CENTRAL BANK

AND ITS FUNCTIONS

CENTRAL BANKING Home Intro History Objective

INTRODUCTION TO CENTRAL
BANKS
DEFINITION OF CENTRAL BANKS

Central bank: Apex monetary authority

overseeing monetary policy, regulating banking,
issuing currency, and maintaining financial
stability within a country.

IMPORTANCE IN FINANCIAL SYSTEM

Central banks play a pivotal role in the financial

system by regulating banks, controlling monetary
policy, and ensuring economic stability.
CENTRAL BANKING Home History Objectives Structure

HISTORICAL
BACKGROUND
Brief History of Central Banking:-

Central banking originated in the 17th century

with the establishment of institutions like the
Bank of England, evolving over time.

Evolution and Development:-

Central banking has evolved from simple

monetary authorities to complex institutions
influencing global economic policy and financial
stability.
CENTRAL BANKING Home Objectives Structure Policy

MAJOR OBJECTIVES

Maintaining Price Stability: Central banks

aim to control inflation and prevent excessive
01
fluctuations in prices, ensuring the purchasing
power of money remains stable.

Ensuring Full Employment: Central banks

strive to foster conditions conducive to
02
maximum sustainable employment within the
economy, reducing unemployment rates.

Promoting Economic Growth: Central banks

support sustainable economic growth by
03 providing liquidity to the financial system,
facilitating investment, and stabilizing
business cycles.
BORCELLE Home Structure Policy OMO's

STRUCTURE OF CENTRAL
BANKS

Board of Governors: Comprised of appointed

members responsible for setting overarching
01 policies and objectives, often including the
central bank's president or governor.

Monetary Policy Committee: A specialized

committee within the central bank responsible
02 for formulating and implementing monetary
policy decisions, such as setting interest rates
and managing the money supply.

Other Key Departments: Various departments

within the central bank handle specific
03 functions, including banking supervision,
economic research, currency issuance, financial
stability, and foreign exchange operations.
These departments work together to fulfill the
central bank's mandate and objectives.
CENTRAL BANKING Home Policy OMO's Requirements

MONETARY
POLICY
Definition and Purpose:
Monetary policy aims to influence economic activity by
controlling the availability and cost of money, ultimately
stabilizing prices, promoting full employment, and
supporting sustainable economic growth.

Tools of Monetary Policy:

Interest Rates: Central banks adjust short-term interest

rates to influence borrowing, spending, and investment
decisions of businesses and consumers.

Open Market Operations: Central banks buy or sell

government securities in the open market to control the
money supply and interest rates.

Reserve Requirements: Central banks set minimum reserve

requirements that commercial banks must hold against their
deposits, affecting the amount of funds banks can lend and 06

the overall money supply.

CENTRAL BANKING
Open Market Operations
Open market operations
(OMOs) are a key tool of
monetary policy used by
central banks to influence the
money supply and interest
rates.
OPEN MARKET OPERATIONS
Explanation
Open Market Operations
(OMOs) involve central banks
buying or selling government
securities in the open market.
Home
Impact on Money Supply: (1)
Buying securities increases
the money supply as banks
have more reserves to lend,
leading to lower interest rates
and stimulating borrowing
and spending.
OMO's Requirements Discount
Impact on Money Supply: (2)
Selling securities decreases
the money supply as banks
have fewer reserves to lend,
leading to higher interest
rates and curbing borrowing
and spending.
CENTRAL BANKING Home Requirements Discount Easing

RESERVE
REQUIREMENTS

Definition:

Reserve requirements refer to the

minimum amount of funds that banks
must hold in reserve against their
01 deposits, as mandated by the
central bank.

Role in Controlling Money Supply:

Adjusting reserve requirements

affects the amount of money banks
can lend.
02 Increasing reserve requirements
reduces the money supply, as banks
have less to lend.
Decreasing reserve requirements
increases the money supply, as banks
have more to lend.
CENTRAL BANKING
Definition:-
The discount rate is the interest
01 rate charged by a central bank to
commercial banks and other
depository institutions for
borrowing funds directly from the
central bank's discount window.
Home
DISCOUNT RATE
Influence on Borrowing and Lending:
A lower discount rate incentivizes
02 banks to borrow more from the
central bank, increasing their
reserves and promoting lending to
businesses and consumers at lower
rates.
Discount Easing Stability
Conversely, a higher discount rate
03 discourages borrowing from the
central bank, leading to reduced
reserves and potentially higher
interest rates on loans offered by
commercial banks.
CENTRAL BANKING

QUANTITATIVE EASING
Definition:

Quantitative easing (QE) is a central

bank's purchase of long-term
securities to boost liquidity and
stimulate economic activity.

Use in Unconventional Monetary Policy:

QE is utilized when traditional

monetary policy tools, like interest
rate adjustments, have become
ineffective or insufficient to boost
economic activity.

By increasing the central bank's

holdings of long-term securities, QE
aims to lower long-term interest
rates, encourage lending and
investment, and spur economic
growth.
CENTRAL BANKING Home Stability Currency Foreign

ROLE IN FINANCIAL
STABILITY
Banking Supervision:

Central banks oversee and regulate

banks to ensure they operate safely and
soundly.

Supervisory activities include

01 monitoring capital adequacy, risk
management practices, and compliance
with regulations to maintain stability in
the banking sector.

Crisis Management:

Central banks play a critical role in managing

financial crises, such as banking panics or
02 liquidity shortages.

They act as lenders of last resort, providing

emergency liquidity to banks, and may implement
measures to stabilize markets and restore
confidence during times of turmoil.
 CENTRAL BANKING Home Currency Foreign System

ROLE IN CURRENCY ISSUANCE

Printing and Distributing Currency:

Central banks are responsible for printing and distributing physical currency,
including banknotes and coins, to meet the demand for cash in the economy.

They ensure an adequate supply of currency is available to facilitate

transactions and meet public demand.

Ensuring Currency Integrity:

Central banks maintain the integrity of currency by implementing

security features to prevent counterfeiting.

They establish and enforce standards for the design, production,

and quality of banknotes and coins to maintain public trust in the
currency's value and authenticity.
CENTRAL BANKING Home Foreign Systems Central

Foreign Exchange
Management

Maintaining Foreign Exchange Reserves:

Central banks hold reserves, including

foreign currencies and gold, to
01 facilitate international trade and
support currency stability.

Managing Exchange Rate Stability:

Central banks use interventions

to stabilize exchange rates,
02 aiming to support trade and
economic stability.
CENTRAL BANKING
Role in Payment
Clearing and Settlement:
Central banks oversee clearing and settlement
Systems systems, ensuring efficient and secure
processing of financial transactions.
They establish rules and standards for the
timely and accurate settlement of payments,
reducing counterparty risks and promoting
financial stability.
Home Systems Central Accountability
Facilitating Transactions:
Central banks provide infrastructure and support
for payment systems, enabling the smooth flow of
funds between financial institutions and
businesses.
They develop and maintain payment systems that
facilitate various types of transactions.
 Home Central Accountability Economic

CENTRAL BANK INDEPENDENCE

Importance:
Implications for Monetary Policy
Effectiveness:
Central bank independence
safeguards monetary policy from
Independent central banks can
01 political interference, ensuring 03 pursue policies more effectively,
decisions are based on economic
focusing on long-term economic goals
fundamentals rather than short-
rather than short-term political
term political objectives.
pressures.

Independence enhances
credibility, fostering confidence
02 in the central bank's ability to
achieve its objectives of price
stability and economic growth.
Greater independence allows central
banks to implement unpopular but
04 necessary measures to combat
inflation or stabilize the economy,
contributing to overall
macroeconomic stability.
CENTRAL BANKING Home Accountability Economic Challenges

ACCOUNTABILITY OF
CENTRAL BANKS

Transparency in Decision Making: Reporting Mechanisms:

Central banks enhance accountability Central banks provide regular reports and
through transparent communication of disclosures on monetary policy operations,
monetary policy decisions, objectives, and financial stability assessments, and economic
strategies. outlooks.

Openness in decision-making processes Reporting mechanisms facilitate scrutiny by

fosters public understanding, trust, and stakeholders, including governments, financial
credibility in the central bank's actions. markets, and the public, ensuring accountability
and effectiveness in central bank operations.
CENTRAL BANKING Home Economic Challenges Case Study

ECONOMIC DEVELOPMENT

Support for Government Policies:

Central banks collaborate with governments to

implement monetary and fiscal policies that
promote economic stability and growth.

Coordination ensures alignment between

monetary and fiscal measures, enhancing
effectiveness in achieving shared economic
objectives.

Facilitating Financial Inclusion:

Central banks promote access to financial

services for all segments of society, including
low-income individuals and small businesses.

Initiatives such as microfinance, mobile

banking, and financial literacy programs
expand financial inclusion, fostering economic
development and reducing inequality.
CENTRAL BANKING

CHALLENGES FACED BY
CENTRAL BANKS

Inflation Control:

Central banks must balance the dual objectives of

maintaining price stability and supporting economic
growth.

Managing inflationary pressures requires timely

adjustments to monetary policy tools amid changing
economic conditions and external factors.

Financial Stability Risks:

Central banks monitor and mitigate risks to financial

stability, including asset bubbles, excessive leverage,
and systemic vulnerabilities.

Challenges arise from interconnected global markets,

complex financial instruments, and evolving regulatory
frameworks, necessitating proactive risk management
strategies.
CENTRAL BANKING Home Case Study Features Organisations

CASE STUDY
Overview:

The Federal Reserve (Fed) is the central

bank of the United States, established in
1913.

It operates as an independent government

agency with a dual mandate to promote
maximum employment and stable prices,
along with other objectives like financial
stability.
CENTRAL BANKING Home Features Organizations Facilitating

KEY FEAUTURES AND POLICY

Monetary Policy: The Fed sets Economic Research: The

interest rates, conducts open Fed conducts economic
market operations, and research to inform
establishes reserve policymaking and provide
requirements to achieve its public education on
objectives. economic matters.

Currency Issuance: It manages

Banking Supervision: It
the production and distribution
oversees and regulates banks
of currency and coin in the
to maintain a safe and sound
United States.
financial system.

Payment Systems: The Fed

Financial Stability: The Fed
operates and supports
monitors and addresses
payment systems, ensuring the
systemic risks to promote
smooth functioning of
stability in the financial
transactions.
system.
CENTRAL BANKING Home Organizations Facilitating Conclusions

INTERNATIONAL
ORGANIZATIONS

Collaboration with IMF, World Bank, etc.:

01
Central banks collaborate with international
organizations like the International Monetary Fund
(IMF), World Bank, and Bank for International
Settlements (BIS) to promote global economic
stability.

They contribute expertise, data, and financial

resources to support international development
initiatives and address financial crises.

Global Economic Stability Efforts:

02
Central banks participate in global economic forums
and coordinate efforts to address challenges such as
currency volatility, trade imbalances, and financial
contagion.

Collaboration enhances policy coordination, exchange

of best practices, and collective action to maintain
stability in the global economy.
CENTRAL BANKING Home Facilitating Conclusion Future

FACILITATING
TRANSACTIONS

78% 67% 84%

POOR MODERATE RICH

Central banks enable seamless fund flow

through infrastructure development, supporting
interbank transfers, retail payment systems,
and large-value transactions. They promote
innovation while ensuring compliance for secure
and efficient transactions, fostering economic
activity and financial stability.
CENTRAL BANKING Home Conclusion Future Ending

CONCLUSION

Recap of Key Points:

Central banks play a pivotal role in economic management by

implementing monetary policy, regulating financial institutions, and
maintaining stability in the financial system.

They pursue objectives such as price stability, full employment, and

economic growth through various policy tools and initiatives.

Central Banks' Crucial Role in Economic Management:

Central banks' independence, accountability, and expertise are

essential for effective economic management.

Their actions influence inflation, interest rates, and overall

economic activity, shaping the trajectory of national and global
economies.

Central banks are key actors in ensuring stability, resilience, and

prosperity in the face of economic challenges and uncertainties.
CENTRAL BANKING Home Future Ending Ending

FUTURE TRENDS AND

CHALLENGES
Globalization Effects:

02 Central banks face

challenges from increased
interconnectedness, cross-
border capital flows, and
Technological Innovations: economic
interdependencies.
Central banks must adapt
01 Managing global economic
to technological
advancements such as spillovers, trade tensions,
digital currencies, and geopolitical risks
blockchain, and fintech requires enhanced
innovations. coordination, cooperation,
and policy flexibility.
Embracing innovation can
enhance efficiency,
transparency, and
inclusivity in financial
systems while addressing
risks and regulatory
challenges.
 ECONOMICS ........
PRACTICAL

MADE BY AYAN KHAN