Points Covered:

Bank Definition Central bank :Definitions Structure & Functions Monetary policies Target & Tools Conclusion

Group Members:

Samrah IshfaqM.Shahbaz AliRao M. AyyubKhalid Saifullah

What is Bank?Definition:

• Institution

• Providing loans to lend

• And create the credit money

• Bank: An organization, usually a corporation, chartered by a state or federal government, which does most or all of the following: receives demand deposits and time deposits, honors instruments drawn on them, and pays interest on them; discounts notes, makes loans, and invests in securities; collects checks, drafts, and notes; certifies depositor's checks; and issues drafts and cashier's checks.

Bank: A financial establishment that uses money deposited by customers for investment, pays it out when required, makes loans at interest, and exchanges currency.

A national bank that provides financial and banking services for its country's government and commercial banking system, as well as

implementing the government's monetary policy and issuing currency.OR

“An institution charged with the responsibility of managing the expansion and contraction of the volume of money in the interest of

general public welfare”OR

 a bank that does business with other banks and with the government and that controls a country's money supply

and interest rates

What is Central Bank or central bank?

Organizational Structure

Functions of a Central BankFunction of a central bank is to control the nation's money supply (monetary policy), through active duties such as managing interest rates, setting the reserve requirement, and acting as a lender of last resort to the banking sector during times of bank insolvency or financial crisis.

Functions:1. Bank of Issue2. Banker, Agent and Adviser to the Government3. Custodian of the Cash Reserves of Commercial Banks4. Custodian of Foreign Balances of the Country5. Controller of Credit6. Other Functions

a. Bank of IssueCentral Bank has the exclusive monopoly of note issue and the currency notes issued by the Central Bank are declared unlimited legal tender throughout the country.

b. Banker, Agent and Adviser to the GovernmentAs Banker and Agent, keeps the banking accounts of the Central and State governments and makes and receives payments on behalf of the government.

As an Agent to the government, the central bank collects taxes and other payments on behalf of the government.

It provides short-term advances to the govt to tide over temporary shortage of funds. It advises the govt on all monetary and banking matters.

Functions of a Central Bank

b. Banker, Agent and Adviser to the GovernmentAs Banker and Agent, keeps the banking accounts of the Central and State governments and makes and receives payments on behalf of the government.

As an Agent to the government, the central bank collects taxes and other payments on behalf of the government.

It provides short-term advances to the govt to tide over temporary shortage of funds. It advises the govt on all monetary and banking matters.

c. Care of the Cash Reserves of Commercial BanksAll Commercial Banks keep part of their deposits as reserves with the Central Banks and hence the name Reserve Bank of Pakistan. Centralised cash reserves serve as the basis of a larger and more elastic credit structure and helps Commercial Banks to meet crises and emergencies.

Functions of a Central Bank

d. Care of Foreign Balances of the CountryCBP holds the foreign exchange assets of all commercial and non-Commercial Banks of the country. It is the responsibility of CBP to maintain the rate of exchange and manage exchange control and other restrictions imposed by the State.

e. Lender of the last resortAs a lender of last resort, Central Bank assumes the responsibility of meeting directly or indirectly all reasonable demands for accommodation by the Commercial Banks.

g. Controller of Credit controls the level of credit in the economy by either expanding or contracting bank deposits.

Functions of a Central Bank

f. Central Clearance, Settlement and TransferAs the Central Bank keeps cash reserves of Commercial Banks, it is easier for member banks to settle their mutual claims in the books of the Central Bank. These are the clearing house operations of CBP where in cheques are cleared, claims settled and funds transferred in the books of the member banks.

Other Functions: It brings uniformity in the monetary system of note issue and note

circulation. It economies the use of cash by banks while settling their claims

and counter-claims. It enables the commercial banks to carry on their activities even

with their limited cash reserves. It provides financial help to the commercial banks in times of

emergency.  The central bank also earns profit from the issue of paper

currency.

Functions of a Central Bank

Central Bank It is apex institution of

monetary systems It is owned by government It is non profit org. It is banker and agent to

government It controls credit created by

commercial banks It has monopoly to note issue It has no competition

There is only one central bank in economy

Commercial Bank It is operating as per

guideline of central bank It owned by private sector or

government It is a profit seeking org. It is banker and agent to

public It creates credit

It has no power to issue credit There is a competition among

themselves. Commercial banks are many

in number

Difference between Central and Commercial Bank

CONCLUSION1. Central bank plays important role in achieving economic growth of a developing country.

2. It promotes economic growth with stability.3. It helps in attaining full employment of resources, in overcoming balance of payment disequilibrium & in stabilizing exchange rates.

Monetary policyTargets & its Tools

Definition: “Monetary policy is concerned with deciding how

much money the economy should have or perhaps more correctly deciding whether to increases or decrease the purchasing power of money.”

According to McConnell: “Changing the money supply to assist the

economy to achieve a full employment”.

MONETARY POLICY

Contractionary / Tight monetary policy “Tight monetary policy, also called

contractionary monetary policy, tends to curb inflation by contracting/reducing the money supply”

Expansionary /Easy monetary policy “Easy monetary policy, also called expansionary

monetary policy, tends to encourage growth by expanding the money supply.

TYPES OF MONETARY POLICY

Money supply: There are several standard measures of the

money supply, including the monetary base, M1, and M2. The monetary base is defined as the sum of currency in circulation and reserve balances.

Interest rate: The proportion of a loan that is charged as

interest to the borrower, typically expressed as an annual percentage of the loan outstanding.

TARGET OF MONETARY POLICY

Employment, economic growth, and inflation can not control directly, it must choose settings, or targets, for variables that it can control in order to best achieve its goals.

In practice, there are two types of targets:

1. Money supply targets2. Interest rate targets

TARGETS FOR MONETARY POLICY

Quantitative Tools: Open Market Operations Bank Rate Cash Reserve Requirement Liquidity ratio Special deposit Qualitative Tools: Credit rationing Credit ceiling Moral persuasion Direct action Advertisement

TOOLS OF MONETARY POLICY

These tools are used to establish limits on interest rates, credit and lending. These include direct credit control, direct interest rate control and direct lending to banks as lender of last resort, but they are rarely used in the implementation of monetary policy by the Bank.

Interest rate controls   Lending to domestic banks Credit controls

 

DIRECT POLICY TOOLS

Used more widely than direct tools, indirect policy tools seek to alter liquidity conditions. While the use of reserve requirements has been the traditional monetary tool of choice, more recently, the Bank shifted towards the use of open market operations to manage liquidity in the financial system and to signal its policy stance.

Secondary reserve requirement  Cash reserve requirements Asecurities requirement

INDIRECT POLICY TOOLS

ANY QUESTION