What is s central bank?
Central bank is central agency
It stands at the centre of national banking
system.
Played a key role in in development of modern
monetary system.
Mission of central bank?
Macroeconomic stability.
Low and stable inflation , increased growth and employment.
Financial stability.
To ensure that nations financial
system functions properly, avoids and
prevents financial panics.
Policy tools of central bank
Monetary policy.
Adjusting lever of short
term interest rates, to influence spending, production, investment.
Provision of liquidity.
For short term finance and ensuring
that financial institutions do not collapse, they provide liquidity, thus
acting as lender of last resort.
Financial regulation and supervision.
Central banks do ensure supervision, thus
reducing loss of confidence of public and minimising financial panics.
Role during crisis as lender of last resort in 2008
crisis.
Lessons from great depression.
In a financial panic central bank
need to lend freely to halt runs and restore functioning.
Highly accommodative financial policy
helps support economic recovery and employment.
Global response was,
Prevent fallout of globally important
financial institutions.
Work to normalise credit market.
Restore depositors confidence.
Ensure financial institutions access
to funds.
Federal reserve action.
Federal lends to bank through credit
facility called discount window.
Maturity of discount loan was
extended and interest rates reduced.
Regular auctions of discount window funds was
conducted to encourage participation of financial firms.
All loans were required to be secured
by collaterals.
New programs allowed to provide
liquidity to financial institutions and end illiquidity problems.
Purpose was to enhance stability of
financial system.
Promote availability of funds to US
business and house hold and thus ensure recovery
Institutions and markets covered by
fed ‘s action of last resort.
Banks [through discount window]
Brokers –dealers[financial firms that
deal in securities and derivatives]
Commercial paper borrowers
Money market funds
Asset backed securities markets
Federal reserve established special
programme to repair functioning in CP market and restart flow of credit.
In march 2008,,fed had facilitated
take over of failed broker-dealer, bear sterns by bank JP Morgan chase.
In oct 2008 fed intervened by
takeover of largest insurance company AIG .o prevent its collapse,fed reserve
loaned 85 bn $ using AIG assets as ciollaterals.rescue of AIG prevented even
greater shocks to wodl economy.
Fed worked closely with regulatory
bodies such as FDIC and SEC,
Coordinated with foreign nbanks by
issuing foreign currency swaps.
Fed led the stress test in start of
2009 of 19 banks,which helped restoring investors confidence and allowed banks
to raise private capital.
Followed conventional monetary policy
during financial crisis.
Fed reduced federal funds rate from
5.25 to nearly 0.
Fed undertook large scale purchases
of treasury government sponsored enterprises mortgage related securities.
Large scale assets purchases.[also
known as quantitative easing]
Harsh vardhan pathak
Msc economics
[i studied few lectures of rbi publications,, policies like increasing
key rates is known to us,,,as inflation controlling in main target of any
central bank,,,we see banks rates like CRR,,repo,,,etc increased,,,
same way we know about bond buying program mes of federal reserve of 85
bn $..which has continued,,,
central banks play very crucial role,in maintaining supervision and
regulation too,,
i focused on one specific time period when by 2008 bank had collapsed in
USA,,,
i just made a small note on the steps taken at that time,,]
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