cP 1+ Central bank is the government institution that control the banking system & is the sole money-issuing authority. Through it, the government conducts monetary policy. 2- Commercial banks serve the general public. They are called financial intermediaries because they stand between savers, from whom they accept deposits, and borrowers, to whom they make loans a. to allow sustainable economic growth, b. maintain a high level of employment, c. ensure orderly financial markets, d. to preserve reasonable price stability. NOTE - The Central Bank could act as an independent government agency in the U.S. economy (The Federal Reserve System- FED) - it acts as a government agency as in the Egyptian economy, and has great role in determining monetary policyA. The bank of commercial banks. B. The bank for government. C. The controller of the nation’s supply of money. D. A regulator of money market (monetary policy). A- The bank of commercial banks. + The central bank accepts deposits from commercial banks and will, on order, transfer them to the accounts of other banks. * Central bank provides temporary liquidity to the commercial banks by making short-term loans to them, and by purchasing securities from them. * The loans made by the central bank to commercial banks are called discount loans. The rate of interest that the Central bank charges on such loans is called the discount rate. + These loans are given to commercial banks to increase the liquidity available to. it, and to prevent banking panics. The central bank is called the lender of last resort. + It performs a regulatory function by setting rules for how banks can operate B- Central Bank as a bank for the Government: + The government keeps its deposits at the central bank. + When the government requires more money than it collects in taxes, to finance the budget deficit, it needs to borrow, and it does so by selling securities to the public, through the central bank. * When the central bank sells a new government bond on the open market, it is indirectly lending to the government. Treasury Bills have maturities of up to 1 year, Government Bonds have maturities of more than 1 year. * The central bank is financial advisor for the government, and is the director of all government's debts, with debtors inside and outside the country. 2C) Regulator of money Markets. * Central banks help the financial institutions by moderating rapid swings in interest rates on its deposits and loans, which affects changes in other short- term interest rates. + Central banks assume responsibility for preventing serious financial panic and the resulting banks failures. + The central bank acts as the lenders of last resort to commercial banking system and provides them with the money needed to meet the demanders of their deposits. D- The central Bank as the Controller of the money Supply: One of the most important functions of the central bank is controling the money supply (MS) through 3 basic instruments Which are the Tools of Monetary Policy: 1) Discount rate on bank borrowing, by which the central bank affects the loans that can be provided to commercial banks, then the money supply Ms + Discount Rate T > Mst + Discount Rate | > Ms? 2) Open-Market Operations (OMO) by which the central bank can sell and buy securities in the open market, and affect on the commercial banks’ reserves, and then on the money supply Ms. - Buy Bonds > Ms? - Sell bonds > Msl 3) legal reserve requirements (RR) on depository institutions, by which the central bank affects the process of deposit creation by commercial banks, and then affects the money supply Ms. - RRR: Required reserve ratio: the stated percentage indicating how much in reserves banks are required to hold in relation to their outstanding deposits. + Reserve requirement tT > Mst + Reserve requirement) > MsTA bank loan is liability to the borrower, who must pay it back, but an asset to the bank. Reserves: All banks would prefer to keep sufficient cash on hand to be able to meet depositors’ day-to-day requirements for deposit outflow. An individual bank needs to keep only fractional reserves against its deposits. Reserves are held by a commercial bank at the central bank to pay the required payments either when checks drawn by the bank’s customers are deposited in other banks or when customers make cash withdrawals. The reserves that the central bank requires the bank to hold are called required reserves. Any reserves held over and above required reserves are called excess reserves. Excess reserves are important to a bank to avoid any costs, and bank failure..' | | Gree Tues $i « Interest Paid Interest Received (Low Rate) (High Rate) Modern commercial banking system is of two main types: * One type has a small number of banks, each with a large number of branch offices; (U.K. and Egypt ) the other consists of a large number of independent banks (the U.S. system). The basic unit of the banking system in Egypt is the commercial banks, which are profit seeking institutions. In practice all commercial banks are under the regulatory influence of the central bank.+ It accepts deposits, demand deposits that can be transferred by personal checks, and time or saving deposits. * It provides them with services such as clearing checks and issuing regular monthly statements. Issuing credit cards such as Visa card, and master card. Commercial banks earn profits by lending and investing money ith them for more than they pay their depositors in terms of interest and other services provided. Interbank Activities: Commercial banks have a number of Interbank cooperative relationships, such as check clearing and Assets include Liabilities + Reserves + Deposits + Loans + Borrowing + Securities Commercial Bank’s balance sheet + The principal assets of a bank are: > reserves, > loans to individuals, and business firms, > securities such as government bonds which pay interest, & equities which pay dividends.* The sources of bank’s liabilities which are: > deposits that are owed by its depositors, > borrowings from other banks and central bank, The relationship between total assets and liabilities of a bank is that: Bank Capital = Total Assets — Total Liabi - The demand curve for money (MD) shows the quantity of money people will hold at each interest rate Interest rate a R 8 Quantity of Mim wB money (M) For a given level of nominal income, a lower interest rate increases the demand for money (movement on the money demand curve). - The demand for money depends negatively on the interest rate (change in interest rate causes movement along the MD)Interest rate (i) Interest rate (i) The central bank determines the quantity of money supplied and on any given day, that quantity Is fixed. The supply of money curve is vertical at the given quantity of money supplied (Ms). An increase in money supply shifts the MS rightward * ' Msi MS — Money Money Money market equilibrium (MS = MD) determines the interest rate: => The interest rate (i) must be such that the supply of money (which is independent of the interest rate) is equal to the demand for money (which does depend on the interest rate).> Monetary policy refers to the actions undertaken by a nation's central bank to control money supply and achieve economic growth. Using the tools of monetary policy, the Central bank (FED in the US) affects intermediate targets, such as the level of bank reserves, market interest rates, and the money supply. > Monetary policy can be classified as either expansionary or contractionary. Expantionary monetary policy Contractionary monetary policy > aims to boost investment and > ‘aims to bring down inflation (inflation is consumer spending related to increasing cost of living) > money supply increases > __money supply decreases > __theinterest rate falls > __ the interest rate rise Increase in Money Supply Decrease in Money SupplySummary of Monetary Policy: — Expansionary Contractionary mst iv Ms it 1-OMO Buy bonds Sell bonds 2-RRR L t 3- + t Discount rate 10