CENTRAL BANKS MSc.

Phan Thu Trang

CONTENT
Origins of the Federal Reserve System
Structure of FED
 Structure of FED
 The independence of FED

Structure and Independence of the European Central bank

Structure of Central banks around the world
Structure of the State bank of Vietnam
Function and operations of central bank
ORIGINS OF THE FEDERAL
RESERVE SYSTEM

1913
1907 FED was
Bank created
1836 panic
the Second bank of the US expired
1811
The First bank of the Us was
disbanded
STRUCTURE OF FED
Federal Reserve Banks
STRUCTURE OF FED
STRUCTURE OF FED
Member banks: All national banks (commercial banks chartered by the Office of the
Comptroller of the Currency) are required to be the member of Federal Reserve
System
Board of Governors of the Federal Reserve System: Seven-member Board of
Governors, headquartered in Washington DC. The Board of Governors is involved
actively in the conduct of monetary policy
Federal Open Market Committee (FOMC): make decisions regarding the conduct of
open market operations and the setting of the policy interest rate, the fed fund rate;
tighten/easing of monetary policy
THE FEDERAL RESERVE
SYSTEM
Assessing the Fed’s Structure.
Independence.
Controls its own Budget
Long-term appointments of Governor

Decision Making by Committee

FOMC is a committee
16-7
 THE FEDERAL RESERVE
SYSTEM
Assessing the Fed’s Structure.
Accountability and Transparency
 Monetary Policy Report to Congress

Policy Framework
 "The Board of Governors of the Federal Reserve System and the Federal Open
Market Committee shall maintain long run growth of the monetary and credit
aggregates commensurate with the economy's long run potential to increase
production, so as to promote effectively the goals of maximum employment, stable
prices, and moderate long-term interest rates."
16-8
HOW INDEPENDENT IS THE
FED
Two types of independence of central banks: instrument and goal
independence:
 Instrument independence: the ability to set monetary policy instrument
 Goal independence: the ability to set goals of monetary policy

The Federal Reserve has both types of independence and is remarkably free of
the political pressures that influence over government agencies.

Yet the Federal Reserve is subject to the influence of Congress, because the
legislation that structure it is written by Congress and is subject to change at
any time
SHOULD THE FED BE
INDEPENDENT?
The case for independence
- Political pressure would impart an inflationary bias to monetary
policy
- Political business cycle
- Could be used to facilitate Treasury financing of large budget
deficits—accommodation
- Too important to leave to politicians—the principal-agent
problem is worse for politicians
SHOULD THE FED BE
INDEPENDENT?
The case against independence:
- Undemocratic
- Unaccountable
- Difficult to coordinate fiscal and monetary policy
- Has not used its independence successfully
STRUCTURE AND INDEPENDENCE OF
THE EUROPEAN CENTRAL BANK (ECB)
January 1999: start up of ECB and European System of Central Banks
(ESCB) which now conduct the monetary policy for countries that are
members of the European Monetary Union
Eurosystem: consists of ECB and NCBs of only 17 countries adopted the
euro
The ECB is owned by the 17 NCBs and it was established as the center of the
European System of Central Banks (ESCB)
Decision making process at European Monetary Union (EMU) takes place at
three levels: The Governing Council, The Executive Board and the General
Council
THE EUROPEAN CENTRAL
BANK

16-13
 THE EUROPEAN CENTRAL
BANK

Differences between ECB and The Fed

- ECB does not regulate financial institutions
- ECB’s monetary intervention is accomplished by all the
National Central Banks.
- ECB’s budget is controlled by the National Central Banks

16-14
 THE EUROPEAN CENTRAL
BANK
Policy Framework
"The primary objective of the European System of Central
Banks shall be to maintain price stability. Without prejudice
to the objective of price stability, the ECB shall support the
general economic policies in the [European] Community,"
including the objective of sustainable and noninflationary
growth.
16-15
STRUCTURE OF CENTRAL
BANKS AROUND THE WORLD
Bank of Canada
Bank of England
Bank of Japan
Central Banks in Transition Economies
Central Banks in Developing Countries and Emerging
Countries
STRUCTURE OF THE STATE
BANK OF VIETNAM
History of The State
Bank of Vietnam
The Structure of
The State Bank of
Vietnam
FUNCTION AND OPERATIONS
OF CENTRAL BANK
Print bank note and conducting
monetary policy

The central bank of all banks

The bank of the State