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Lecture notes, cheat sheets
Banking. Monetary regulation of the economy by the Central Bank (Western and Russian models) (lecture notes)
Directory / Lecture notes, cheat sheets Table of contents (expand) Monetary regulation of the economy by the Central Bank (Western and Russian models) The Central Bank is the main conductor of monetary regulation of the economy, which is an integral part of the government's economic policy, the main goals of which are to achieve stable economic growth, reduce unemployment and inflation, and equalize the balance of payments. The general state of the economy largely depends on the state of the monetary sphere. In terms of the number of institutions, the volume of credit resources and operations, the base of the entire monetary system is made up of commercial banks and other credit institutions. It is enough to note that from 75 to 90% of the money supply in most countries are bank deposits and only 25-10% are central bank notes. Therefore, state regulation of the monetary sphere can be successful only if the state, through the central bank, is able to influence the scale and nature of the operations of commercial banks. Methods of this influence are diverse, the most common of them are: ▪ change in the discount interest rate or the official discount rate of the central bank (discount or discount policy); ▪ changes in required reserve standards; ▪ operations on the open market, i.e. transactions for the purchase and sale of bills, government bonds and other securities; ▪ regulation of economic standards for banks (the ratio between cash reserves and deposits, liquid assets and deposits, equity and borrowed capital, equity and assets, the amount of a loan to one borrower and capital or assets, etc.). These methods of monetary regulation can be called general in the sense that they affect the operations of all commercial banks, the loan capital market as a whole. Selective (selective) methods can also be applied, aimed at regulating certain forms of credit (for example, consumer credit) or lending to various industries (housing construction, export trade). Selective methods include: ▪ direct restrictions on the size of bank loans for individual banks or loans (so-called credit ceilings); ▪ regulation of the conditions for issuing specific types, in particular, establishing a margin, i.e. the difference between the amount of security and the size of the loan issued; deposit rates and loan rates, etc. The leading method of regulation is the accounting policy. By raising or lowering the official discount rate, the central bank affects the ability of commercial banks and their clients to obtain credit, which in turn affects economic growth, money supply, and the level of market interest. A change in the discount rate of the central bank, causing a corresponding change in the market interest, is reflected in the state of the balance of payments and the exchange rate. An increase in the rate helps to attract foreign short-term capital to the country, and as a result, the balance of payments is activated, the supply of foreign currency increases, the foreign exchange rate decreases and the national currency exchange rate rises accordingly. Lowering the rate has the opposite effect. A significant impact on the credit resources of commercial banks, their ability to provide loans has a change in the required reserve ratio. Raising it does not mean that most of the bank funds are "frozen" in the accounts of the central bank and cannot be used by commercial banks to issue loans. As a result, bank loans and the money supply in circulation are reduced, and interest on bank loans is increasing. A decrease in the norm of bank reserves leads to an expansion of bank loans and money supply, to a decrease in market interest (Shevchuk D.A. Banking operations. Principles. Control. Profitability. Risks. - M .: GrossMedia: ROSBUH, 2007). In countries with a developed securities market, the most common method of monetary regulation is open market operations that affect the activities of commercial banks through the amount of resources they have. If the central bank sells securities on the open market and commercial banks buy them, then the resources of the latter and, accordingly, their ability to provide loans to customers is reduced. This leads to a reduction in the money supply in circulation and an increase in the loan interest. By buying securities on the market from commercial banks, the central bank provides them with additional resources and expands their ability to issue loans. Open market operations contribute to the regulation of banking resources, interest rates and government securities. To regulate short-term interest rates, central bank operations with bills of exchange (treasury and commercial) and short-term government bonds are traditionally used. Selling them limits the availability of the money market and leads to an increase in market interest rates. If the central bank does not want to allow an increase in the market rate of interest, then it provides support to banks by buying short-term securities and bills from them at current market rates. The traditional means of regulating long-term interest rates are the operations of the central bank with long-term government obligations. The purchase of such obligations by the central bank causes their market price to rise (as a result, the demand for them increases). An increase in the price of bonds means a decrease in their actual yield, which is determined by the ratio of the amount of coupon income on a bond to its market rate. A decrease in the actual yield of long-term bonds leads to a decrease in long-term interest rates in the market. The sale of bonds by the central bank on the open market causes a fall in their price and an increase in bond yields, and hence long-term interest rates. In addition, the purchase and sale of securities affects interest rates through the expansion or restriction of bank cash. Monetary policy should be considered in a broad and narrow sense. In a broad sense, it is aimed at combating inflation and unemployment, at achieving stable rates of economic development through the regulation of the money supply in circulation, the liquidity of the banking system, and long-term interest rates. In a narrow sense, such a policy is aimed at achieving an optimal exchange rate through foreign exchange intervention, accounting policies and other methods of regulating short-term interest rates. Currency intervention refers to the policy of buying and selling by the central bank of foreign currency to the national currency in the foreign exchange market. When the central bank sells or buys foreign currency in exchange for national currency, the ratio of supply and demand for foreign currency changes and the national currency exchange rate changes accordingly. If, for example, the Bank of Russia sells dollars on the currency exchange, then the supply of dollars increases and, accordingly, their exchange rate decreases, and the ruble exchange rate rises. When buying dollars, their exchange rate increases. Monetary regulation of the economy of the Russian Federation is carried out by the Bank of Russia by determining the norms of required reserves, discount rates on loans, conducting transactions with securities, and setting economic standards for banks. In order to influence the liquidity of the banking system, the Bank of Russia refinances banks by providing them with short-term loans at its discount rate and determines the conditions for granting loans secured by various assets. The Bank of Russia establishes the following economic standards for banks: the minimum amount of authorized capital; the limiting ratio between the size of the authorized capital of the bank and the amount of its assets, taking into account the risk assessment; liquidity indicators of the bank's balance sheet in the form of a standard ratio between the bank's assets and liabilities, taking into account their maturity, as well as the possibility of selling assets; the minimum amount of required reserves deposited with the Bank of Russia as a percentage of banks' liabilities; the maximum amount of risk per borrower in the form of a certain percentage of the total capital of the bank (when calculating the maximum risk, the concept of risk includes the entire amount of investments and loans to this borrower, as well as obligations issued on his behalf); limiting the size of currency and exchange rate risks; limiting the use of attracted deposits for the acquisition of shares of legal entities. The Bank of Russia performs the functions of regulating and supervising the activities of banks to maintain the stability of the monetary system, while the Bank of Russia does not interfere in the operational activities of banks. Author: Shevchuk D.A. << Back: Passive and active operations of the Central Bank of the Russian Federation >> Forward: Regulation and control by the Central Bank of the activities of commercial banks of the Russian Federation
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