|This article is part of the series:|
Finance and Taxation
|Income tax · Payroll tax|
CGT · Stamp duty · LVT
Sales tax · VAT · Flat tax
Tax, tariff and trade
|Tax rate · Proportional tax|
Progressive tax · Regressive tax
Central bank · Money supply
Spending · Deficit · Debt
Tariff · Trade agreement
Financial market participants
Corporate · Personal
Public · Regulation
Full-reserve · Free banking
A central bank, reserve bank, or monetary authority is the entity responsible for the monetary policy of a country or of a group of member states. Public finance is a field of economics concerned with paying for collective or governmental activities and with the administration and design of those activities The field of finance refers to the concepts of Time, Money and Risk and how they are interrelated Payroll tax generally refers to two kinds of taxes: Taxes which Employers are required to withhold from Employees Pay, also known as Withholding A capital gains tax (abbreviated CGT) is a Tax charged on Capital gains the profit realized on the sale of a non-inventory Asset that was purchased Stamp duty is a form of Tax that is levied on documents Historically a physical stamp (a Tax stamp) had to be attached to or impressed upon the document to denote Land value taxation (LVT (or site value taxation) is an Ad valorem tax where only the value of land itself is taxed A sales tax is a Consumption tax charged at the Point of purchase for certain goods and services Value added tax ( VAT) or goods and services tax ( GST) is a consumption Tax levied on value added. A flat tax (short for flat rate tax is a Tax system with a constant tax rate The tax tariff and trade laws of a political region State or Trade bloc determine which forms of consumption and production tend to be encouraged A tax haven is a place where certain Taxes are levied at a low rate or not at all In Economics, tax incidence is the analysis of the effect of a particular Tax on the distribution of economic welfare. In a Tax system and in Economics, the tax rate describes the burden Ratio (usually expressed as a Percentage) at which a business or person is A proportional tax is a Tax imposed so that the Tax rate is fixed as the amount subject to taxation increases A progressive tax is a Tax imposed so that the Tax rate increases as the amount subject to taxation increases A regressive tax is a Tax imposed in such a manner that the Tax rate decreases as the amount subject to taxation increases Tax advantage refers to the economic bonus which applies to certain accounts or Investments that are by Statute, tax-reduced tax-deferred or tax-free Personal income taxes See also Income tax in Australia Only the federal government imposes income taxes on individuals and this is the most significant source of Taxation in the British Virgin Islands is relatively simple by comparative standards photocopies of all of the tax laws of the British Virgin Islands would together amount to about 200 The level of Taxation in Canada is average among Organisation for Economic Co-operation and Development (OECD countries Taxes provide the most important revenue source for the Government of the People's Republic of China. See Government of Colombia for a wider perspective of Colombian government See Government of France for a wider perspective of French government Taxes in Germany —being a Federal Republic —are levied by the federation ( Bund) the States ( Länder) as well as the HK Inland Revenue Ordinance Cap112 is one of Hong Kong's Ordinances Taxes in India are levied by the Central Government and the State Governments This article ls with Taxation in Indonesia or pajak. Definitions "Pajak" in Indonesian for Tax and taxes whereas " Perpajakan The system of Taxation in Ireland is broadly similar to the system of Taxation in the United Kingdom. The Netherlands has a rich history dealing with taxation predating the Romanic period. Taxation in New Zealand is collected at a national level by the Inland Revenue Department (IRD on behalf of the Government of New Zealand. The Income tax in Peru is collected by the Superintendencia Nacional de Administración Tributaria, best known as SUNAT. The Russian Tax Code is the primary tax law for the Russian Federation. Individual income tax in Singapore forms part of two main sources of Income tax, the other being Corporate taxes on companies In Tanzania the Income Tax Act 2004 came into effect in July 2004 Taxation in the United Kingdom may involve payments to a minimum of two different levels of government The central government ( Her Majesty's Revenue and Customs) Taxation in the United States is a complex system which may involve payment to at least four different levels of government and many methods of taxation Value added tax ( VAT) or goods and services tax ( GST) is a consumption Tax levied on value added. Comparison of Tax Rates around the world is a difficult and somewhat subjective enterprise This table lists countries by total 2005 Tax revenues (federal state and local as a percentage of GDP (Gross Domestic Product Economic policy refers to the actions that Governments take in the economic field. Monetary policy is the process by which the Government, Central bank, or monetary authority of a country controls (i the Supply of Money, In Economics, money supply, or money stock, is the total amount of money available in an Economy at a particular point in time The gold standard is a monetary system in which a region's common media of exchange are paper notes that are normally freely convertible into pre-set fixed quantities of Gold Fiscal policy, taking the scope of Budgetary policy, refers to government policy that attempts to influence the direction of the economy through changes in government taxes Government spending or government expenditure is classified by economists into three main types A budget deficit occurs when an Entity (often a Government) spends more Money than it takes in Government debt (also known as public debt or national debt) is Money (or credit) owed by any level of government either Central government Trade is the willing exchange of goods, services, or both Trade is also called Commerce. For other uses of this word see Tariff (disambiguation. A tariff is a tax imposed on goods when they are moved across a political boundary A trade pact is a wide ranging Tax tariff and trade pact that often includes Investment guarantees The field of finance refers to the concepts of Time, Money and Risk and how they are interrelated In Economics, a financial market is a mechanism that allows people to easily buy and sell ( Trade) financial Securities (such as stocks and bonds There are two basic financial market participant categories Investor vs Corporate finance is an area of Finance dealing with the financial decisions Corporations make and the tools and analysis used to make these decisions Personal finance is the application of the principles of Finance to the monetary decisions of an individual or family unit Public finance is a field of economics concerned with paying for collective or governmental activities and with the administration and design of those activities Financial regulations are a form of Regulation or supervision which subjects Financial institutions to certain requirements restrictions and guidelines aiming to A banker or bank is a Financial institution whose primary activity is to act as a payment agent for customers and to borrow and lend money Fractional-reserve banking is the banking practice in which Banks keep only a fraction of the value of their Bank notes and demand deposits in reserve Full-reserve banking is the Banking practice in which the full amount of each depositor's funds are available in reserve at the bank when each depositor Free banking is a theory of Banking in which commercial banks and market forces control the provision of banking services Islamic banking refers to a system of banking or banking activity that is consistent with Islamic law ( Sharia) principles and guided by Islamic economics Monetary policy is the process by which the Government, Central bank, or monetary authority of a country controls (i the Supply of Money, Its primary responsibility is to maintain the stability of the national currency and money supply, but more active duties include controlling subsidized-loan interest rates, and acting as a "bailout" lender of last resort to the banking sector during times of financial crisis (private banks often being integral to the national financial system). A currency is a unit of exchange, facilitating the transfer of Goods and/or services It is one form of Money, where money is In Economics, money supply, or money stock, is the total amount of money available in an Economy at a particular point in time A loan is a type of Debt. This article focuses exclusively on monetary loans although in practice any material object might be lent Interest is a fee paid on borrowed capital Assets lent include Money, Shares, Consumer goods through Hire purchase, major assets A lender of last resort ( LOLR) is an institution willing to extend credit when no one else will A banker or bank is a Financial institution whose primary activity is to act as a payment agent for customers and to borrow and lend money It may also have supervisory powers, to ensure that banks and other financial institutions do not behave recklessly or fraudulently.
Most richer countries today have an "independent" central bank, that is, one which operates under rules designed to prevent political interference. Examples include the European Central Bank, the Banco Central de Chile, the Reserve Bank of Australia, the Reserve Bank of India, the Bank of England, the Bank of Canada, Sveriges Riksbank, the Banco de la República de Colombia, Norges Bank, State Bank of Pakistan, National Bank of Azerbaijan and the U.S. Federal Reserve. The European Central Bank (ECB is one of the world's most important Central banks responsible for Monetary policy covering the 15 member countries of the The Central Bank of Chile (Banco Central de Chile is the Central bank of Chile. The Reserve Bank of Australia came into being on 14 January 1960 to operate as Australia 's Central bank and banknote issuing authority The Reserve Bank of India (RBI भारतीय रिज़र्व बैंक is the Central bank of India, and was established on April The Bank of England (formally the Governor and Company of the Bank of England) is a state-owned institution and the Central bank of the United Kingdom For the defunct commercial bank see Bank of Canada (commercial. Sveriges Riksbank, or simply Riksbanken, is the Central bank of Sweden and the world's oldest central bank The Bank of the Republic (Banco de la República is the Central bank of the Republic of Colombia. Norges Bank / Noregs Bank is the Central bank of Norway. Among other tasks it manages The Government Pension Fund of Norway, a The State Bank of Pakistan ( SBP) ( Urdu: بینک دولت پاکستان) is the Central bank of Pakistan. The National Bank of Azerbaijan (NBA Azərbaycan Milli Bankı is the Central bank of Azerbaijan, emitting Azerbaijani manat. The United States of America —commonly referred to as the Some central banks are publicly-owned, and others are, in theory, privately-owned. In practice, there is little difference between public and private ownership, since in the latter case almost all profits of the bank are paid to the government either as a tax or a transfer to the government.
Functions of a central bank (not all functions are carried out by all banks):
Central banks implement a country's chosen monetary policy. The foreign exchange ( currency or forex or FX) market refers to the market for currencies. Gold reserves (or gold holdings) are held by Central banks as a Store of value. In economics inflation or price inflation is a rise in the general level of prices of goods and services over a period of time In Finance, the exchange rates (also known as the foreign-exchange rate, forex rate or FX rate) between two currencies specifies how Monetary policy is the process by which the Government, Central bank, or monetary authority of a country controls (i the Supply of Money, At the most basic level, this involves establishing what form of currency the country may have, whether a fiat currency, gold-backed currency (disallowed for countries with membership of the IMF), currency board or a currency union. The terms fiat currency and fiat money relate to types of currency or Money whose usefulness results not from any intrinsic value or guarantee that it can be The gold standard is a monetary system in which a region's common media of exchange are paper notes that are normally freely convertible into pre-set fixed quantities of Gold The International Monetary Fund ( IMF) is an International organization that oversees the Global financial system by following the Macroeconomic A currency board is a Monetary authority which is required to maintain a Fixed exchange rate with a foreign currency In economics a monetary union is a situation where several countries have agreed to share a single currency (also known as a unitary or common currency When a country has its own national currency, this involves the issue of some form of standardized currency, which is essentially a form of promissory note: a promise to exchange the note for "money" under certain circumstances. A promissory note, also referred to as a note payable in Accounting, is a Contract where one party (the maker or issuer) makes an Historically, this was often a promise to exchange the money for precious metals in some fixed amount. Now, when many currencies are fiat money, the "promise to pay" consists of nothing more than a promise to pay the same sum in the same currency. The terms fiat currency and fiat money relate to types of currency or Money whose usefulness results not from any intrinsic value or guarantee that it can be
In many countries, the central bank may use another country's currency either directly (in a currency union), or indirectly, by using a currency board. The European Central Bank (ECB is one of the world's most important Central banks responsible for Monetary policy covering the 15 member countries of the In Architecture, Construction, Engineering and real estate development the word building may refer to one of the following Any man-made A currency board is a Monetary authority which is required to maintain a Fixed exchange rate with a foreign currency In the latter case, local currency is directly backed by the central bank's holdings of a foreign currency in a fixed-ratio; this mechanism is used, notably, in Hong Kong and Estonia. Hong Kong ( officially the Hong Kong Special Administrative Region, is a territory located on China 's south coast on the Pearl River Delta, and borders Estonia, officially the Republic of Estonia ( Eesti or Eesti Vabariik) is a Country in Northern Europe in the Baltic region
In countries with fiat money, monetary policy may be used as a shorthand form for the interest rate targets and other active measures undertaken by the monetary authority.
Many central banks are "banks" in the sense that they hold assets (foreign exchange, gold, and other financial assets) and liabilities. A central bank's primary liabilities are the currency outstanding, and these liabilities are backed by the assets the bank owns. Central banks in jurisdictions with fiat currencies such as the USA may "create" new money, usually backed by the full faith and credit of the government. The United States of America —commonly referred to as the
Central banks generally earn money by issuing currency notes and "selling" them to the public for interest-bearing assets, such as government bonds. Since currency usually pays no interest, the difference in interest generates income. In most central banking systems, this income is remitted to the government. The European Central Bank remits its interest income to its owners, the central banks of the member countries of the European Union.
Although central banks generally hold government debt, in some countries the outstanding amount of government debt is smaller than the amount the central bank may wish to hold. In many countries, central banks may hold significant amounts of foreign currency assets, rather than assets in their own national currency, particularly when the national currency is fixed to other currencies.
There is no standard terminology for the name of a central bank, but many countries use the "Bank of Country" form (e. g. , Bank of England, Bank of Canada, Bank of Russia). The Bank of England (formally the Governor and Company of the Bank of England) is a state-owned institution and the Central bank of the United Kingdom For the defunct commercial bank see Bank of Canada (commercial. The Bank of Russia (Банк России or the Central Bank of the Russian Federation (Центральный банк Российской Федерации is the Some are styled national banks, such as the National Bank of Ukraine. National Bank of Ukraine (Національний банк України is the Central bank of Ukraine. In other cases they may incorporate the word "Central" (e. g. European Central Bank, Central Bank of Ireland). The European Central Bank (ECB is one of the world's most important Central banks responsible for Monetary policy covering the 15 member countries of the The Central Bank and Financial Services Authority of Ireland (Banc Ceannais agus Údarás Seirbhísí Airgeadais na hÉireann is the financial services regulator of Ireland In many countries, there may be private banks that incorporate the term national. Many countries have state-owned banks or other quasi-government entities that have entirely separate functions, such as financing imports and exports.
In some countries, particularly in some Communist countries, the term national bank may be used to indicate both the monetary authority and the leading banking entity, such as the USSR's Gosbank (state bank). The Union of Soviet Socialist Republics (USSR was a constitutionally Socialist state that existed in Eurasia from 1922 to 1991 Gosbank (Госбанк Государственный банк СССР Gosudarstvenny bank SSSR &mdashthe USSR State Bank was the central bank of the Soviet Union In other countries, the term national bank may be used to indicate that the central bank's goals are broader than monetary stability, such as full employment, industrial development, or other goals.
The word "Reserve" is also used, primarily in the U. S. , Australia, New Zealand, South Africa and India.
Typically a central bank controls certain types of short-term interest rates. Interest is a fee paid on borrowed capital Assets lent include Money, Shares, Consumer goods through Hire purchase, major assets These influence the stock- and bond markets as well as mortgage and other interest rates. A stock market, or (equity market is a private or public market for the trading of company Stock and derivatives of company The bond market (also known as the debt, credit, or fixed income market) is a Financial market where participants buy and sell Debt A mortgage loan is a Loan secured by Real property through the use of a Mortgage (a legal instrument The European Central Bank for example announces its interest rate at the meeting of its Governing Council (in the case of the Federal Reserve, the Board of Governors). The European Central Bank (ECB is one of the world's most important Central banks responsible for Monetary policy covering the 15 member countries of the A board of governors is usually the governing board of a public entity
Both the Federal Reserve and the ECB are composed of one or more central bodies that are responsible for the main decisions about interest rates and the size and type of open market operations, and several branches to execute its policies. In the case of the Fed, they are the local Federal Reserve Banks, for the ECB they are the national central banks.
Interest rate interventions are the most common and are dealt with in more detail below.
Contrary to popular perception, central banks are not all-powerful and have limited powers to put their policies into effect. Most importantly, although the perception by the public may be that the "central bank" controls some or all interest rates and currency rates, economic theory (and substantial empirical evidence) shows that it is impossible to do both at once in an open economy. Robert Mundell's "impossible trinity" is the most famous formulation of these limited powers, and postulates that it is impossible to target monetary policy (broadly, interest rates), the exchange rate (through a fixed rate) and maintain free capital movement. Robert Alexander Mundell CC (born October 24, 1932) is a professor of economics at Columbia University. The Impossible Trinity (also known as the Inconsistent Trinity, Triangle of Impossibility or Unholy Trinity) is the hypothesis in International economics Since most Western economies are now considered "open" with free capital movement, this essentially means that central banks may target interest rates or exchange rates with credibility, but not both at once.
Even when targeting interest rates, most central banks have limited ability to influence the rates actually paid by private individuals and companies.
Even the US must engage in buying and selling to meet its targets. In the most famous case of policy failure, George Soros arbitraged the pound sterling's relationship to the ECU and (after making $2B himself and forcing the UK to spend over $8B defending the pound) forced it to abandon its policy. George Soros (ˈsɔroʊs or /ˈsɔrəs/ Hungarian ˈʃoroʃ (born August 12, 1930, in Budapest, Hungary, as György Schwartz) is The Pound Sterling ( symbol £; ISO code: GBP) subdivided into 100 pence (singular penny) is the Currency The European Currency Unit ( ₠; ECU) (the word ECU pronounced either /eky/ /ɛkʊ/ or /əː'siː'uː was a basket of the currencies of the European Community Since then he has been a harsh critic of clumsy bank policies and argued that no one should be able to do what he in fact did.
The most complex relationships are those between the yuan and the US dollar, and between the Euro and its neighbours. The United States dollar ( sign: $; code: USD) is the unit of Currency of the United States; it has also been Please update other articles as well to avoid contradiction within Wikipedia e The situation in Cuba is so exceptional as to require the Cuban peso to be dealt with simply as an exception, since the US forbids direct trade with Cuba. The Republic of Cuba (ˈkjuːbə or) consists of the island of Cuba (the largest and second-most populous island of the Greater Antilles) Isla de la The peso ( ISO 4217 code CUP, sometimes called the "national peso" is one of two official currencies in use in Cuba, the other being the US dollars were ubiquitous in Cuba's economy after its legalization in 1991, but were officially removed from circulation in 2004 and replaced by the Convertible peso. The convertible peso (sometimes given as CUC$) (informally called a chavito) is one of two official currencies in Cuba, the other being the peso
The main monetary policy instruments available to central banks are open market operation, bank reserve requirement, interest rate policy, re-lending and re-discount (including using the term repurchase market), and credit policy (often coordinated with trade policy). Open market operations are the means of implementing Monetary policy by which a Central bank controls its national Money supply by buying and selling government The reserve requirement (or required reserve ratio) is a Bank regulation that sets the minimum reserves each Bank must hold to customer Monetary policy is the process by which the Government, Central bank, or monetary authority of a country controls (i the Supply of Money, Trade is the willing exchange of goods, services, or both Trade is also called Commerce. While capital adequacy is important, it is defined and regulated by the Bank for International Settlements, and central banks in practice generally do not apply stricter rules. The capital requirement is a Bank regulation, which sets a framework on how Banks and Depository institutions must handle their capital. The Bank for International Settlements (or BIS) is an International organization of Central banks which "fosters international monetary and
To enable open market operations, a central bank must hold foreign exchange reserves (usually in the form of government bonds) and official gold reserves. Foreign exchange reserves (also called Forex reserves) in a strict sense are only the foreign Currency deposits held by Central banks and monetary A government bond is a bond issued by a national government denominated in the country's own Currency. Gold reserves (or gold holdings) are held by Central banks as a Store of value. It will often have some influence over any official or mandated exchange rates: Some exchange rates are managed, some are market based (free float) and many are somewhere in between ("managed float" or "dirty float"). In Finance, the exchange rates (also known as the foreign-exchange rate, forex rate or FX rate) between two currencies specifies how
By far the most visible and obvious power of many modern central banks is to influence market interest rates; contrary to popular belief, they rarely "set" rates to a fixed number. Although the mechanism differs from country to country, most use a similar mechanism based on a central bank's ability to create as much fiat money as required. The terms fiat currency and fiat money relate to types of currency or Money whose usefulness results not from any intrinsic value or guarantee that it can be
The mechanism to move the market towards a 'target rate' (whichever specific rate is used) is generally to lend money or borrow money in theoretically unlimited quantities, until the targeted market rate is sufficiently close to the target. Central banks may do so by lending money to and borrowing money from (taking deposits from) a limited number of qualified banks, or by purchasing and selling bonds. As an example of how this functions, the Bank of Canada sets a target overnight rate, and a band of plus or minus 0. For the defunct commercial bank see Bank of Canada (commercial. The overnight rate is generally the rate that large Banks use to borrow and lend from one another on the Interbank market. 25%. Qualified banks borrow from each other within this band, but never above or below, because the central bank will always lend to them at the top of the band, and take deposits at the bottom of the band; in principle, the capacity to borrow and lend at the extremes of the band are unlimited.  Other central banks use similar mechanisms.
It is also notable that the target rates are generally short-term rates. The actual rate that borrowers and lenders receive on the market will depend on (perceived) credit risk, maturity and other factors. For example, a central bank might set a target rate for overnight lending of 4. 5%, but rates for (equivalent risk) five-year bonds might be 5%, 4. 75%, or, in cases of inverted yield curves, even below the short-term rate. In Finance, the yield curve is the relation between the Interest rate (or cost of borrowing and the time to maturity of the debt for a given borrower Many central banks have one primary "headline" rate that is quoted as the "Central bank rate. " In practice, they will have other tools and rates that are used, but only one that is rigorously targeted and enforced.
"The rate at which the central bank lends money can indeed be chosen at will by the central bank; this is the rate that makes the financial headlines. " - Henry C. K. Liu, in an Asia Times article explaining modern central bank function in detail He explains further that "the US central-bank lending rate is known as the Fed funds rate. In the United States, the federal funds rate is the Interest rate at which private Depository institutions (mostly banks lend balances ( Federal funds The Fed sets a target for the Fed funds rate, which its Open Market Committee tries to match by lending or borrowing in the money market. The Federal Open Market Committee (FOMC a component of the Federal Reserve System, is charged under U In Finance, the money market is the global Financial market for short-term borrowing and lending . . . a fiat money system set by command of the central bank. The Fed is the head of the central-bank snake because the US dollar is the key reserve currency for international trade. The global money market is a US dollar market. All other currencies markets revolve around the US dollar market. " Accordingly the US situation isn't typical of central banks in general.
A typical central bank has several interest rates or monetary policy tools it can set to influence markets. Interest is a fee paid on borrowed capital Assets lent include Money, Shares, Consumer goods through Hire purchase, major assets
These rates directly affect the rates in the money market, the market for short term loans. In Finance, the money market is the global Financial market for short-term borrowing and lending
Through open market operations, a central bank influences the money supply in an economy directly. Open market operations are the means of implementing Monetary policy by which a Central bank controls its national Money supply by buying and selling government Each time it buys securities, exchanging money for the security, it raises the money supply. A security is a Fungible, Negotiable instrument representing financial value Conversely, selling of securities lowers the money supply. Buying of securities thus amounts to printing new money while lowering supply of the specific security.
The main open market operations are:
All of these interventions can also influence the foreign exchange market and thus the exchange rate. The foreign exchange ( currency or forex or FX) market refers to the market for currencies. For example the People's Bank of China and the Bank of Japan have on occasion bought several hundred billions of U.S. Treasuries, presumably in order to stop the decline of the U.S. dollar versus the Renminbi and the Yen. The People's Bank of China ( PBC or PBOC) ( is the Central bank of the People's Republic of China (not to be confused with the Bank is the Central bank of Japan. History Like most modern Japanese institutions the Bank of Japan was born after the Meiji Restoration. Treasury securities are Government bonds issued by the United States Department of the Treasury through the Bureau of the Public Debt. The United States dollar ( sign: $; code: USD) is the unit of Currency of the United States; it has also been
All banks are required to hold a certain percentage of their assets as capital, a rate which may be established by the central bank or the banking supervisor. For international banks, including the 55 member central banks of the Bank for International Settlements, the threshold is 8% (see the Basel Capital Accords) of risk-adjusted assets, whereby certain assets (such as government bonds) are considered to have lower risk and are either partially or fully excluded from total assets for the purposes of calculating capital adequacy. The Bank for International Settlements (or BIS) is an International organization of Central banks which "fosters international monetary and The Basel Accord(s or Basle Accord(s (see spelling section below refers to the banking supervision Accords (recommendations on banking laws and regulations The capital requirement is a Bank regulation, which sets a framework on how Banks and Depository institutions must handle their capital. Partly due to concerns about asset inflation and repurchase agreements, capital requirements may be considered more effective than deposit/reserve requirements in preventing indefinite lending: when at the threshold, a bank cannot extend another loan without acquiring further capital on its balance sheet. Assets inflation is an economic phenomenon denoting a rise in Price of Assets as opposed to ordinary Goods and services. Better known as Repurchase agreements ( RPs or repos) a Sale and Repurchase Agreement has a Borrower (seller/cash receiver sell securities
Another significant power that central banks hold is the ability to establish reserve requirements for other banks. By requiring that a percentage of liabilities be held as cash or deposited with the central bank (or other agency), limits are set on the money supply. Cash usually refers to Money in the form of Currency, such as Banknotes and Coins In Bookkeeping and Finance, In Economics, money supply, or money stock, is the total amount of money available in an Economy at a particular point in time
In practice, many banks are required to hold a percentage of their deposits as reserves. Bank reserves are Banks holdings of deposits in accounts with their Central bank (for instance the European Central Bank or the Federal Reserve Such legal reserve requirements were introduced in the nineteenth century to reduce the risk of banks overextending themselves and suffering from bank runs, as this could lead to knock-on effects on other banks. The reserve requirement (or required reserve ratio) is a Bank regulation that sets the minimum reserves each Bank must hold to customer A bank run (also known as a run on the bank) occurs when a large number of Bank customers withdraw their deposits because they believe the bank is or might See also money multiplier, Ponzi scheme. Money creation is the process by which Money is produced or issued A Ponzi scheme is a Fraudulent Investment operation that involves promising or paying abnormally high returns (" Profits quot to investors out of the As the early 20th century gold standard and late 20th century dollar hegemony evolved, and as banks proliferated and engaged in more complex transactions and were able to profit from dealings globally on a moment's notice, these practices became mandatory, if only to ensure that there was some limit on the ballooning of money supply. The gold standard is a monetary system in which a region's common media of exchange are paper notes that are normally freely convertible into pre-set fixed quantities of Gold This article describes the ideas of Henry CK Liu For the topic of Jean Gabriel's book The Dollar Hegemony Dollar Dollarization and Progress (2000 see In Economics, money supply, or money stock, is the total amount of money available in an Economy at a particular point in time Such limits have become harder to enforce. The People's Bank of China retains (and uses) more powers over reserves because the yuan that it manages is a non-convertible currency. The People's Bank of China ( PBC or PBOC) ( is the Central bank of the People's Republic of China (not to be confused with the Bank Convertibility is the quality of paper Money substitutes which entitles the holder to redeem them on demand into money proper
Even if reserves were not a legal requirement, prudence would ensure that banks would hold a certain percentage of their assets in the form of cash reserves. It is common to think of commercial banks as passive receivers of deposits from their customers and, for many purposes, this is still an accurate view.
This passive view of bank activity is misleading when it comes to considering what determines the nation's money supply and credit. Loan activity by banks plays a fundamental role in determining the money supply. The money deposited by commercial banks at the central bank is the real money in the banking system; other versions of what is commonly thought of as money are merely promises to pay real money. These promises to pay are circulatory multiples of real money. For general purposes, people perceive money as the amount shown in financial transactions or amount shown in their bank accounts. But bank accounts record both credit and debits that cancel each other. Only the remaining central-bank money after aggregate settlement - final money - can take only one of two forms:
The currency component of the money supply is far smaller than the deposit component. Currency and bank reserves together make up the monetary base, called M1 and M2. In Economics, money supply, or money stock, is the total amount of money available in an Economy at a particular point in time In Economics, money supply, or money stock, is the total amount of money available in an Economy at a particular point in time
To influence the money supply, some central banks may require that some or all foreign exchange receipts (generally from exports) be exchanged for the local currency. The rate that is used to purchase local currency may be market-based or arbitrarily set by the bank. This tool is generally used in countries with non-convertible currencies or partially-convertible currencies. The recipient of the local currency may be allowed to freely dispose of the funds, required to hold the funds with the central bank for some period of time, or allowed to use the funds subject to certain restrictions. In other cases, the ability to hold or use the foreign exchange may be otherwise limited.
In this method, money supply is increased by the central bank when the central bank purchases the foreign currency by issuing (selling) the local currency. The central bank may subsequently reduce the money supply by various means, including selling bonds or foreign exchange interventions.
In some countries, central banks may have other tools that work indirectly to limit lending practices and otherwise restrict or regulate capital markets. For example, a central bank may regulate margin lending, whereby individuals or companies may borrow against pledged securities. In finance a margin is collateral that the holder of a position in securities, options, or Futures contracts has to deposit to cover The margin requirement establishes a minimum ratio of the value of the securities to the amount borrowed.
Central banks often have requirements for the quality of assets that may be held by financial institutions; these requirements may act as a limit on the amount of risk and leverage created by the financial system. These requirements may be direct, such as requiring certain assets to bear certain minimum credit ratings, or indirect, by the central bank lending to counterparties only when security of a certain quality is pledged as collateral. A credit rating assesses the Credit worthiness of an individual Corporation, or even a country In lending agreements collateral is a borrower's asset that is Forfeited to the lender if the borrower is insolvent—that is unable to pay back the principal and interest on
The People's Bank of China has been forced into particularly aggressive and differentiating tactics by the extreme complexity and rapid expansion of the economy it manages. The People's Bank of China ( PBC or PBOC) ( is the Central bank of the People's Republic of China (not to be confused with the Bank It imposed some absolute restrictions on lending to specific industries in 2003, and continues to require 1% more (7%) reserves from urban banks (typically focusing on export) than rural ones. This is not by any means an unusual situation. The US historically had very wide ranges of reserve requirements between its dozen branches. Domestic development is thought to be optimized mostly by reserve requirements rather than by capital adequacy methods, since they can be more finely tuned and regionally varied.
In some countries a central bank through its subsidiaries controls and monitors the banking sector. In other countries banking supervision is carried out by a government department such as the UK Treasury, or an independent government agency (eg UK's Financial Services Authority). The Financial Services Authority ( "FSA") is an independent non-governmental body Quasi-judicial body and a company limited by guarantee that regulates It examines the banks' balance sheets and behaviour and policies toward consumers. In Financial accounting, a balance sheet or statement of financial position is a summary of a person's or organization's balances Consumers refers to individuals or households that use goods and services generated within the economy. Apart from refinancing, it also provides banks with services such as transfer of funds, bank notes and coins or foreign currency. A banknote (often known as a bill, paper money or simply a note) is a kind of Negotiable instrument, a Promissory note made by a main - title Coin keywords numismatics coin review Thus it is often described as the "bank of banks".
Many countries such as the United States will monitor and control the banking sector through different agencies and for different purposes, although there is usually significant cooperation between the agencies. For example, money center banks, deposit-taking institutions, and other types of financial institutions may be subject to different (and occasionally overlapping) regulation. A banker or bank is a Financial institution whose primary activity is to act as a payment agent for customers and to borrow and lend money Some types of banking regulation may be delegated to other levels of government, such as state or provincial governments.
Any cartel of banks is particularly closely watched and controlled. Most countries control bank mergers and are wary of concentration in this industry due to the danger of groupthink and runaway lending bubbles based on a single point of failure, the credit culture of the few large banks. Reliability engineering is an Engineering field that deals with the study of Reliability: the ability of a System or component to perform its required
Over the past decade, there has been a trend towards increasing the independence of central banks as a way of improving long-term economic performance. However, while a large volume of economic research has been done to define the relationship between central bank independence and economic performance, the results are ambiguous.
Advocates of central bank independence argue that a central bank which is too susceptible to political direction or pressure may encourage economic cycles ("boom and bust"), as politicians may be tempted to boost economic activity in advance of an election, to the detriment of the long-term health of the economy and the country. In Economics, the term boom and bust refers to the movement of an economy through Economic cycles. In this context, independence is usually defined as the central bank’s operational and management independence from the government. On the other hand, an independent central bank can, and has been proven in the past to have done as such (The Great Depression), create a boom & bust scenario for the profit of the owners & shareholders of the bank itself.
The literature on central bank independence has defined a number of types of independence.
Legal Independence: The independence of the central bank is enshrined in law. This type of independence is limited in a democratic state; in almost all cases the central bank is accountable at some level to government officials, either through a government minister or directly to a legislature. Even defining degrees of legal independence has proven to be a challenge since legislation typically provides only a framework within which the government and the central bank work out their relationship.
Goal Independence: The central bank has the right to set its own policy goals, whether inflation targeting, control of the money supply, or maintaining a fixed exchange rate. While this type of independence is more common, many central banks prefer to announce their policy goals in partnership with the appropriate government departments. This increases the transparency of the policy setting process and thereby increases the credibility of the goals chosen by providing assurance that they will not be changed without notice. In addition, the setting of common goals by the central bank and the government helps to avoid situations where monetary and fiscal policy are in conflict; a policy combination that is clearly sub-optimal.
Operational Independence: The central bank has the independence to determine the best way of achieving its policy goals, including the types of instruments used and the timing of their use. This is the most common form of central bank independence. The granting of independence to the Bank of England in 1997 was, in fact, the granting of operational independence; the inflation target continued to be announced in the Chancellor’s annual budget speech to Parliament.
Management Independence: The central bank has the authority to run its own operations (appointing staff, setting budgets, etc) without excessive involvement of the government. The other forms of independence are not possible unless the central bank has a significant degree of management independence. One of the most common statistical indicators used in the literature as a proxy for central bank independence is the “turn-over-rate” of central bank governors. If a government is in the habit of appointing and replacing the governor frequently, it clearly has the capacity to micro-manage the central bank through its choice of governors.
It is argued that an independent central bank can run a more credible monetary policy, making market expectations more responsive to signals from the central bank. Recently, both the Bank of England (1997) and the European Central Bank have been made independent and follow a set of published inflation targets so that markets know what to expect. Inflation targeting is a Monetary policy in which a Central bank attempts to keep Inflation in a declared target range —typically by adjusting Interest Even the People's Bank of China has been accorded great latitude due to the difficulty of problems it faces, though in the People's Republic of China the official role of the bank remains that of a national bank rather than a central bank, underlined by the official refusal to "unpeg" the yuan or to revalue it "under pressure". The People's Bank of China ( PBC or PBOC) ( is the Central bank of the People's Republic of China (not to be confused with the Bank Talk People's Republic of China) PEOPLE'S REPUBLIC OF CHINA ARTICLE GUIDELINES The term national Bank has several meanings especially in Developing countries, a bank owned by the State an ordinary private PBoC independence can thus be read more as independence from the US which rules the financial markets, not from the Communist Party of China which rules the country. The Communist Party of China ( CPC) ( also known as the Chinese Communist Party ( CCP) is the founding and ruling political party of the The fact that the CPoC is not elected also relieves the pressure to please people, increasing its independence.
Governments generally have some degree of influence over even "independent" central banks; the aim of independence is primarily to prevent short-term interference. For example, the chairman of the U. S. Federal Reserve Bank is appointed by the President of the U.S. (all nominees for this post are recommended by the owners of the Federal Reserve, as are all the board members), and his choice must be confirmed by the Congress. The President of the United States is the Head of state and Head of government of the United States and is the highest political official in United States by The United States Congress is the bicameral Legislature of the federal government of the United States of America, consisting of two houses
International organizations such as the World Bank, the BIS and the IMF are strong supporters of central bank independence. The World Bank is an internationally supported Bank that provides financial and technical assistance to developing countries for development programs (e The Bank for International Settlements (or BIS) is an International organization of Central banks which "fosters international monetary and The International Monetary Fund ( IMF) is an International organization that oversees the Global financial system by following the Macroeconomic This results, in part, from a belief in the intrinsic merits of increased independence. The support for independence from the international organizations also derives partly from the connection between increased independence for the central bank and increased transparency in the policy-making process. International Organization is a peer-reviewed Academic journal that covers the entire field of International affairs. The IMF’s FSAP review self-assessment, for example, includes a number of questions about central bank independence in the transparency section. The International Monetary Fund ( IMF) is an International organization that oversees the Global financial system by following the Macroeconomic An independent central bank will score higher in the review than one that is not independent.
In Europe prior to the 17th century most money was commodity money, typically gold or silver. Commodity money is Money whose value comes from a Commodity out of which it is made Gold (ˈɡoʊld is a Chemical element with the symbol Au (from its Latin name aurum) and Atomic number 79 However, promises to pay were widely circulated and accepted as value at least five hundred years earlier in both Europe and Asia. The medieval European Knights Templar ran probably the best known early prototype of a central banking system, as their promises to pay were widely regarded, and many regard their activities as having laid the basis for the modern banking system. The Poor Fellow-Soldiers of Christ and of the Temple of Solomon (Pauperes commilitones Christi Templique Solomonici commonly known as the Knights Templar or the Order At about the same time, Kublai Khan of the Mongols introduced fiat currency to China, which was imposed by force by the confiscation of specie. Early years Kublai Khan studied Chinese culture and became enamoured of it The terms fiat currency and fiat money relate to types of currency or Money whose usefulness results not from any intrinsic value or guarantee that it can be
The oldest central bank in the world is the Riksbank in Sweden, which was opened in 1668 with help from Dutch businessmen. Sveriges Riksbank, or simply Riksbanken, is the Central bank of Sweden and the world's oldest central bank This was followed in 1694 by the Bank of England, created by Scottish businessman William Paterson in the City of London at the request of the English government to help pay for a war. The Bank of England (formally the Governor and Company of the Bank of England) is a state-owned institution and the Central bank of the United Kingdom Sir William Paterson (born April 1658 in Tinwald Dumfries and Galloway, Scotland - died in Westminster, London, on January 22, For London as a whole see the main article London. The City of London is a geographically The Kingdom of England was a State (927-1707 located in Western Europe dating from the ninth or tenth century to the early eighteenth century when it was legally The US Federal Reserve was created by the U.S. Congress through the passing of the Glass-Owen Bill, signed by President Woodrow Wilson on December 23, 1913. The United States Congress is the bicameral Legislature of the federal government of the United States of America, consisting of two houses The Federal Reserve Act (ch 6, Enacted December 23 1913) is the act of Congress that created the Federal Reserve System, the central banking system of the United Thomas Woodrow Wilson (December 28 1856—February 3 1924 was the twenty-eighth President of the United States. Events 962 - Byzantine-Arab Wars: Under the future Emperor Nicephorus Phocas, Byzantine troops stormed the city Year 1913 ( MCMXIII) was a Common year starting on Wednesday (link will display the full calendar of the Gregorian calendar (or a Common
The People's Bank of China evolved its role as a central bank starting in about 1979 with the introduction of market reforms in that country, and this accelerated in 1989 when the country took a generally capitalist approach to developing at least its export economy. The People's Bank of China ( PBC or PBOC) ( is the Central bank of the People's Republic of China (not to be confused with the Bank By 2000 the PBoC was in all senses a modern central bank, and emerged as such partly in response to the European Central Bank. The European Central Bank (ECB is one of the world's most important Central banks responsible for Monetary policy covering the 15 member countries of the This is the most modern bank model and was introduced with the euro to coordinate the European national banks, which continue to separately manage their respective economies other than currency exchange and base interest rates. Please update other articles as well to avoid contradiction within Wikipedia e