BA 543: FINANCIAL MARKETS AND INSTITUTIONS (SPRING, 2005) INTERNATIONAL BANKS

1. BA 543: FINANCIAL MARKETS AND INSTITUTIONS(SPRING, 2005) INTERNATIONAL BANKS Presented By: Gideon Darko Oppong

2. Introduction • The primary goal of central banks is to provide their countries' currencies with price stability by controlling inflation. • Has two kinds of functions: (1) macroeconomic when regulating inflation and price stability (2) microeconomic when functioning as a lender of last resort.

3. Introduction (Cont’d.) • For price stability, the central bank must regulate the level of inflation by controlling money supplies by means of monetary policy. • The establishment of central banks as lender of last resort has pushed the need for their freedom from commercial banking. • The Central banks to be discussed: Federal Reserve or Feds, the German Bundesbank, the European Central Bank, the Bank of England and the Bank of Japan.

4. The Central Bank of the United States: The Federal Reserve System • It was created in 1913 • Main task: -Supervise and regulate banks, implement monetary policy . -Does so buying and selling U.S. Treasury bonds (T-bills), and steering interest rates • Managed by a seven member Board of Governors.

5. Feds (Cont’d.) • The governors have 14-year appointments (with one appointment ending every two years). • Consists of 12 districts covering the entire country. • Independent of legislative and executive branch of the federal government.

6. Feds (Cont’d.) • Tools for monetary management in the economy: • Fractional reserve banking system. • The Fed’s most powerful instrument is Open Market Operations . • Federal Open Market Committee (FOMC) decides on Changing the growth rate in the money supply.

7. Feds (Cont’d.) • Open Market Repurchase Agreements (repo) use to bring about temporary change in the level of reserves in the sytem. • The Discount Rate is not often used.

8. European Central Bank (ECB)/ German Bundesbank • The Deutsche Bundesbank was established in 1957. • The Deutsche Mark was introduced on June 20, 1948. • Decision-making body is the eight member Executive Board. • It has 9 Regional Offices and subordinated to these offices, is 66 branches .

9. ECB/Bundesbank (Cont’d.) • Promotes efficient and secure payment transactions within Germany and in the developing single European payments area. • The European Central Bank (ECB) was established on January 4, 1999. • With 11 initial members. • Currently, has 12 members.

10. ECB (Cont’d.) • ECB’s main task is to maintain the euro's purchasing power and thus price stability in the euro area. • Has a highly decentralized structure and an 18 member governing council. • The Governing Council usually meets twice a month. • The council is composed of 12 national central bankers and six executive board members.

11. ECB (Cont’d.) • Responsibilities: ( 1)To adopt the guidelines and take the decisions necessary to ensure the performance of the tasks entrusted to the Euro system. ( 2 ) To formulate monetary policy for the euro area.

12. ECB (Cont’d.) • It is a blend of the Bundesbank and the U.S. Fed. • Monetary Policy instruments are: -open market operations, standing facilities and minimum reserves. -The Euro system prescribes the minimum reserves which the banks are required to hold.

13. Bank of England • Central bank of the United Kingdom. • Founded in 1694. • Nationalized on 1 March 1946 • Gained operational independence in 1997. • Two primary: -setting and executing monetary policy . -maintaining the stability of the financial system.

14. BOE (Cont’d.) • It has 12 agencies across the United Kingdom. • Banker to the banking system more generally - the bankers' bank. • Before the Bank of England Act 1998, the Exchequer could control the BOE. • Government has power to give instructions to the bank on interest rates for a limited period of time in extreme circumstances.

15. BOE (Cont’d.) • Government’s inflation target is confirmed in each budget statement. • BOE’s Monetary Policy Committee (MPC) sets interest rates to meet the government’s inflation target for the year. • The MPC meets monthly. • The governor has the casting vote if there is no majority. • Treasury has the right to be represented in a nonvoting capacity.

16. Bank of Japan • Main task: • To maintain price stability and to ensure the stability of the financial system, thereby laying the foundations for sound economic development. • Until the 1998 Japan’s Diet, the BOJ was controlled by the Ministry of Finance. • The revision became effective on April 1, 1998.

17. BOJ (Cont’d.) • The new law (revision) was built on the two principles of independence and transparency. • Strengthen the functions of the Policy Board. • Before 1998, the board consisted of seven members. • Currently, the board consist of nine members: the governor, two deputy governors of the BOJ, and six deliberative members.

18. BOJ (cont’d.) • The Policy Board meets once a month. • The law permits government representatives to attend Policy Board meetings on monetary control matters and to express their views when necessary. • This is to ensure good communication.

21. Conclusion • The functions of the various central banks have basically, the same. • The difference is the level of independence. • All the central banks are moving towards the attainment of independence and transparent operations. • Independence and transparent operations are essential to the success of a central bank.

22. References • Foundations of Financial Markets and Institutions. By F. J .Fabozz, F. Modigliani, 2222F. J. Jones and M. G. Ferri. Third editions, pages 65-79. • 2.http://www.investopedia.com/ • 3.http://www.ecb.int/ • 4. http://www.bundesbank.de/ • 5.http://www.bankofengland.co.uk/ • 6.http://www.boj.or.jp/