Central Bank

CENTRAL BANK
A central bank has been described as the "lender of last resort," which means it is responsible for
providing its nation's economy with funds when commercial banks cannot cover a supply shortage. In
other words, it provides loans to banks
A central bank is a public institution that is responsible for implementing monetary policy, managing the
currency of a country, or group of countries, and controlling the money supply.
Example:
The Bangko Sentral ng Pilipinas (BSP) is the central bank of the Republic of the Philippines.
How the Central Bank Influences an Economy
A central bank can be said to have two main kinds of functions: (1) macroeconomic when regulating
inflation and price stability and (2) microeconomic when functioning as a lender of last resort.
Macroeconomic Influences
As it is responsible for price stability, the central bank must regulate the level of inflation by controlling
money supplies by means of monetary policy. Their actions directly influence market sentiment. The
central bank performs open market transactions (OMO) that either inject the market with liquidity or
absorb extra funds, directly affecting the level of inflation.
To increase the amount of money in circulation and decrease the interest rate (cost) for borrowing, the
central bank can buy government bonds, bills, or other government-issued notes. This buying can,
however, also lead to higher inflation. When it needs to absorb money to reduce inflation, the central
bank will sell government bonds on the open market, which increases the interest rate and discourages
borrowing. Open market operations are the key means by which a central bank controls inflation, money
supply, and prices.
Microeconomic Influences
The establishment of central banks as lenders of last resort has pushed the need for their freedom from
commercial banking. A commercial bank offers funds to clients on a first-come, first-serve basis.
If the commercial bank does not have enough liquidity to meet its clients' demands (commercial banks
typically do not hold reserves equal to the needs of the entire market), the commercial bank can turn to
the central bank to borrow additional funds. This provides the system with stability in an objective way;
central banks cannot favor any particular commercial bank. As such, many central banks will hold
commercial-bank reserves that are based on a ratio of each commercial bank's deposits.
Commercial Bnaks: Landbank, BDO, CHINA BANK

Are Central Banks Government Banks?
Generally, central banks are not government agencies and operate independently of the government;
however, many central bank positions can be appointed by the government, and they are required to
abide by the law, just as they are protected by the law.
What Are the Essential Roles of a Central Bank?
The essential roles of a central bank are to affect monetary policy, be the lender of last resort, and
oversee the banking system. Central banks set interest rates, lend money to other banks, and control the
money supply.
The functions of a central bank may include:
 Monetary policy: by setting the official interest rate and controlling the money supply;
 Financial stability: acting as a government's banker and as the bankers' bank ("lender of last
resort");
 Reserve management: managing a country's foreign-exchange and gold

reserves and government bonds;
 Banking supervision: regulating and supervising the banking industry, and currency exchange;
 Payments system: managing or supervising means of payments and inter-banking clearing

systems;
 Coins and notes issuance;
 Other functions of central banks may include economic research, statistical collection,
supervision of deposit guarantee schemes, advice to government in financial policy.
U.S. Federal Reserve System (Fed)
The Federal Reserve, commonly referred to as the Fed, is the central bank of the United States. It is
probably the most influential central bank in the world. With the U.S. dollar used for approximately 90%
of all of the world's currency transactions, the Fed's sway has a sweeping effect on the valuation of many
currencies.
The Fed is responsible for the effective operation of the U.S. economy while keeping the best interests of
the public in mind. In accordance with its five key functions, the Fed:
 promotes monetary policy
 maintains financial stability
 preserves the soundness of individual financial institutions
 promotes the safety of payment and settlement systems
 oversees consumer protection.1

European Central Bank (ECB)
The European Central Bank (ECB) was established in 1999. The governing council of the ECB decides on
changes to monetary policy. The council consists of six members of the executive board of the ECB, plus
the governors of all the national central banks from the 19 eurozone countries.
As a central bank, the ECB does not like surprises. Whenever it plans to change interest rates, it generally
gives the market ample notice by warning of an impending move through comments to the press.
The bank's mandate is to keep prices stable and ensure that growth is sustainable. Unlike the Fed, the
ECB strives to maintain the annual growth in consumer prices below 2%.
European Central Bank. "Why Are Stable Prices Important?"
As an export-dependent economy, the ECB also has a vested interest in preventing excess strength in its
currency because this poses a risk to its export market.
The ECB's council meets bi-weekly. Policy decisions are generally made at meetings where there is an
accompanying press conference. These meetings happen 11 times a year.
Bank of England (BOE)
The Bank of England (BOE) is publicly-owned, which means it reports to the British people through its
parliament. Founded in 1694, it is often touted as one of the world's most effective central banks.
Its mission is to maintain the stability of England's monetary and financial systems.9 To accomplish this,
the central bank has an inflation target of 2%. If prices surpass that level, the central bank will look to
curb inflation. A level far below 2% will prompt the central bank to take measures to boost inflation.10
The BOE also ensures:
 the soundness of the nation's financial institutions
 the security of its currency
 a financial system that's free from unnecessary risk
The bank's monetary policy committee has nine members. They include a governor, three deputy
governors, a chief economist, and four outside experts. The committee meets eight times a year to
announce findings and policy.

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CENTRAL BANK

How the Central Bank Influences an Economy

Commercial Bnaks: Landbank, BDO, CHINA BANK

What Are the Essential Roles of a Central Bank?

The functions of a central bank may include:

 Reserve management: managing a country's foreign-exchange and gold

 Payments system: managing or supervising means of payments and inter-banking clearing

 Coins and notes issuance;

U.S. Federal Reserve System (Fed)

 promotes monetary policy

 maintains financial stability

 preserves the soundness of individual financial institutions

 promotes the safety of payment and settlement systems

 oversees consumer protection.1

European Central Bank. "Why Are Stable Prices Important?"

Bank of England (BOE)

The BOE also ensures:

 the soundness of the nation's financial institutions

 the security of its currency

 a financial system that's free from unnecessary risk

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