basit central bank

8/6/2019 Basit Central Bank

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Central Bank

Presenters:Abdur-Rehman

Ali Dar

Farhan HamidKawar Abdul Basit

Rehan Hassan

Rizwan Arshad



Contents

� Introduction:

± Definition

± History

� Functions:

1. Lender of last resort

2. Determining & setting the interest rates

3. Controlling money supply�

Open market operations.

4. Implementing monetary policy� Goals

� Tools



Contd

5. Regulating & supervising the banking sector

� Reserve requirements

6. Functioning as the governments bank

7. Managing a countrys foreign exchange and goldreserves.

� State Bank Of Pakistan

± A brief history

± Current functioning

� Federal Reserve



Introduction

by Abdur Rehman



Definition

� A central bank a.k.a. reserve bank or monetary

authority is a public institution that usually issues the

currency, regulates the money supply, and controls

the interest rates in a country. Central banks oftenalso oversee the commercial banking system within

its country's borders.

� A central bank is distinguished from a normal

commercial bank because it has a monopoly on

creating/issuing the currency of that nation and is

usually that nation's legal tender.



History

� Paper currency was first used in Chinese empires but

their usage stopped as it caused inflation.

� Up till the 17th century, commodity money was

widely used in transactions.

� In 1664, the central bank of Sweden Sveriges

Riksbank was founded followed by the

establishment of The Bank of England in 1694.

� In the 19th and earlier 20th century, central banks

used Gold Standards.

� Gold Standards collapsed after the Great War that

ended in 1918.



Functions

by Rizwan Arshad



Functions

1. Lender of last resort

2. Determining & setting the interest rates

3. Controlling money supply

4. Implementing monetary policy

5. Regulating & supervising the banking sector

6. Functioning as the governments bank

7. Managing a countrys foreign exchange and gold

reserves.



1. Lender of last resort:

± Is an institution willing to extend credit at the timeof crises. Can be a central bank or other largefinancial institutions.

± Prevents widespread withdrawals, savesdepositors and prevents the economicdisruption(s) associated with the collapse.

± Consequently, it gives the commercial banksconfidence to undertake more risk.



2. Determining & Setting the Interest

Rates

± Influencing the market interest rates is the most

obvious power of the central banks.

± The base of this power is to issue or borrow

theoretically unlimited quantities of money until

the market rate is close to the target rate.

± This is achieved by purchasing and selling bonds.



Money Supply

by Farhan Hamid



3. Money Supply:

± The money supply is the total amount of money available in aneconomy at a particular point in time.

± Money supply is measured along a spectrum from narrow tobroad monetary aggregates. Narrow measures include the

most liquid assets while the broader measures include lessliquid assets like certificates of deposits etc.

± The different types of money are classified as Ms:a) M1 = Includes currency and checking deposits. Represents the

moneys function as a medium of exchange.

b) M2 = Includes M1 and close substitutes for money e.g. small timedeposits. Reflects moneys function as a store of value.

c) M3 = Includes M2 and assets in large time deposits.



The central bank also has complete authority (monopoly) over

issuing currency.

Some important advantages for this soleauthority are:

± Credit creation by commercial banks can be checked and

controlled by central bank.

± Central Bank has the confidence of people as it has the

government backing and recognition.

± As the sole authority of issuing currency there is uniformity in

the countrys currency.

± Government can use this sole authority for the best interest of

people.



Monetary policy

by Rehan Hassan



4. Monetary policy:

± Monetary policy is the process by which themonetary authority of a country controls the supplyof money, often targeting a rate of interest to attaina set of objectives oriented towards the growth and

stability of the economy.

± The goals of monetary policy include:

a) Price stability

b) Economic growthc) High employment

d) Interest rate stability

e) Financial market stability



Tools of Monetary Policy

I. Q uantitative

a) Open market operations (sale & purchase of

governmental securities in financial markets)

b) Variation in the discount rate (decrease rate to injectmoney in the market and increase it to curb inflation)

c) Credit rationing (a restriction is applied on the

maximum amount of credit an individual bank can

draw by rediscounting bills of exchange)d) Varying reserve requirements (increase the

requirements to reduce the lending abilities of

commercial banks and vice versa)



II. Q ualitative

a) Varying margin requirements (varying the minimum

requirements, the down payments required to

purchase a security)b) Use of moral persuasion (a minor monetary policy

tool that involves giving the commercials banks a

friendly precaution or a verbal warning)

c) Direct action (if the commercial banks dont followthe monetary policy, the central bank can impose

penalties above the official rate of it can refuse to

discount the bills of exchange)



5. Regulating & supervising the banking

sector:

± In some countries a central bank through itssubsidiaries controls and monitors the bankingsector. In other countries banking supervision is

carried out by a government department such as theUK Treasury, or an independent government agency(e.g. UK's Financial Services Authority). It examinesthe banks' balance sheets and behavior and policiestoward consumers.

± Any cartel of banks is particularly closely watchedand controlled.



� Reserve requirements

± Commercial banks are required to hold a percentageof their deposits as reserves. Such legal reserverequirements were introduced in the nineteenthcentury to reduce the risk of banks overextendingthemselves and suffering from bank runs, as this couldlead to runs on other banks too.

± In the past century, banks have proliferated and have

been engaged in transactions that enabled them toprofit from dealings globally. Reserve requirementsput a limit to the ballooning of money supply by suchoperations.



6. Functioning as the Governments

Bank: ± A central bank performs and provides services

to the government just like commercial banksprovide services to their customers.

± It acts as the government bank and agent, tocollect and pay transactions on behalf of thegovernment. Central bank has a detail recordof all monetary issues and present in goodposition to advise government for monetary,banking and financial issues.



7. Managing a countrys foreign exchange and

gold reserves. ± The central bank is responsible for the management

of a countries gold and foreign exchange reserves.

± To influence the money supply, some central banksmay require that some or all foreign exchange receipts(generally from exports) be exchanged for the localcurrency. The rate that is used to purchase localcurrency may be market-based or arbitrarily set by thebank.

± In this method, money supply is increased by thecentral bank when it purchases the foreign currencyby issuing (selling) the local currency. The moneysupply can be reduced by reversing the process.



SBP &

Federal Reserve

by Kanwar Abdul Basit



State bank of Pakistan



State bank of Pakistan

� The Reserve Bank of India was the

central bank of the British India.

� SBP was established in May 1948

and started operating on 1st June,1948.

� On 30 December, 1948, the British Government's

commission distributed the Bank of India's reservesbetween Pakistan (30%) and India (70%).



� The Indian Reserve bank was the sole note

issuing authority in Pakistan till September, 1948. � SBP started issuing notes and coins after 30th

September, 1948.

�

SBP

was fully nationalized in1

974

, when thegovernment took charge of all financial

institutions.

� The current governor of SBP is Mr. Shahid Hafiz

Kardar.



2. Secondary:

± Management of public debt.

± Management of foreign exchange.

± Advising the government on policy matters.

± Maintaining close relationships withInternational Financial Institutions.



Federal Reserve

� It is the central bank of the United States of America.

� It was created in 1913 in response to a series of financialpanics particularly the one in 1907.

�

J.P.M

organ, is blamed to have created the panic in orderto persuade the Americans to accept the idea of a centralbank.

� The F.E.D. is a privately owned company. Its stocks arenot traded publically. 10 banks combine to form this

international banking cartel, which, under the FederalReserve Act have the sole right of printing money in theUnited States.



Banks Making up F.E.D.

� Rothschild Bank of London

� Warburg Bank of Hamburg

� Rothschild Bank of Berlin

� Lehman Brothers of New York

� Lazard Brothers of Paris

� Kuhn Loeb Bank of New York

� Israel Moses Seif Banks of Italy

� Goldman, Sachs of New York

� Chase Manhattan Bank of New York

� Warburg Bank of Amsterdam

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