Globally Important Central Banks

Transcription

1 Globally Important Central Banks This lecture considers the most important central banks in the world, their policies and operations. We can list these as (1) The US Federal Reserve (Fed) (2) The Bank of England (BE) (nationalized) (3) The European Central Bank (ECB) (began operations) (4) The Bank of Japan (BoJ) (5) The Peoples' Bank of China (PBOC) Central banks perform important functions. First, they control the amount of money in their respective economies. Sometimes central banks focus on the control of interest rates, and sometimes they try to control exchange rates. Although it is not obvious, it will not be possible for central banks to simultaneously control all three of these. Second, central banks are the banks used by commercial banks (they take deposits, clear and transfer money between the accounts of commercial banks, and make short term loans to commercial banks). Third, they sometimes coordinate government financing and borrowing. Finally, they quite often supervise the running of the banking system and other financial organizations, markets, and activities. The US Central Bank: The US central bank had a rough start. The prototypical central bank for the US was the First Bank of the United States, which was established in It issued currency, handled government financing and expenditures and controlled the national debt. This bank had a charter which expired in No bank was created to replace it until By 1833, President Andrew Jackson hated the bank. It symbolized the rich elite and pampered upper classes of the northeast, always ready to sacrifice the common people for their own benefit. Jackson was a rugged military man and loved the common people. In 1833 he separated the US government from

2 the Federal government and later distributed the money to "pet banks" at the state level. This effectively destroyed the Second Bank of the US and the countrycontinued on without a central bank until I will discuss more about the Federal System when I am in class. (Here is a comic on the Fed produced by the NY Fed...not a bad reference but really simple). The Fed has seven governors and 12 District Fed Banks. Each Fed bank has a president who is elected by the member banks. The NY Fed Bank president and 4 (alternating) other Fed bank presidents come together with the 7 governors to form the Federal Open Market Committee (FOMC). The FOMC has 12 voting members and makes monetary policy in the US. The UK Central Bank: The Bank of England was established in 1694 and became a joint stock (corporate) bank. It was a private affair, but the British government used it to raise money (especially for wars) and to issue currency. By 1844 it had become a monopoly in issuing currency. The Bank of England helped to make Britain the world's financial leader and London the world's financial center. By 1946, the Bank of England had been nationalized and was under government control. The B of E is managed by a governor, 2 deputy governors, and 16 non-executive directors. This group of people is sometimes referred to as the "Court". The recent financial crisis has led Parliament to propose and institute financial reforms. Some of these mirror the efforts by the American Congress with its Dodd-Frank law. There is now a Financial Policy Committee (FPA) that is responsible for identifying, monitoring, and and lessening financial stability risks. In addition, there is a Prudential Regulatory Authority (PRA) which looks at significant firms that manage balance sheet risks. Finally, there is the Financial Conduct Authority (FCA) that protects consumers.

3 European Central Bank (ECB): The ECB was established by the Maastricht Treaty in 1991, but it was only after seven years that it began operations. Monetary policy in the Eurozone18 is determined by a governing council made up of the 18 countries' central bank heads. An executive board consisting of a president, vice-president, and four other members, carry out or execute monetary policy by issuing orders to the 18 central banks. The primary goal of the ECB is to ensure price stability. Obviously, coordinating these 18 central banks (each with their own set of policies they wish to have enacted) is a monumental task -- some would say an impossible task. With regard to bank supervision there are some inherent questions over who does the supervision, the home central bank or the host central bank, within the Eurozone18. A banking union within the Eurozone18 has been implemented and has help to clarify and rationalize baking supervision. The basic problem of having 18 fiscal policies and one monetary policy remains. Bank of Japan: The Bank of Japan was established in 1882 during the Meiji Restoration. The yen was established as the official currency in Japan earlier Banknotes were issued in Japan joined the gold standard in The BoJ was reorganized in 1942 and again after the war in Up to 1991, monetary policy was mainly control over the amount of credit which banks could issue. This type of policy led to the famous bubble economy that burst in In 1997 laws were passed to give the BoJ more independence from the government and from the Ministry of Finance in particular. However, the BoJ was not very successful in stimulating the economy. In 1998 supervision was given to the Financial Services Agency. Following the election of Abe in 2012, the BoJ began a very aggressive monetary expansion much like the US QE policies, only of larger relative scale. The monetary policy of the BoJ was referred to as QQE and the money supply was targeted to double in just two years. In April of 2013 the BoJ began to buy up to 60 trillion yen of securities per year. This represents an unprecedented loosening of monetary policy.

4 The Peoples' Bank of China (PBOC): In 1948, in Hebei Province, China, the Peoples' Bank was established. By 1949, the PBOC had moved to Beijing. Until the 1980s the PBOC was the only bank in China, being both a commercial bank and a correspondent bank. During the 1980s the commercial banking activities of the PBOC was separated and given to four independent state owned banks. In 1983, the PBOC began the activities of a central bank. Later, in 1995, the PBOC was formally made a central bank in law. in 1998 the PBOC was restructured and modernized and in 2003 the PBOC was strengthened and given the right to form monetary policy. The management of the bank is under a governor and a set of deputy governors. The PBOC is currently one of the largest central banks in the world with combined assets nearly equal to $4 trillion USD. The Balance Sheet of a Typical Central Bank Like all balance sheets, a central bank's balance sheet is composed of assets, liabilities, and equity. Since these are government agencies, central banks rarely have much equity. This means that assets and liabilities are roughly the same. An example of the balance sheet for a central bank is given on the next page. With respect to liabilities, the central bank has currency, reserves and bonds it has issued. Currency is equal to the the cash in the hands of the non-bank public. Reserves are equal to vault cash of the banks and deposits of banks in the central bank. The bonds that are issued by the central bank have been sold to commercial banks and are used to control the money supply. These may not be strictly bonds. They may be time deposits or bills sold to banks. In any event, they are securities issued by the central bank and sold to banks. On the asset side we have foreign exchange reserves, gold, and holdings of government issued bonds and other securities. There is no need for a central bank to hold gold. Gold does not in anyway need to back the money issued by the government. Gold is held to diversify the holding of assets of the central bank. The foreign exchange reserves are foreign held assets. It is investment in foreign countries by the

5 central bank. Most of this will be the holding of foreign government bonds, especially US Treasury securities. When we say foreign exchange reserves, we do not mean simply foreign money or US dollars. We mean income earning foreign assets. The foreign exchange reserves cannot be withdrawn from a country. It can only be sold for other types of assets (e.g. US dollar denominated assets sold for yen denominated assets). Principal Activities of the Central Bank These will be discussed in class. The central bank usually has numerous functions. These include (1) developing and implementing monetary policy, (2) issuing currency, (3) supervising commercial banks and other financial institutions, (4) acting as a ender of last resort, (5) facilitating the financing of government, and (6) stabilizing exchange rates.