Lecture 6 Revision 1

Lecture 6 - Revision Q1: What is mean by schedule and non- schedule banks? Gives examples. 2

Lecture 6 - Revision What are the primary functions of commercial banks? 3

Lecture 6 - Revision What is agency service means in commercial banking? 4

Lecture 7 5

Central Bank - SBP 6

Central Bank The banking system of a country can work systematically and in a coordinated manner only if there is an apex institution to direct the activities of the banks. Such an apex institution is popularly known as Central Bank. 7

Central Bank There is no standard terminology for the name of a Central bank. Many countries use the form, for example, Bank of England, Bank of Canada and Bank of Russia. Some are styled as national banks, such as the National Bank of Ukraine. Some countries may incorporate the word ‘central’ for example, European Central Bank and Central Bank of Ireland. 8

Central Bank The central bank of a country is an autonomous institution, entrusted with powers of control and supervision of the monetary and banking system of the country. Its primary responsibility is to maintain the stability of the national currency and money supply. 9

Central Bank In addition, its active duties include controlling subsidized loan interest rates, acting as a ‘bail out’ lender of last resort to the banking sector during times of financial crisis, as banker’s bank and as custodian of the foreign currency reserves and the government treasury. It may also have supervisory powers to ensure that banks and other financial institutions do not behave recklessly or fraudulently. 10

Central Bank Functions of Central Bank 11

Central Bank Functions The main functions of a Central Bank are common all over the world. But the scope and content of policy objectives may vary with respect to the country of origin, the period and depending on the country’s economic situations. Generally, all Central Banks aim at achieving economic stability along with a high growth rate and a favourable external payment position through proper monetary management. 12

Central Bank Capital requirements: All banks are required to hold a certain percentage of their assets as capital, a rate which may be established by the Central bank.. 13

Central Bank Reserve requirements: Another significant power that the Central Bank 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, limits are set on the money supply. 14

Central Bank Banking Supervision: The Central Banks through their subsidiaries control and monitor the banking sector. A central Bank examines the bank’s balance sheets, and behaviour and policies towards customers. 15

Central Bank Banking Supervision: In some countries, banking supervision is carried out by a government department or an independent government agency. Some types of banking regulation may be delegated to other levels of the government, such as State or provincial governments. 16

Independence of the Central Bank: 17

Central Bank Independence of the Central Bank: Advocates of independence of the Central Bank argue that a Central Bank which is too sensitive to political direction or pressure may encourage economic cycles, as politician 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. 18

Central Bank Independence of the Central Bank: In this context, independence is usually defined as the Central Bank’s operational and management independence from the government. An independent Central Bank can run a more credible monetary policy, making market expectations more responsive to signals from the bank. 19

Central Bank Independence of the Central Bank: Governments generally have some degree of influence over even ‘independence’ Central Banks, the aim of independence is primarily to prevent short-term interference. International organizations such as the World Bank, IMF are strong supporters of Central Bank Independence. 20