises control over the bank lending and the money supply by altering the reserves of commercial banks and of other deposit-type institutions and by influencing the deposit creation multiplier(存款 创造乘数). 7.4.1 Reserve requirements (legal reserve requirements) A bank must hold funds in the form of vault cash or deposits at the Federal Reserve to meet its required reserve ratio. Required reserve ratio: the ratio of bank reserves to deposits that a bank must hold according to law. According to the legislation of 1998, each depositary institution had to hold reserves, in the form of vault cash or deposits in a regional Federal Reserve bank. 1.Against demand deposits and other transactions accounts, reserves equal to : a. 3 percent of its first $ 47.8 million of demand deposits b. 10 percent of its demand deposits in excess of that amount. The Fed can vary this latter percentage within a range of 8 percent to 14 percent, and under emergency circumstances it can go as high as 18 percent. 2. Against business-owned time and savings deposits, reserves are zero. The Fed can vary reserves against such deposits within a range of zero to 9 percent. 3. Finally, regardless of the above requirements, the first $ 4.7 million ofreservableliabilities is exempt from reserve requirements. The Fed adjusts this $ 4.3 million of figure upward annually by 80 percent of the annual percentage increase in total reservablein the country . Reports related to Reserves All member banks must make daily reports of their net demand deposits, time deposits, and vault cash to the Federal banks of their respective districts. Penalties for Deficiencies A member bank that fails to maintain its reserves at the proper level makes itself subject to certain penalties. What advantages and disadvantages does it has to alter the legal reserve ratio so as to control the money supply ? ---advantages ---disadvantages What would happen if the Federal Reserve eliminated reserve requirements entirely in order to increase bank profits? 7.4.2 discounting and the discount rate The Federal Reserve can also alter the excess reserves (超额准备金) of banks and other depository institutions by changing the actual amount of reserves that financial institutions hold. The Federal Reserve tries to influence the willingness of banks to borrow reserves by changing the interest rate it changes on such loans. The effectiveness of the discount mechanism as a means of injecting or withdrawing reserves is limited by the fact that the initiative for borrowing from the Fed rests not with the Fed but with the banks. A higher discount rate makes it relatively more advantageous to sell securities to get additional reserves, and a lower discount rate makes it relatively more advantageous to borrow from the Federal Reserve Bank. Banks will want to borrow reserves only when they need them. The central bank is the ultimate source of liquidity in the economy, because it can increase or decrease the ability of the banking system to create money. When liquidity shortages threaten economic stability, the central bank has the responsibility for supplying funds promptly. That is why the central bank is called the lender of last resort. Financial panics(金融恐慌) qOne Fed method of preventing the “abuse” of the discount facility is to enhance supervision procedures: the central bank checks up on why banks are borrowing and what they are doing with the money. qAnother way is simply to raise the price of borrowing. 7.4.3 The Discount Rate and Market Interest Rates The objective for the central bank to change the discount rate is just to affect the willingness of the banks to borrow from the central bank. A lower discount rate will make the borrowing of the reserves more attractive to banks and a higher discount rate will make the borrowing of the reserves less attractive to banks. In some countries, the discount rate is often kept above short- term market interest rates, so that it is a penalty rate, a means of restraining commercial bank’s excessive use of the central bank’s borrowing facilities. In the US, the discount rate is usually held below the treasury bill rate, so that the Fed has to rely more on supervision than cost to prevent in “abuse” of the discount privilege. How does a change in the discount rate affect market interest rates? The discount rate and market interest rates are not directly connected. The change of discount rate affect bank borrowing from the central bank, thereby, changing bank reserves, bank lending, the money supply, and finally market interest rates. So the linkage between the discount rate and market interest rates is rather weak. v One possible way that changes in the discount rate might directly affect market interest rates is through the “announcement effect” (告示效应) produced when a discount rate change comes unexpectedly. v Because an unanticipated rise in the discount rate is likelyto lead bondholders to expect tight money and higher interest rates. While tight money and higher interest rates will cause lower bond prices, people may sell bonds to avoid capital losses, thus hastening the drop in bond prices and the rise in interest rates. 7.4.3 Open-Market Operations The purchase and sale of government securities by the Federal Reserve in order to control levels of bank reserves. vThe central bank possesses the power of buying and selling government securities in the open-market. vOpen-Market Operations is the most important means for the control of the actual volume of commercial bank primary reserves and therefore of the total money supply. 1. Objectives of Open-Market Operations The fundamental objective of Open-Market Operations is to control the money supply in the interest of the general public welfare. 2. the advantages of Open-Market Operations Open-Market Operations are carried out by the central bank on its own initiative and the scale of Open-Market Operations can be controlled completely by central bank. Open-Market Operations are of the flexibility Open-Market Operations tend to be reverse Open-Market Operations can be carried out promptly 3. Types of Open-Market Operations qDefensive Open-Market Operations qDynamic Open-Market Operations Defensive Open-Market Operations防御性公开市场业务 Those aimed at defending a target level of reserves From outside influences. repurchase agreement 回购协议 opposite repurchase agreement 反回购协议 Repurchase agreement :指联邦储备银行在购买 政府证券时同证券签定短期的回购协议，协议规 定证券商在将来某个具体日期重新购回证券。 Opposite repurchase agreement :指联邦储备银 行在出售证券时，要求证券商应允在未来一个具 体日期由联邦储备银行将这些证券重新购回，因 此也叫配对的售——购协议。 Dynamic Open-Market Operations Those aimed at changing the level of reserves.