Banking. Central banks, their functions (Western model) (lecture notes)

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Banking. Central banks, their functions (Western model) (lecture notes)

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Central banks, their functions (western model)

Traditionally, the Central Bank performs 4 main functions: it carries out the monopoly issue of banknotes, is the bank of banks, the banker of the government, conducts monetary regulation and banking supervision.

The central bank, as a representative of the state, is legally assigned an issuing monopoly only with respect to banknotes, that is, nationwide credit money, which are the universally recognized final means of repaying debt obligations. In some countries, the central bank monopoly issues coins, but minting is usually handled by the ministry of finance (treasury). Banknotes make up an insignificant part of the money supply of industrialized countries, so the functions of the issuing monopoly of the Central Bank are somewhat reduced, although banknote emission is still necessary for payments in retail trade and ensuring the liquidity of the credit system. The higher the share of cash circulation in the country, the more important the value of banknote emission.

It should be borne in mind that the monopoly on the issue of banknotes at the present stage does not at all mean its strict control or linkage with the goals of monetary regulation. The main task of monetary policy is the regulation of non-cash emission, the main source of which is commercial banks. At the same time, the issuing monopoly has turned the central bank into the issuing and cash center of the banking system, since the obligations of the central bank (in the form of both banknotes and deposits of commercial banks) serve as the cash reserve of any commercial bank.

The Central Bank does not deal directly with entrepreneurs and the public. Its main clientele are commercial banks, acting as intermediaries between the economy and the central bank. The latter keeps the free cash of commercial banks, i.e., their cash reserves. Historically, these reserves have been placed by commercial banks with the central bank as a guarantee fund to pay off deposits.

In most countries, commercial banks are required by law to keep a portion of their cash reserves with the central bank. Such reserves are called required bank reserves. The Central Bank sets the minimum ratio of required reserves to banks' deposit liabilities (required reserve ratio). Through accounts opened by commercial banks at the central bank, the latter settles settlements between them. With the introduction of electronic settlement systems, the importance of the central bank's traditional function of the settlement center of the banking system has significantly decreased.

By accepting for storage the cash reserves of commercial banks, the central bank provides them with credit support. He is a lender of last resort for commercial banks, that is, a lender of last resort. Usually, its loans are provided to banks at a rate higher than the market rate, and therefore banks turn to the central bank for support only if there is no other way to get a loan.

Regardless of the ownership of the capital, the central bank is closely connected with the state. In its role as the government's banker, the bank acts as its teller and creditor, and holds accounts for the government and government departments. In most countries, the central bank carries out the cash execution of the state budget. Government revenues from taxes and loans are credited to an interest-free account of the Treasury (Ministry of Finance) at the central bank, from which all government expenses are covered. In some countries, such as the United States, most of the budget funds are placed in commercial banks.

In the context of a chronic deficit of state budgets, the function of lending to the state and managing public debt is being strengthened (Denis Shevchuk). Public debt management refers to the operations of the central bank to place and repay loans, organize the payment of income on them, to carry out conversion and consolidation. The Central Bank uses various methods of public debt management: it buys or sells government bonds in order to influence their rates and profitability, changes the terms of the sale, and in various ways increases the attractiveness of government bonds for private investors.

On behalf of the government, the central bank regulates foreign exchange and gold reserves, and is the traditional custodian of state gold and foreign exchange reserves. It regulates international settlements, balances of payments, participates in the operations of the world market for loan capital and gold. The Central Bank, as a rule, represents its country in international and regional monetary organizations.

All functions of the central bank are closely interrelated. By lending to the state and banks, the central bank simultaneously creates credit instruments of circulation, by issuing and repaying government obligations, and affects the level of loan interest. These functions of the central bank create objective prerequisites for it to perform the function of regulating the entire monetary system of the country and, consequently, regulating the economy. The function of monetary regulation and banking supervision at the present stage is the most important function of the central bank.

The central bank carries out its functions through banking operations - passive and active. Passive operations are called operations through which banking resources are generated, active are operations for the placement of banking resources (Shevchuk D.A. Fundamentals of Banking. - Rostov-on-Don: Phoenix, 2006).

Author: Shevchuk D.A.

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