Central Banking
the Federal Advisory Council, and
Central Banks
•A central bank, reserve bank, or monetary
authority is an institution that manages the
currency, money supply, and interest rates of a
state or formal monetary union, and oversees
their commercial banking system.
Functions of Central Banks
• implementing monetary policies.
• setting the official interest rate – used to
manage both inflation and the country's exchange
rate – and ensuring that this rate takes effect via
a variety of policy mechanisms
• controlling the nation's entire money supply
• the Government's banker and the bankers' bank
("lender of last resort")
• managing the country's foreign exchange and
gold reserves and the Government bonds
• regulating and supervising the banking industry
How does the central bank implement monetary
policy?
•Central banks conduct monetary policy by
adjusting the supply of money, generally through
open market operations.
•For instance, a central bank may reduce the
amount of money by selling government bonds
under a “sale and repurchase” agreement,
thereby taking in money from commercial banks.
The Federal Reserve System
•is the central banking system of the United
States of America. It was created on December
23, 1913, with the enactment of the Federal
Reserve Act, after a series of financial panics led
to the desire for central control of the monetary
system in order to alleviate financial crises.
Bangko Sentral ng Pilipinas
•is the central bank of the Philippines. It was
established on July 3, 1993, pursuant to the
provision of Republic Act 7653 or the New Central
Bank Act of 1993.
Structure of the Federal Reserve System
•The Federal Reserve System include the
following entities:
1. the Federal Reserve banks,
2. the Board of Governors of the Federal
Reserve System,
3. the Federal Open Market Committee
(FOMC),
4.
5. member commercial banks.
Functions of the Federal Reserve banks
• Clear checks
• Issue new currency
• Withdraw damaged currency from circulation
• Administer and make discount loans to banks in
their districts
• Evaluate proposed mergers and applications for
banks to expand their activities
• Act as liaisons between the business community
and the Federal Reserve System
• Examine bank holding companies and state-
chartered member banks
• Collect data on local business conditions
• Use their staffs of professional economists to
research topics related to the conduct of
monetary policy
Federal Reserve Bank's Involvement in Monetary
Policy
1. Their directors “establish” the discount rate
(although the discount rate in each district is
reviewed and determined by the Board of
Governors).
2. They decide which banks, member and non-
member alike, can obtain discount loans from the
Federal Reserve bank.
3. Their directors select one commercial banker
from each bank’s district to serve on the Federal
Advisory Council, which consults with the Board
of Governors and provides information that helps
in the conduct of monetary policy.
4. Five of the 12 bank presidents each have a
vote on the Federal Open Market Committee,
which directs open market operations (the
purchase and sale of government securities that
affect both interest rates and the amount of
reserves in the banking system). Because the
president of the New York Fed is a permanent
member of the FOMC, he or she always has a
vote on the FOMC, making it the most important
of the banks; the other four votes allocated to the
district banks rotate annually among the
remaining 11 presidents.
Board of Governors of the Federal Reserve
System
•At the head of the Federal Reserve System is
the seven-member Board of Governors,
headquartered in Washington, D.C.
•Actively involved in decisions concerning the
conduct of monetary policy.
The Monetary Board of BSP: Functions
• issue rules and regulations it considers
necessary for the effective discharge of the
responsibilities and exercise of the powers vested
upon the Monetary Board and the Bangko Sentral
• direct the management, operations, and
administration of the Bangko Sentral, reorganize
its personnel
• establish a human resource management
system which shall govern the selection, hiring,
appointment, transfer, promotion, or dismissal of
all personnel
• adopt an annual budget for and authorize such
expenditures by the Bangko Sentral
• indemnify its members and other officials of the
Bangko Sentral, including personnel of the
departments performing supervision and
examination functions against all costs and
expenses reasonably incurred by such persons in
connection with any civil or criminal action, suit or
proceedings to which he may be, or is, made a
party by reason of the performance of his
functions or duties
Federal Open Market Committee (FOMC)
•The FOMC usually meets eight times a year
(about every six weeks) and makes decisions
regarding the conduct of open market operations,
which influence the money supply and interest
rates.
Open Market
•The term open market refers to interbank trade in
securities.
Advisory Committee
•The BSP created an Advisory Committee which
deliberates, discusses and recommends to the
Monetary Board the appropriate monetary policy
stance that will enable the BSP to achieve the
desired inflation target. The Advisory Committee
meets every six weeks and in between regular
meetings, whenever it is deemed necessary.
Open Market Operations (OMO)
•OMO is a monetary tool which involves the BSP
publicly buying or selling government securities
from banks and financial institutions in order to
expand or contract the supply of money.
Chairman of the Board of Governors (FRS)
•Spokesperson for the entire Federal Reserve
System, and supervises the Board’s staff
•Negotiates, as needed, with Congress and the
President of the United States
•With these, the chairman has effective control
over the system, even though he doesn’t have
legal authority to exercise control over the system
and its member banks.
Governor (BSP): Functions
• prepare the agenda for the meetings of the
Monetary Board and to submit for the
consideration of the Board the policies and
measures that he believes to be necessary to
carry out the purposes and provisions of RA 7653

• execute and administer the policies and

measures approved by the Monetary Board
• direct and supervise the operations and internal
administration of the Bangko Sentral
• appoint and fix the remunerations and other
emoluments of personnel below the rank of a
department head, as well as to impose
disciplinary measures upon personnel of the
Bangko Sentral, provided, that removal of
personnel shall be with the approval of the
Monetary Board
• render opinions, decisions, or rulings on matters
regarding application or enforcement of laws
pertaining to institutions supervised by the
Bangko Sentral
• exercise such other powers as may be vested in
him by the Monetary Board
• be the principal representative of the Monetary
Board and of the Bangko Sentral