The Central Bank of The Bahamas

Objectives At the end of this presentation, students should be able to: Define the economic term “ Central Bank.” History of Central Banks Identify central banks in and around the region Identify the role of the central bank. Identify the functions of the central bank

Definition The Central Bank is a nationalized industry owned and controlled by the government. A central bank is an independent national authority that conducts monetary policy, regulates banks, and provides financial services including economic research.

The History Sweden created the world's first central bank, the Riks, in 1668. The Bank of England came next in 1694. Napoleon created the Banquet de France in 1800. Congress established the Federal Reserve in 1913. The Bank of Canada began in 1935 The German Bundesbank was reestablished after World War II. In 1998, the European Central Bank replaced all the eurozone's central banks.

The History Central Bank of The Bahamas/Founded 1974 Mission To foster an environment of monetary stability conducive to economic development, and to ensure a stable and sound financial system. Functions & Objectives Full scope of monetary policy was provided for under the Central Bank of The Bahamas Act, 1974 now superseded by the Central Bank of The Bahamas Act, 2000. Accordingly, it is the duty of the Bank to promote and maintain monetary stability and credit and balance of payments conditions conducive to the orderly development of the economy; to promote and maintain an adequate banking system and high standards of conduct and management therein; and to advise the Minister of Finance on any matter of a financial or monetary nature.

Central Banks The Bahamas The Central Bank of The Bahamas Jamaica The Bank of Jamaica (B.O.J) United States of America The Federal Reserve System (The Fed) Trinidad and Tobago The Central Bank of Trinidad and Tobago The United Kingdom The Bank of England Haiti Banque de la République d'Haïti

Role of The Central Bank The Central Bank acts as the country’s monetary authority, established at the heart or centre of the Money Market. It is organized into Two Departments: Issue Department: responsible for issuing notes and coins Banking Department: which conducts the country’s banking business. The Central Bank is important because of the following functions:

Functions of The Central Bank To issue new, and take back old, notes and coins To keep and administer the savings of the country To influence the volume and conditions of the supply of credit so as to promote the greatest expansion in production, trade and employment. This must be consistent with maintaining stable monetary system and the external value of the currency of the country. To assist with the development of money markets in the country e.g. Bahamas Stock Exchange. To act as the banker to commercial banks by controlling the banking system To act as banker to the government To act as lender of last resort

Banker to commercial banks The central bank holds bank accounts for all commercial banks, similar to how commercial banks hold accounts for the general public. The central bank holds cash deposits and other liquid assets for commercial banks These balances enables commercial banks to settle indebtedness between themselves by shifting deposits or balances from one commercial bank to another. They use this as a channel through which new notes and cash gets into circulation. These balances are used to keep a tight rein on commercial banks

Banker to the government The central bank of any country keeps the government’s main accounts, receive tax and other revenues and make payments on behalf of the government. The central bank manages the nation’s debt by selling new issues and redeeming maturing treasury bills and government bonds (gilt edge securities) The government is responsible for maintaining a stable economic environment and for deciding on measures which considers necessary for the well being of the country. Through the central bank the government the government is able to achieve certain economic results by using the following tools:

Banker to the government Setting bank or minimum lending rate. Open market operations Special deposits Minimum cash reserves and liquid assets requirements Credit controls Moral suasion

The Bank Rate The bank rate or minimum lending rate is the rate at which the central bank will discount first class treasury bills. This rate is important because all other rates of interest charged by financial institutions in the country depend upon it. It is the rate that the central bank uses for loans to commercial banks and discount houses in it’s capacity of lender of last resort. The central bank can make changes in the bank rate to affect the economy. Encourage or reduce spending to reduce inflation or unemployment.

Open Market Operations Government through the central bank can reduce bank lending rate by selling securities (treasury bills and government bonds) to the public through the stock market. The buyers will either pay in cash or by cheques drawn on their commercial bank accounts. This will result in a reduction of the amount of cash commercial banks will have to lend. If the intention is to increase bank lending, the government will buy back these securities This tool is usually used with bank rate to achieve desired results

Example of a Treasury Bill: Bank of England

Example of a Treasury Bond: United States of America

Special deposits The commercial banks can be instructed by the central bank to put away a specified sum on special deposit. This is then frozen or kept for a period of time until it is released by the central bank to be used by commercial banks This action affects the ability of the commercial banks to loan money, thereby reducing the public demand for loans

Minimum cash reserves and liquid assets requirements The central bank stipulates the percentage of deposits and other specified liabilities that commercial banks and other financial institutions are required to hold in cash. This restricts the commercial banks against unsound credit policies Central bank may increase or decrease the reserve requirements influencing the amount of money in circulation and the availability of funds to be lent out by commercial banks. There are two types of reserve requirements employed by the Central Bank of The Bahamas.

Minimum cash reserves and liquid assets requirements In accordance with the Central Bank of The Bahamas Act, 2000, banks are required to maintain primary reserves referred to as the 'Statutory Reserve', against their Bahamian dollar liabilities. Since coming into force in 1974, the ratio has been unchanged at 5.0%, although the Central Bank does have the authority to raise it to 20.0%. The Central Bank is also empowered to impose a secondary reserve, called the Liquid Asset Ratio(LAR), which mandates banks to maintain an average ratio of liquid assets in relation to their Bahamian dollar deposit liabilities. The LAR is currently set at 20.0% of demand deposits, 15.0% of savings and fixed deposits, and 15.0% of borrowings due to or from the Central Bank as well as inter-

Credit controls The central bank can restrict lending to sectors it feels are not socially productive or facilitating and encouraging lending to sectors it deems more productive or important for economic development. This restricting of lending is how the central bank controls credit extended by commercial banks to firms and individuals.

Moral suasion The central bank can meet regularly with commercial banks and other financial institutions, providing them with clear directions and guidelines related to monetary policies. The central bank will persuade them to follow these guidelines rather than face measures defined by the statute Among the functions of the Central Bank of The Bahamas, the regulation of the supply of money and credit is especially important to the Bank's overall objective of monetary stability. Accordingly, there are five primary instruments through which the Bank seeks to influence the flow and supply of money and credit in the banking system: Reserve Requirements, Discount Policy, Selective Credit Controls, Moral Suasion and Open Market Operations. In The Bahamas, while Open Market Operations have been employed within a very limited context, and Reserve Requirements have remained virtually unchanged, Discount Policy--supplemented by Moral Suasion--have been used with far greater regularity, and have been most effective in the Bank's efforts to manage bank liquidity.

Question The government accepts responsibility for the economic state of the the country. Since the money market is centred on the central bank and the government controls the central bank, it can use its powers to make decisions that will have certain economic effects. i. define the term ‘money market’. (2 marks) ii. List four (4) instruments that are apart of the money market (4 marks) Explain THREE steps the government could take through the Central Bank to reduce inflation in the country (6 marks) Discuss the possible effect any ONE of the actions mentioned above could have on: i) citizens of the country ii) the business sector (8 marks)