Financial Crisis

Financial Markets and Institutions - 1940
Spring 2020
Assignment 2
Central Banks: A Global Perspective
TO BE ONLY USED FOR INFORMATION

PURPOSES.
Table of Contents
Contents
Central Banks .................................................................................................................................. 1
The Reserve bank of Australia ........................................................................................................ 2
Monetary Policy .......................................................................................................................... 4
Governance Structure ................................................................................................................. 5
Reserve Bank Board ................................................................................................................ 5
Payments System Board ......................................................................................................... 6
Audit Committee..................................................................................................................... 6
Remuneration Committee ...................................................................................................... 6
Executive Committee .............................................................................................................. 6
Risk Management Committee ................................................................................................ 6
Financial Stability ........................................................................................................................ 7
Main Types of Financial Institutions ........................................................................................... 7
Role of the Reserve Bank in Maintaining Financial Stability ...................................................... 8
The Bank of England ..................................................................................................................... 10
Structure of Bank of England .................................................................................................... 10
About the Governor .................................................................................................................. 11
Role of Bank of England in Economy ........................................................................................ 11
Functions ............................................................................................................................... 11
Monetary Stability ................................................................................................................ 11
Monetary Policy Committee ................................................................................................. 11
Financial Stability .................................................................................................................. 13
Financial Conduct Authority ................................................................................................. 14
Payment System Regulator ................................................................................................... 14
Financial Policy Committee ................................................................................................... 14
Prudential Regulations Authority ......................................................................................... 15
Government’s banker ........................................................................................................... 15
Gold Custodian ...................................................................................................................... 15
Lender of last Resort ............................................................................................................. 15
The Reserve Bank of India (RBI) .................................................................................................... 17
Structure ................................................................................................................................... 17
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Table of Contents
Branches and Linkages .............................................................................................................. 18

Functions ................................................................................................................................... 18
Financial supervision ............................................................................................................. 18
Regulator and supervisor of the financial and banking system ........................................... 19
Regulator and supervisor of the payment and settlement systems .................................... 19
Banker and debt manager to government ........................................................................... 19
Managing foreign exchange.................................................................................................. 19
Issuance and Detection of fake currency.............................................................................. 19
Banker's bank ........................................................................................................................ 20
Developmental role .............................................................................................................. 20
RBI and the Economic Growth of India .................................................................................... 20
GDP Growth and Nominal GDP............................................................................................. 21
The RBI and Economy ........................................................................................................... 21
Final Thoughts ........................................................................................................................... 21
Bank of Russia ............................................................................................................................... 22
Brief History .............................................................................................................................. 22
National Financial Board & Board of Directors ......................................................................... 22
Duties and Functions ................................................................................................................ 24
Bank of Russia’s Role to Economy ............................................................................................ 25
Who Holds the Real Power? ..................................................................................................... 25
The State Bank of Pakistan (SBP) .................................................................................................. 27
Subsidiaries of the SBP .............................................................................................................. 27
Regulation of Liquidity .............................................................................................................. 28
Ensuring the Soundness of Financial System ............................................................................ 28
Regulation and Supervision .................................................................................................. 28
Exchange Rate Management and Balance of Payments ...................................................... 29
Developmental Role of State Bank ....................................................................................... 30
Governance ............................................................................................................................... 30
The Board of Directors .......................................................................................................... 30
Management of the SBP ....................................................................................................... 31
Role of SBP Towards the Development of Economy of Pakistan ............................................. 33
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Table of Contents
Issuance of Notes .................................................................................................................. 33

Banker to the Government ................................................................................................... 33
Banker's Bank ........................................................................................................................ 33
Clearing House ...................................................................................................................... 33
Advisor to Government ........................................................................................................ 33
Controller of Credit ............................................................................................................... 34
Bank Rate Policy .................................................................................................................... 34
Economic Growth.................................................................................................................. 34
Growth of Credit Institutions and Money Market ................................................................ 34
Value of Rupee ...................................................................................................................... 34
Special Funds for Development ............................................................................................ 34
Debt Management ................................................................................................................ 34
Foreign Exchange Reserves ................................................................................................... 35
Exchange Centre ................................................................................................................... 35
International Relations ......................................................................................................... 35
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Introduction
Central Banks
We can define a central bank to be a financial entity having high authority with regards to the
origination and disbursement of bank notes, coins and credit for one or several countries.
According to a more recent definition, its roles include designing the monetary policy to be
followed and the supervision of commercial/partner banks.
The central banks are originally known to be independent with regards to the market, thus are
popular non risk-seeking institutions. Except for a few, central banks are privately owned, thus
enjoy a nonpolitical environment. Although, not being lawfully owned by the government doesn't
deprive it of being protected by the legal code.
Something that makes a central bank stand apart from other banking institutions is the legal
monopoly authority that it enjoys, enabling it to print and issue currency. In contrast, non-public
banks are lawfully restricted to only providing on-demand liabilities to entities, including checking
deposits.
In this report we’ll be studying about the system of central banks in many countries covering each
of the developed, emerging and developing economies. The countries covered include Australia,
England, India, Russia and Pakistan.
The roles of each central bank, their structure, functions, governance, hierarchy and their
contribution toward their country’s economy would be covered in this report.\
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The Reserve Bank of Australia
The Reserve bank of Australia

The Reserve Bank of Australia (RBA) is Australia's central bank and derives its functions and
powers from the Reserve Bank Act 1959. Its duty is to contribute to the stability of the currency,
full employment, and the economic prosperity and welfare of the Australian people. It does this
by setting the cash rate to meet an agreed medium-term inflation target, working to maintain a
strong financial system and efficient payments system, and issuing the nation's banknote. It
conducts monetary policy, works to maintain a strong financial system, and issues the nation's
currency. As well as being a policy-making body, the Reserve Bank provides selected banking and
registry services to a range of Australian government agencies and to several overseas central
banks and official institutions. It also manages Australia's gold and foreign exchange reserves.
The RBA provides certain banking services as required to the Australian Government and its
agencies, and to several overseas central banks and official institutions. Additionally, it manages
Australia's gold and foreign exchange reserves.
Philip Lowe, Governor (2016 – Present)
“The Parliament of Australia has given the Reserve Bank some incredibly important
responsibilities. The one the community's most familiar with is that the first Tuesday of every
month except for January, the Reserve Bank Board meets to set the cash rate. The cash rate's
very important because it influences the cost of people's mortgages, the rate of return they get
on their savings. It influences the exchange rate and the value of people's assets. So, the
community has a lot of interest in those decisions.
The Reserve Bank also produces and distributes Australia's banknotes. We have some of the best
quality banknotes in the world. We've got fantastic technology. We were the first country to
introduce the polymer banknotes. We were also one of the first countries to have a man and a
woman on every single banknote which I'm particularly proud of. The banknotes are produced in
a purpose-built facility down on the outer suburbs of Melbourne. We've got a huge vault there
which we store and distribute banknotes from. It might come as a surprise to many people that
despite the use of, increase in use of electronic payments, the value of bank notes on issue is at
a record high. So many people are holding our banknotes as a store of value.
The Reserve Bank is also the banker for the Australian Government. So, when you get a Medicare
refund or if you're lucky enough to get a tax refund. Or when you must pay your tax, those
transactions occur through the government's bank accounts at the Reserve Bank. So, we manage
all the government's payments whether it's for defense purposes or social security. So, we're a
very large transactional banker in our own right.
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The Reserve Bank also operates the core of Australia's payment system. When money goes from
one bank to another, perhaps because you are paying a bill to somebody who banks with a
different bank. The money finds its way from your bank to the other bank through the Reserve
Bank. So, it is a central part of Australia's payment system.
The Reserve Bank has also developed with the banks, the New Payments Platform. Which allows
people to make payments 24 hours a day, 7 days a week using just a mobile phone number or an
email address. So, you don't need to know a BSB or account number anymore. The Reserve Bank
encouraged the financial institutions to develop this new system and then we built a core part of
the infrastructure that allows the money to move from one bank to another.
The Reserve Bank is also responsible for the stability of the financial system. We do this in several
ways. We operate in the financial markets every day to keep the liquidity of the system stable. In
extremes we can operate as the lender-of-last-resort providing liquidity of solvent but troubled
institutions. We also work with the other regulators APRA and ASIC, through the Council of
Financial Regulators to identify risks in the financial system. And develop plans when we see the
risks developing. And we put out public analysis and research on financial stability issues on a
regular basis.
The Reserve Bank also manages Australia's foreign exchange reserves, which is very important.
We represent Australia in many international forums, the G20, the Bank for International
Settlements, and the International Monetary Fund. We're bringing Australia's particular
perspective to international audiences. Which in many cases is very important and it's often
highly valued. We do all this with 1,300 people. Most of us are located here in the head office in
Sydney. But we have offices in Brisbane, in Melbourne, in Adelaide, in Perth. And we also have
offices in Beijing, London and New York.”
The Reserve Bank Board's obligations with respect to monetary policy are laid out in Sections
10(2) and 11(1) of the Act. Section 10(2) of the Act, which is often referred to as the Bank's
‘charter’, says:
It is the duty of the Reserve Bank Board, within the limits of its powers, to ensure that the
monetary and banking policy of the Bank is directed to the greatest advantage of the people of
Australia and that the powers of the Bank ... are exercised in such a manner as, in the opinion of
the Reserve Bank Board, will best contribute to:
the stability of the currency of Australia;
the maintenance of full employment in Australia; and
the economic prosperity and welfare of the people of Australia.
Section 11(1) of the Act covers the need to consult with Government;
the Reserve Bank Board is to inform the Government, from time to time, of the Bank's monetary
and banking policy.
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The ‘charter’ of the Payments System Board is defined in section 10B (3) of the Act as follows:
It is the duty of the Payments System Board to ensure, within the limits of its powers, that:
the Bank's payments system policy is directed to the greatest advantage of the people of
Australia; and
the powers of the Bank under the Payment Systems (Regulation) Act 1998 and the Payment
Systems and Netting Act 1998 are exercised in a way that, in the Board's opinion, will best
contribute to:
controlling risk in the financial system;
promoting the efficiency of the payments system; and
promoting competition in the market for payment services, consistent with the overall stability
of the financial system; and
the powers and functions of the Bank under Part 7.3 of the Corporations Act 2001 are exercised
in a way that, in the Board's opinion, will best contribute to the overall stability of the financial
system
Monetary Policy
The Reserve Bank of Australia is answerable for planning and executing Monetary approach.
Financial approach choices include setting the Interest rate on for the time being advances in the
Money showcase. Other Interest rates in the economy are impacted by this Interest rate to
changing degrees, with the goal that the conduct of borrowers and moneylenders in the
budgetary markets is influenced by Monetary policy.
The central medium-term goal of Monetary Policy is to control Inflation, so an Inflation target is
in this way the highlight of the Monetary Policy structure. All things considered, over time. This
is a pace of Inflation adequately low that it doesn't physically twist Economic choices in the
network. All things considered, gives order to Monetary Policy dynamic, and fills in as a grapple
for private division Inflation desires.
The Reserve Bank uses its domestic market operations (sometimes called ‘open market
operations’) to keep the cash rate as close as possible to the target set by the Board, by managing
the supply of funds available to banks in the money market.
The Cash Rate is resolved in the currency showcase because of the association of Demand for
and Supply of Overnight assets. The Reserve Bank's capacity to seek after effectively an objective
for the Cash Rate comes from its authority over the inventory of assets which Banks use to settle
exchanges among themselves. These are called trade Settlement Funds, after the records at the
Reserve Bank in which banks hold these assets.
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Governance Structure
Reserve Bank Board
The Reserve Bank Board is answerable for the Bank's monetary and banking arrangement, and
the Bank's approach on every single other issue, except for its payments system policy. The
Governor, who is liable for dealing with the Reserve Bank, is Chair of the Reserve Bank Board.
The Deputy Governor is Deputy Chair.
The ‘mandate’ or ‘charter’ of the Reserve Bank Board is contained in section 10(2) of the Reserve
Bank Act:
...the Reserve Bank Board has power to determine the policy of the Bank in relation to any
matter, other than its payments system policy, and to take such action as is necessary to ensure
that effect is given by the Bank to the policy so determined.
It is the duty of the Reserve Bank Board, within the limits of its powers, to ensure that the
monetary and banking policy of the Bank is directed to the greatest advantage of the people of
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Australia and that the powers of the Bank under this Act and any other Act, other than
the Payment Systems (Regulation) Act 1998 and the Payment Systems and Netting Act 1998,
are exercised in such a manner as, in the opinion of the Reserve Bank Board, will best
contribute to:
the stability of the currency of Australia;
the maintenance of full employment in Australia; and
the economic prosperity and welfare of the people of Australia.
Payments System Board
The Payments System Board is responsible for payments system policy. The Governor is also Chair
of the Payments System Board. The Assistant Governor (Financial System) is Deputy Chair.
Audit Committee
The Audit Committee is a committee of the Reserve Bank Board. Its membership comprises two
non-executive members of the Reserve Bank Board and two external members. The Committee
is chaired by Mark Barnaba, a non-executive member of the Reserve Bank Board.
Remuneration Committee
The Remuneration Committee is a committee of the Reserve Bank Board. Its membership is
drawn from the non-executive members of the Reserve Bank Board.
Executive Committee
The Executive Committee is the key decision-making committee of the Bank for matters of a
management and/or administrative nature that have strategic, Bank-wide or external
significance. Its role is to assist and support the Governor in fulfilling his responsibilities under
the Reserve Bank Act 1959 to manage the Bank. It is a management committee chaired by the
Governor.
Risk Management Committee
The Risk Management Committee is responsible for ensuring that operational and financial risks
are properly identified, assessed and managed across the Reserve Bank in accordance with the
Bank's Risk Management Policy. It is a management committee chaired by the Deputy Governor.
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Financial Stability
Keeping up the unfaltering quality of the cash related system is a longstanding obligation of the
Reserve Bank. A stable money related system is one in which budgetary foundations, markets
and market establishments energize the smooth movement of advantages among savers and
monetary masters. This helps with propelling improvement in budgetary development.
The Reserve Bank has an occupation both in assuaging the peril of financial disrupting impacts
that may have central outcomes, and in responding to a cash related system disturbance should
it occur. The Bank tackles these issues with other relevant associations, primarily through the
Council of Financial Regulators (CFR). The CFR, which is driven by the Reserve Bank Governor,
joins the Bank, APRA, the Treasury and ASIC, with an order to add to the profitability and
suitability of rule and the unfaltering quality of the cash related structure.
Main Types of Financial Institutions

The main types of financial institutions in Australia are:
• Authorized Deposit-taking Institutions (ADIs)

• Non-ADI Financial Institutions
• Insurers and Funds Managers
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Role of the Reserve Bank in Maintaining Financial Stability

Strength of the budgetary framework is a longstanding obligation of the Reserve Bank – a
command reconfirmed by the Government when it acquainted noteworthy changes with
Australia's monetary administrative structure in July 1998. These incorporated the exchange of
duty regarding the supervision of banks to another coordinated controller, the Australian
Prudential Regulation Authority (APRA), and the foundation of the Payments System Board inside
the Bank.
In satisfying its order to advance budgetary framework solidness, the Reserve Bank has a job both
in relieving the danger of monetary unsettling influences with conceivably fundamental
outcomes, and in reacting if a money related framework aggravation occurs.
There are a few manners by which the Reserve Bank plans to diminish the probability of money
related unsteadiness. One is by establishing the framework for low and stable expansion and
maintainable monetary development, a domain that will for the most part be helpful for money
related steadiness.
Related with this is the job that the Reserve Bank plays in checking the soundness of the
budgetary framework. On a progressing premise, the Bank evaluates a scope of total money
related and monetary information that help measure the sufficiency of the budgetary framework
and potential vulnerabilities. The consequences of such investigation are distributed half-yearly
in the Financial Stability Review.
The Bank likewise attempts to guarantee that the installments framework is protected and
powerful. The Payments System Board inside the Bank has unequivocal expert for installments
framework security and soundness and has the support of solid administrative forces.
The Bank normally shares its perspectives on these issues with other applicable organizations.
Locally, the fundamental discussion is the Council of Financial Regulators (CFR). The CFR, which
is led by the Reserve Bank Governor, unites the Bank, APRA, the Treasury, and ASIC, with an order
to add to the proficiency and adequacy of guideline and the dependability of the budgetary
framework.
Globally, the Reserve Bank adds to the discussion on the change of the worldwide money related
framework, principally through its participation of the Financial Stability Board (FSB) and the
Basel Committee on Banking Supervision (BCBS). The FSB has a command to survey the
vulnerabilities influencing the monetary framework, recognize and supervise activity to address
them, and advance co-activity and data sharing among specialists answerable for money related
strength. The BCBS gives the global structure to prudential guideline of universally dynamic
banks.
The Reserve Bank's order to maintain money related solidness doesn't compare to an assurance
of dissolvability for budgetary organizations. The Bank does, be that as it may, have a significant
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job in the administration of emergency circumstances in co-activity with the other CFR
organizations. Specifically, the Bank has duty regarding observing money related markets, and
installment and repayment frameworks, and for exhorting the Treasurer or other applicable
Minister on rising misery in these business sectors and frameworks. Furthermore, the Bank has
obligation regarding surveying and instructing on the nature and scale concerning the
fundamental effect of any noteworthy budgetary pressure, including suggestions for money
related markets and the installments framework. The Bank is likewise liable for assessing and
executing reaction alternatives that include liquidity support or the utilization of installments
framework powers.
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The Bank of England
The Bank of England

The Bank of England is Central Bank of United Kingdom. It was established in 1694 making it as
world’s eighth oldest bank. It is the model on which most central banks are based upon. In 1694
it was made to act as English’s government banker and still acts as a banker of United Kingdom.
It was owned by stockholders until it became nationalized in 1946.
It became an independent Public Office in 1998 wholly owned by Treasury Solicitor (Government
legal department) on behalf of government but with independence of setting monetary policy.
They have been given independence on setting base rates.
It has a headquarter in Thread needle Street, London, England, United Kingdom
Structure of Bank of England

The Governor of England is the senior most position. It is normally a civil service job; However,
the appointment is done within the Bank by the recommendation of the former governor of bank
of England and with the approval Queen on the advice of Prime Minister.
Governor is chairman for monetary policy committee that has a major role in providing economic
and monetary policy. Therefore, it is one of the most important public office in UK. The term of
governor of Bank of England is around 8 years with 1 time being allowed renewed. Currently the
governor of Bank of England is Andrew Bailey.
The deputy governor of England is holder of one of senior position of Bank of England. They
report directly to governors. They have special responsibility of financial stability, monetary
policy, prudential regulations, markets and banking respectively. In 2013 a new position of CEO
was created which has same role as deputy. The deputy governor of Bank of England is appointed
for 5 years and can be renewed for 2 more terms. Currently the deputy governor of England are
Sir Jon Cunliffe, Ben Broadbent, Sam Woods and Sir David Ramsden. Sir Jon Cunliffe oversees
financial stability. Ben Broadbent oversees monetary policy. Sam Woods oversees Prudential
Regulation and is Chief Executive of the Prudential Regulation Authority. Sir David Ramsden
overseas markets and banking.
The court of directors is appointed by Court. They consist of five executive members and nine
non-executive. The chairman of court of director is appointed by chancellor and is from non-
executive members. They must meet at least 7 times a year. The tenure of non-executive
member lasts up to 4 years. The non-executive members play an important role in reviewing the
Bank’s performance and financial controls.
According to original charter of 27 July 1694 the bank would be supervised by 1 governor, 1
deputy governor and 24 directors; However, currently the bank is controlled by 1 governor, 4
deputy governors and 9 non-executive member of court of directors.
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The Bank of England
About the Governor

As mentioned above Andre John Bailey is the governor of Bank of England. Previously, he served
as a Chief Cashier of Bank of England from January 2004 until April 2011. Then he served a deputy
governor from 2013-2016 and Chief executive of Financial Conduct Authority from 2016 to 2020.
Role of Bank of England in Economy

Functions
As mentioned above the Bank of England has been provided with freedom of setting its own
monetary policy. So, Bank of England has been provided with freedom with the tools.
Monetary Stability
Monetary Stability relates to support the confidence in currency and stable prices. This is done
using base rates which is decided by Monetary Policy Committee which is explained in later part
of this report.
Monetary Policy Committee
Monetary Policy Committee is a committee of Bank of England which meets approximately eight
times a year (of which 4 are joint meetings with Fiscal Policy Committee). It is composed of
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The Bank of England
Governor of Bank of England, 3 Deputy Governors (Monetary Policy, Financial Stability and
Markets and Banking), bank’s chief economist and four external member appointed by
Chancellor of Exchequer for a renewable term of 3 years.
Each member has 1 equal with chairman having last vote (voting in case of a tie). The treasury
members can attend but being non-voting observers. The meeting is of three and half days. On
the first day of meeting, the committee studies performance related to UK economy, as well as
world’s economy presented by bank’s economists. On second day there is a debate on main
policy and there are opinions on correct course of action. The governor chooses the policies
which would lead to majority votes. Then on third day there is a voting done, the minority are
then asked what and why would they had preferred. The committee’s decision is then announced
on the day after meeting has been completed.
The primary purpose of this meeting is to lay down the monetary policy of UK, which is often
done by setting out Bank of England Base Rate (rate at which it lends to bank). The main aim is
of price stability, with government target of 2% inflation.
The secondary aim is to support the government’s economic policies and help them to meet the
target of employment and growth. Due to secondary aim the monetary policy committee has
been given freedom to openly trade off above inflation rate to boost economic indicators.
Monetary policy committee isn’t responsible for fiscal policy; However, the committee is briefed
about development in fiscal policy by treasurer in meetings.
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The Bank of England
If inflation exceeds target rate by 1 point the governor must write the letter to Chancellor of
Exchequer. He must provide the explanation of the movement and he must write once in three
month until it is back in its target.
The government has also allowed asset purchase facility (plan to inject money in economy
through purchasing open market bonds) to influence long term rates). This was done to increase
liquidity in market. The committee had started to cut the rates (0.5% interest rates), hence
leading to a process of quantitative easing. In this bank purchased a high number of government
bonds and a few high-quality debts issued by private companies. On 7 August 2013, Governor
Mark Carney issued the committee's first forward guidance( a tool used by central bank in order
to exercise to control monetary policy, with their own forecasts, the market level expectation
level of interest rate)as a third tool for controlling future inflation.
Though the committee has been independent in their usage of tools; However, in extreme
economic situations the government may interfere. Currently the base rate is 0.1%.
Financial Stability
Bank of England also oversees financial stability. Maintaining financial stability means to monitor
the financial system and protect it from threats so that there is a confidence in financial
institutions, markets and overall financial system. The threats to financial system include bribery,
corruption, frauds and money laundering. The protection is done through market intelligence
and surveillance.
The Bank of England has 3 broad strategy for maintaining financial stability
Establishing strict financial laws to protect UK real economy, that is to implement requirement
of level of resilience to be maintained financial system, increasing individual accountability, work
with international authorities to have a rigorous common baseline standard, to promote safety
of financial institutions, remove incentives for excessive risk taking, implement market disciplines
so that it ends problems of financial institutions that are too big to fail and also provide
infrastructure for the tough settlements of high critical value sterling payments by allowing them
to be settled in Bank of England balance sheet.
Ensuring level of resilience to adopt the risk that financial system faces, this means to identify
potential risk to financial stability, maintains stress test for bank to resilience to potential risk,
take action when necessary to weaken financial stability risk from private sector debt, which can
make economic growth fragile
Empower the system to absorb shocks, so that when they occur, the system can support the
economy. This is done by providing liquidity to banks in hard times. In short becoming lender of
last resort.
The Financial Service Act of 2012 established 2 institutions to deal with financial stability that is
financial policy committee and prudent regulation authority.
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The Bank of England
Financial Conduct Authority

Financial Conduct Authority is financial regulatory body which operates independently of UK
government. It controls financial firms that provides services and maintains honesty of financial
market. Both the Prudential Regulations Authority and Financial policy committee are part of
Financial Committee Authority
It has the power to regulate the promotions of financial products as well as setting minimum
criteria. Moreover, it can carry out investigations against individuals or firm and may also carry
out strict actions against them (like banning them). It can also freeze their assets whether they
are innocent or not.
Payment System Regulator
Payment system regulator is an independent body created by FCA in accordance with banking
act to create innovations and competition in payment system and see that they work in interest
of individuals and firms using them.
Financial Policy Committee
This was created after financial crisis. The role of financial policy committee is to spot, monitor
and act against risk that can proved to be unhealthy for UK financial system.
The Financial Policy Committee includes 13 members. 6 of them are Bank of England staff which
includes governor, four deputy governors and executive director for financial stability strategy
and risk. There are 5 members from outside who are selected on basis of their experience and
expertise in financial service. The committee also includes Chief executive of financial conduct
authority and one non-voting member from treasury.
The FPC meets 4 times a year. The record of meeting is published twice a year when Financial
Stability Report is published. In Financial Report the FPC tells out the main risk to financial stability
evaluate impact of any actions taken. FPC along with Prudential Regulations authority helps in
designing of stress test for banks in order to evaluate bank’s resilience and check their capability
to withstand any shocks and support economy.
FPC sets counter cyclical buffer rate for UK, sectoral capital requirements for UK firms, leverage
ratio requirement for UK firms, set loan to value and debt to income limits for UK mortgages on
owner occupied properties and buy to let properties.
In counter cyclical buffer rate (CCYB), the FPC can use it to adjust the resilience of banking system
to changing scale of risk over time. When the risks are increasing, the FPC can increase the CCYB
to increase the capital to absorb potential losses. And when threats are looked to be reducing
the CCYB can be reduced. The CCYB applies to all banks, building societies and investment firms
The FPC has two set of power. Power of direction in which they tell regulators to act on specific
tools. In Power of recommendation they can recommend anyone to reduce risk to financial
stability.
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The Bank of England
The FPC is responsible for macro prudential regulations of all UK banks and insurance companies.
Prudential Regulations Authority
It was formed in 2012 according to financial service act. It is a financial service regulatory
authority. It is structured as a wholly company owned by Bank of England and is responsible for
supervision of financial institutions. The Prudential Regulations Authority regulates 1700 financial
firms. It sets standards and supervises financial institutions at the level of the individual firm. Like
DTI and LTV ratio. It has two objectives that is to promote the safety of firm it operates and to
protect the policyholders. The authority also monitors the possible damage a financial institution
can cause to economy. It provides statutory requirements. They are threshold conditions that
firm must meet. These include firm maintaining appropriate capital and liquidity. The PRA will
use judgement to whether financial firms are safe and sound.
The PRA’s approach to regulation and supervision has 3 characteristics. The judgement approach,
forward looking approach and focused approach. In judgement approach the PRA sees whether
the firms are secured, providing protection for policyholders and ability to meet threshold. In
forward the PRA just won’t assess firm with current risk, but also with future possible risk. And if
any problem arsis the PRA will look to interfere and sort out problem in early stages. In focused
approach the firm will focus to those firms that can create more issues; However, PRA will not
look to operate a zero-failure approach but will ensure that a failing firm will not create issues
for economy. The PRA has 3 areas banking (responsible for supervision of UK banks), Insurance
for protection of policy holders) and policy (This covers prudential standards for firm).
PRA also works with fiscal policy committee and treasury.
PRA is led by Sam Woods who is also the Deputy Governor for Bank. It consists of governor,
deputy governors, Chief executive officer of financial conduct authority, a member appointed by
governor by approval of chancellor and 6 other external member appointed by chancellor.
Government’s banker
The bank of England also acts as a government’s banker and it also maintain government’s
consolidated fund account (where government deposits its taxes which are kept for general
spending). The Bank of England also maintains UK foreign exchange reserves to ensure that
country settle its debts.
Gold Custodian
Bank of England acts as the official gold curator. It is being found that the bank holds
approximately 3% of all gold mined in history. Currently bank has got 400,000 gold bullion bars,
which values at 142 billion pounds.
Lender of last Resort
Since being central bank of UK, it acts as lender of last resort to commercial banks which suffer
cash shortfall. This helps in controlling liquidity and confidence in financial system. For example,
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The Bank of England
when Northern Rock Bank suffered grave hardships it had to seek help from bank of England by
borrowing some funds.
The Bank of England also issues bank notes. There are over 3 billion notes in circulation worth
over 60 billion pounds. Bank of England gained monopoly of issuing bank notes in 1921. Bank of
England got a monopoly in issuing bank notes in 1921 in England and Wales.
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The Reserve Bank of India
The Reserve Bank of India (RBI)

Putting the order of the Reserve Bank of India Act (1934) into action, the Reserve Bank of India
came into being. After initial private ownership, it was fully nationalized by 1949. Serving as
India’s central bank, it controls the issuance and supply of the Indian Rupee. It acts as the
regulator for the whole banking system of India and observes a vital role in the Development
Strategy of the Indian Government. It also oversees non-banking financial institutions in India. It
reserves the right to carry out India’s monetary policy.
RBI provides important services like managing foreign exchange reserves and controls inflation,
acting as the absolute monetary control authority of India. It is expected to have a goal of
stabilizing the local economy and its growth. Its promotion of financial inclusion is reflected in it
being a member of the AFI, short for the Alliance for Financial Inclusion. RBI is also referred by
names such as Mint Street and banker’s bank.
Structure
Being a member of the Asian Clearing Union, its board of directors consists of the following
distribution:
(From Ministry of Finance)
The Director Board is the main committee of the central bank, which is appointed by the
Government of India. This distribution is followed for a four-year term, after which the (following)
government reappoints the board.
Amongst the 4 deputy governors, 2 are typically appointed from the Executive directors of the
RBI, 1 is selected from the chairpersons of the public-sector banks and 1 needs to be a capable
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economist. Also, a member of the Indian Administrative Service can also be appointed as the
deputy governor, proceeding to be a governor.
Branches and Linkages

The RBI has four branches in the Indian Region, one each in the North, South, West and East
regions. Each of the branch has 5 members, which are appointed by the central government for
a period of 4 years and serve, along with the Central Board, as a forum for dealing with tasks
delegated by the Central Board.
The RBI has 2 training colleges for its officers, which are: The College of Agricultural Banking
(Pune) and the Reserve Bank Staff College (Chennai). It also runs 3 independent institutions,
named Indira Gandhi Institute of Development Research (IGIDR), Institute for Development and
Research in Banking Technology (IDRBT) and the National Institute of Banking Management
(NIBM). Alongside, it also has 4 training centers, spread across India.
The Community Central Bank Corporation (CCBD) is represented by the Board of Financial
Supervision (BFS), in order to control the financial institutions. Its 4 members, appointed for 2
years, lead measures for external and internal monitoring and control, and strengthen the role
of statutory auditors in the financial region of the country. Another committee set up by the RBI
worked towards achieving capital account convertibility by 2000.
Functions
Functions of the central bank for countries, generally, include issuing and managing currency,
foreign exchange, managing foreign policy and acting as a bank for the government and as a
banker for the commercial banks. It also helps in the overall economic development of the
country at large.
Its main functions include “..to regulate the issue of Bank Notes and keeping of reserves with a
view to securing monetary stability in India and generally to operate the currency and credit
system of the country to its advantage.” (Source: Preamble, Reserve Bank of India)
Financial supervision
Perhaps, the aim of the RBI is to collectively supervise the financial sector (commercial banks,
financial and non-financial institutions). The central board, chaired by the governor and vice-
chaired by the deputy governor who is in-charge of the banking supervisory and regulation,
meets once every month. It scrutinized inspection reports and other supervisory reports provided
by the respective supervisory departments.
The board of Financial Supervision (BFS) also works to improve the quality of the legislative and
internal audit functions carried out in banks and financial institutions. The audit sub-committee
includes the deputy governor and two directors of the central board, overseeing the functioning
of the Department of Banking supervision (DBS) and two other authorities (For non-banking and
financial services). And gives them directions on regulatory and supervisory issues.
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Regulator and supervisor of the financial and banking system

Being the regulator and supervisor of the whole financial system, RBI provides broad parameters
of banking and financial operations to be followed. It aims to protect depositors’ interest and
maintain public confidence by providing cost-effective banking services to them. It uses the BOS
scheme to formulate the design of banknotes and coins, along with overseeing GDP/GNP and
other economic indicators. It also uses methods like on-site inspections, 24/7 surveillance and
periodic meetings to supervise new bank licenses, regulating interest rates and setting capital
requirements.
Regulator and supervisor of the payment and settlement systems
Using the payment and settlement act of 2007, the RBI aims to improve overall economic
efficiency by using its authority to improve the payment and settlement systems, country wide.
It does this by designing efficient payment systems such as the NEFT (National Economic Funds
Transfer), enabling people to transfer money easily and securely, within the country.
Banker and debt manager to government
The RBI manages the accounts of the government, helping it, in turn, raise money from the public
through attracting them to buy bonds and securities issued by the government. In September
2019, the RBI decided to change its fiscal year to March-April, instead of June-July to match the
governments year.
Managing foreign exchange
Following the Foreign Exchange Management Act of 1999, the Central Bank aims to facilitate
external trade and payment to ensure proper maintenance of the foreign exchange market of
India. Playing a vital role, the RBI also manages the forex and gold reserves of the country. Thus,
it effectively manages the forex rate by carrying out sales and purchases to ease volatility when
demand is high. Plus, this authority enables it to control the balance of payments when the
situation is bad.
Issuance and Detection of fake currency
Besides the Indian government, RBI is the only body to have permission to print and issue
banknotes. Printing is done by the usage of four facilities, including the Security Printing and
Minting Corporation of India. Due to the banknotes being a monetary liability for the RBI, it has
an obligation to back the currency with fixed assets, to maintain public confidence in paper
currency. In effect, the RBI can be aided to be maintaining the economic structure of the country
so that, in the long run, it can achieve the aim of economic stability. it has permission to issue a
variety of notes and coins, with values ranging to INR 10000.
Thus, it also has a big responsibility to curb the usage of fake currency. It has launched a website
at www.paisaboltahai.rbi.org.in, providing information regarding fake currency. And for the
purpose of rendering old, fake banknotes useless, the RBI announced in January 2014, that
banknotes issued prior to 2005 should no longer be in circulation, although they would continue
to be legal tender, and the public reserves the right to exchange old notes with new notes. This
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helped fight against in-cash black money and added security features in new notes made it very
difficult to reproduce them illegally.
Banker's bank
RBI also serves as a central bank where commercia banks hold accounts, hence the term banker’s
bank. It is the responsibility to control the credit that commercial banks create though open
market operations and repo rate. It helps cheque-clearance between commercial banks and
inter-bank funds transfer. To save a commercial bank on the verge of bankruptcy, it can also
provide it loans.
Developmental role
The RBI has an obligation to perform a wide range of promotional functions to support the
economic sector, including dealing with inflation related problems, supporting MSEs (micro and
small enterprises). To improve money and make it easy for the rural class to avail banking
services, the RBI encourages banks to start operations in rural areas and supports small-scale
banks to help them flourish.
RBI and the Economic Growth of India
The growth rates provided in the picture make the role of the RBI very important, as we can
visualize the increasing GDP of India. Being one of the top ten countries as categorized by the
overall GDP, India still falls far behind its competitors, being superpowers, which are just ahead
in rank.
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GDP Growth and Nominal GDP

According to estimates, India will have a GDP of around $2.9 trillion in 2019 and $3.3 trillion in
2020. As compared to the US and China, these numbers merely represent 1/8th and 1/5th of their
GDPs.
The RBI and Economy
As discussed above, the RBI plays a key role in monitoring and managing the monetary policies
which influence the banking system, as well as personal finance, at the micro level. This role is
bound to become increasingly important as the GDP moves up in the ranking.
At the start of the 2nd quarter of 2019, the RBI made a decision to lower its borrowing rate to 6%,
which is expected to have a noticeable effect on the borrowing decisions throughout the country,
after the credit rates had remained relatively high, which discouraged people to borrow money.
The RBI is also expected to deal with an increasing rat of inflation from a lower bound of 2.4% in
2019 to an upper bound of 3.8% in the second half of 2020.
The RBI also influenced a de-monetization across country, in 2016, removing INR 5000 and INR
1000 notes from circulation, exercising its powers to curb illegal activities such as the hoarding
of black money in the form of bank notes. Although this decision did create problems for the
entities involved in false practice, the public did suffer too, as they had to use more, less-value
notes for day to day transactions, leading to a shortage of cash, and making the RBI print more
money, which in turn lead to a substantial increase in inflation. However, the biggest win was an
increase in tax collection, which was caused by an increased consumer reporting transparency.
When Shaktikanta was appointed the new RBI governor in December 2018, he supported
demonetization, which was in-line with the thoughts of the top government hierarchy. The
advantages that this act is expected to bring to the Indian economy include an increase in money
circulation, as people would deposit money in banks, rather than hoarding it at homes. This
would, in turn, lower credit rates and make credit more accessible to the population at large.
Final Thoughts
Thus, we can conclude, using the example of the Reserve Bank of India, that a central bank is a
vital part of a country’s economy. If the government works to provide it autonomy, in a controlled
manner, it is bound to yield positive results. Plus, the employment of capable and efficient human
capital in these banks would work to improve the economic situation of a nation, in the long run,
as that hierarchy, working with the government, would tend to make decisions which would be
in the interest of the country and the population at large. The central bank’s role in the country’s
financial and economic sector should be recognized, in order to keep the banking and non-
banking institutions of the country in check, and make them strive to provide better services to
the public, which would work to create a mutual, value-building relationship.
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The Central Bank of Russia
Bank of Russia
The Central Bank of Russia (also called Bank of Russia) was found in 1990 as a result of the
collapse of the socialist state of Union of Soviet Socialist Republics (USSR). Previously, Russia had
the State Bank of the USSR called Gosbank.
Brief History
In 1860, the State Bank was founded in the Russian Empire. the earlier days, the Gosbank
implemented centralized control over the state through banking. However, contrary to most
central banks in the world, it did not follow the capitalist philosophy of earning profits from
banking. It was a financial control agency under the Council of Ministers. It carried out the roles
of central and commercial bank by creating narrow money in the economy, managing the
reserves of the country, issuing short-term credit to enterprises for working capital. By 1914, the
total number of branches of commercial banks was 716 and the State Bank alone had 135 offices.
The Gosbank had the largest central banking network in all Europe; and their assets and liabilities
were incomparable to any other bank. Government expenditures exceeded government revenue
and savings were too low to cover the troubling budget deficit. The rise of cooperative banks and
market-based banking system by the late 80s played a vital role in the transformation of the
Gosbank to the Central Bank of Russian Federation. In 1991, the Gosbank was abolished and all
its assets and liabilities were transferred to the Central Bank. The Gosbank was liquidated in 1992,
and Central Bank of Russia received monopoly right to issue money in the Russian Federation.
National Financial Board & Board of Directors

The National Financial Board is a collegiate body of the Central Bank of Russia that acts based on
the Federal Law. This board has 12 members; 2 are delegated by the Federation Council, 3 by the
State Duma, 3 by the Russian President,3 by the Russian Government and 1 Governor who
appointed for 4 years and can be reappointed for consecutive tenures. Except for the Governor
of the Bank of Russia, all other members are not full-time workers and do not receive any
remuneration for their work. The Board is managed by the elected Chairman from all members
of the Board. The current Chairman of the Board is Anton Siluanov who is also the Finance
Minister of Russia, and the Governor is Elvira Nabiullina. All activities of the Board are conducted
under the Article 12 and Article 13 of the Federal Law.
The Board of Directors is the executive body of the Bank of Russia, separate from the National
Financial Board. There are 15 members of the Board of Directors: 14 of these members are
appointed by the State Duma as full-time workers for 5 years except for the Governor. They carry
out broader functions:
1. They regulate a single state monetary policy and oversee the development of the financial
markets, which include decisions on the interest rates, issuance on new banknotes and
coins, and withdrawal of old banknotes and coins.
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2. They regulate the banking system and financial market by setting rules for banking
operations, mandatory reserve requirements.
Below is the organizational structure of the Central Bank:
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Duties and Functions

Apart from overseeing the monetary policies and markets, the Bank of Russia is the sole issuer of
cash and organizer of cash turnover. Like most Central Banks, it is the lender of last resort for
other banks and credit institutions to help pull them out of liquidity and crisis as well as offering
loans to high-risk institutions. It handles the foreign reserves: in the external market, Bank of
Russia manages its assets in foreign currency and gold. Their current total of international
reserves is $564.90 billion. It holds the power to issue and withdraw banking licenses. It registers
government equity securities and keeps a report on joint stock companies and securities.
However, in accordance with the legislation of the Russian Federation, it exercises the foreign
exchange control and publishes the official exchange rates of foreign currencies; thereby
implying a fixed exchange rate, which contradicts their statement of using a floating exchange
where the exchange rates against the Russian ruble is determined by free market forces. Also, it
is a depository of the IMF for ruble-denominated funds; hence, it conducts operations and
transactions with the IMF.
BoR helps the infrastructure of financial markets. They have repositories that store information
on repo agreements and derivative contracts by the over-the-counter method. The depositories
act as intermediaries for investors and issuer of security by holding securities until they give the
rights to the investor of said securities. They perform the clearing house function so that the
buyer and seller honor the contractual obligations. They store information on debt obligations of
individuals by acting as credit bureaus so that lenders can sort out the problems of moral hazard
and adverse selection. BoR has put huge emphasis on developing IT financial infrastructure which
is a major duty for the Board of Directors so that accountability and technology can improve their
system.
Lately, Bank of Russia has heavily emphasized on countering insider information and market
manipulation, particularly after the Russian involvement in the US 2016 Elections where
analysists claim that many Russians had knowledge of the events which were to take place, so
they avoided the big devaluation of the ruble and avoided one of their worst stock markets’
period. These are the gist of the duties the Central Bank of Russia performs as the rest as legal
activities pertaining to the operations of banks and financial and non-financial institution. In
2018, they set up a Situation Centre to monitor insider trading and market manipulation. The
introduction of AML/CFT/CFPWMD system helps BoR to regulate activities of credit institutions
to curb the problem of money laundering. This system also reduced the level of Money
Laundering & Terror Financing (ML/TF) to avoid strict actions by the Financial Action Task Force
(FAFT). This keeps the BoR in constant touch with the Rosfinmonitoring (Russian Federal Financial
Monitoring Service) as they verify identity of customers, spot dubious transactions swiftly. BoR
has tried to create an environment of trust in financial markets by taking strict actions on illegal
activities mentioned above to promote financial development.
Moreover, in 2014 they launched their National Payment System called Mir Payment System
which is a cashless method of payments and settlements to individuals and legal entities through
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the Mir Cards. Currently, there are over 73 million cards issued to citizens. This allows smoother
banking operations as well as an opportunity to ensure efficiency in the system. In 2019, they
introduced the Faster Payment System (FPS) which enables users to transfer fund, pay for
purchases, pay their utility bills using only their mobile numbers regardless of which bank their
account belongs to. Not only was this a popular decision, it allows BoR to monitor cashless
transactions of all banks and keep an eye on suspicious activity.
Bank of Russia’s Role to Economy

To briefly mention the goals set out by the BoR, their main target is to achieve low inflation rate
in the economy and price stability to improve the welfare of Russian citizens. Central Banks use
the Monetary Policy to address the two above mentioned issues to help the economy. Starting
with statistics, the inflation in Russia is, as of March 2020, at 2.5% and the inflation target of BoR
is 4%. This does not mean BoR wants high inflation, which contradicts the previously mentioned
target of low inflation rate; an inflation rate or target in the range of 4% to 6% means there is
economic activity in the country. There is growth, suggested by high aggregate demand of the
economy. It also means there is employment in the nation as higher economic activity leads to
new jobs for the unemployed, thus improving welfare of the citizens. The conduct of monetary
policy impacts inflation in the economy as an increase in the interest rate, or “key rate”, leads to
a series of events: it increases the cost of borrowing so borrowing in the country from banks
decrease, an individual’s real disposable income decreases which is a contractionary policy
because consumer spending in the economy also reduces. The current key rate of Russia is 6%, a
global phenomenon as almost every country is decreasing their interest rates amid the
coronavirus pandemic. Money in circulation has also increased because people need more cash
at hand than normal times, decreasing the banks’ liquidity.
Boosting the economy is a motivator for the Russia, not just the Central Bank, because they have
always cared for the proletarians and the increase in standards of living of the working/middle
class has been a deep social cause for their country so they take great measures to ensure the
welfare of citizens is prioritized.
Who Holds the Real Power?

Unlike the previous times of the USSR, Russia today claims to be a free market without
government interference and allows free trading from all over the world. Yet, all trading by
intermediaries must be approved by the Bank of Russia and by reading the BoR’s organizational
structure, one cannot help but notice the involvement of government at all stages.
The majority shareholder of Sberbank, one of Russia’s largest banks, is the Bank of Russia.
Therefore, it is one of many subsidiaries of BoR. The Moscow Exchange, which is the country’s
largest equity market has 11.75% shares held by Bank of Russia and 9.9% shares held by
Sberbank: thus, showing the influence of BoR through its subsidiaries. On the Board of Directors
of Moscow Exchange, the chairman is a former Finance Minister and Deputy Prime Minister of
Russia, a chief auditor of BoR, the Chairman of Sberbank, and the CEO of the Russian Direct
Investment Fund: a fund established by the Russian Government itself in 2011. Apart from
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subsidiaries, BoR holds majority shareholding in VTB Bank, which is Russia’s largest bank. VTB
merged with Bank of Moscow, the largest private bank of Russia at that time.
Since BoR holds major shareholding in other banks and has directors sitting at the meetings who
were formerly associated with the government and some still working for BoR, they are bound
to follow the lead of BoR. A debatable statement would be to say all Central Banks in the world
have government influence and are not purely independent bodies. Knowing Russia’s history and
its deep-rooted philosophy of Communism, they have tried to relive themselves from the Soviet
past to democratic form of government. But it can’t be helped to see the links between all the
big banks and exchanges with the BoR, which is a state-owned Central Bank. Even the 15
members of the Board of Directors who are appointed by State Duma need the Russian
President’s approval for becoming directors. Therefore, one can conclude that the real power
lies with the Russian Government, but they are trying to move towards democratic methods of
establishing the BoR as an independent body, away from the clutches of the government.
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The State Bank of Pakistan
The State Bank of Pakistan (SBP)

The State Bank of Pakistan (SBP) was incorporated under the State Bank of Pakistan Act, 1956,
which gave them the authority to function as the central bank of the country. The SBP Act
authorizes the Bank to regulate the monetary and credit system of Pakistan as well as fostering
its growth in the best national interest with a view to secure monetary stability and greater
utilization of the country’s productive resources.
Subsidiaries of the SBP

The SBP holds three fully owned subsidiaries to reinforce its functions. These subsidiaries are:
1. SBP-Banking Services Corporation (SBP-BSC): The SBP-BSC was established under the SBP-BSC
Ordinance 2001, and it assists the SBP in performing functions like the handling of currency and
credit management, facilitating the inter-bank settlement system, as well as the sale or purchase
of savings instruments of the Government on behalf of Central Directorate of National Savings.
The SBP-BSC also collects revenue and makes payments on behalf of and for the Government. It
also carries out operational work relating to development finance, management of public debt,
foreign exchange operations and export refinance. The Board of Directors of SBP-BSC, who are
chaired by the Governor SBP, comprise of all members of the Central Board of SBP and the
Managing Director of SBP-BSC. SBP-BSC comprises of 16 field offices in Pakistan with its head
office residing in Karachi.
2. National Institute of Banking and Finance (NIBAF): NIBAF provides executive development
trainings to new inductees and the various levels of SBP employees. This subsidiary also conducts
international courses on central and commercial banking in association with the federal
Government. NIBAF also offers training to SBP-BSC and other financial institutions. NIBAF was
incorporated under Companies Ordinance 1984 and has a separate Board of Directors. It is in
Islamabad with one office in Karachi.
3. Deposit Protection Corporation (DPC): The DPC has been established as a wholly owned
subsidiary of SBP under the DPC Act 2016. Upon commencement, this organization will be
responsible to provide protection of deposits of financial institutions operating in Pakistan. The
objective of DPC is to compensate the depositors to the extent of protected deposits in the event
of failure of a financial Institution member. The limits of protected deposits are to be determined
by DPC and will be announced in due time. For the intention of protecting the depositors of
Islamic Banks and branches, a separate Shariah compliant mechanism of deposit protection is set
to be put in place.
Similar to the Central Bank in any other developing country, the SBP also performs both the
traditional and developmental functions necessary to achieve macro-economic goals of the
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country. Traditional functions are classified into two groups: (a) the primary functions which
include the issuing of notes, regulation and supervision of the financial system, bankers’ bank,
lender of the last resort, banker to Government, and conduct of monetary policy, and (b) the
secondary functions which consist of agency functions such as management of public debt,
management of foreign exchange, and other functions which involve advising the government
on policy matters and maintaining close relationships with international financial institutions. The
non-traditional or promotional functions, on the other hand, are performed by the State Bank
and they involve services such as development of financial framework, institutionalization of
savings and investment, provision of training facilities to bankers, and provision of credit to
priority sectors. The State Bank has also played an active part in the islamization of the banking
system. The main functions and responsibilities of the State Bank are stated under the following:
Regulation of Liquidity
As it is the Central Bank of the nation, SBP has been trusted with the responsibility to formulate
and conduct monetary and credit policy in a manner consistent with the Government’s targets
for growth and inflation and the recommendations of the Monetary and Fiscal Policies Co-
ordination Board with regard to the macro-economic policy objectives. The basic objective of its
functions is two-fold i.e. the maintenance of monetary stability, thereby leading towards the
stability in the domestic prices, as well as the promotion of economic growth. To regulate the
volume and the direction at which the credit flows to various users and sectors, the Bank utilizes
both direct and indirect instruments of monetary management. Until recently, the monetary and
credit scenario was portrayed by acute segmentation of credit markets with all the attendant
distortions. Pakistan began a program of financial sector reforms in the late 1980s. A number of
necessary changes have since been made in the way monetary management is conducted which
essentially marked a move away from administrative controls and quantitative restrictions to
market-based monetary management. A reserve money management program has now been
developed. In the views of the program, the intermediate target of M2 would be achieved by
observing the desired path of reserve money which is the operating target. While indirect
instruments of control like the cash reserve ratio and liquidity ratio are now in use, the program’s
reliance is mainly on open market operations.
Ensuring the Soundness of Financial System

Regulation and Supervision
One of the main responsibilities of the State Bank is regulation and supervision of the financial
system to ensure that its soundness and stability are intact and are working to protect the
interests of depositors. The rapid advancement in information technology, combined with
growing complications of modern banking operations, has made the supervisory role even more
difficult and challenging. The institutional complexity is rising, technical sophistication is
improving and technical base of banking activities is growing. All this requires the State Bank to
work hard in order to keep pace with the fast-changing financial landscape of the country.
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Accordingly, the outdated inspection methods have been replaced with the new ones to have
better inspection and supervision of the financial institutions. The banking activities are now
being observed through a system of ‘off-site’ surveillance and ‘on-site’ inspection and
supervision. Off-site surveillance is conducted by the State Bank through regular examining of
various returns regularly received from the different banks. On the other hand, on-site inspection
is undertaken by the State Bank in the premises of the concerned banks when needed.
Exchange Rate Management and Balance of Payments
One of the most fundamental responsibilities of the State Bank is the maintenance of external
value of the currency. To accomplish this the Bank is required, among other measures taken by
it, to regulate foreign exchange reserves of the country in line with the stipulations of the Foreign
Exchange Act 1947. As an agent to the Government, the Bank has authority to purchase and sell
gold, silver or any other approved foreign exchange and transactions of Special Drawing Rights
with the International Monetary Fund under sub-sections 13(a) and 13(f) of Section 17 of the
State Bank of Pakistan Act, 1956.
The Bank is responsible to maintain the exchange rate of the rupee at a suitable level and prevent
it from high fluctuations in order to maintain competitiveness of our exports and keep stability
in the foreign exchange market. To achieve this objective, numerous exchange policies have been
implemented keeping in view the prevailing situation. In 1971, till September, the Pak-rupee
continued to be linked to Pound Sterling and subsequently to U.S. Dollar. However, it was decided
to embrace the managed floating exchange rate system w.e.f. January 8, 1982 under which the
value of the rupee was determined on daily basis, with reference to a variety of currencies of
Pakistan’s major trading partners and competitors. Adjustments were made in its value as and
when the circumstances deemed fit. In due course, an important development occurred when
Pakistan accepted obligations of Article-VIII, Section 2, 3 and 4 of the IMF Articles of Agreement,
thereby making the Pak-rupee convertible for current international transactions with effect from
July 1, 1994.
In 1998, after nuclear detonation by Pakistan, a two-tier exchange rate system was introduced
from 22nd July 1998, with the aim to decrease the pressure on official reserves of the country
and prevent the economy from unfavorable implications of sanctions imposed on Pakistan to an
extent. Since 19th May 1999, however, the exchange rate has been unified, with the introduction
of market-based floating exchange rate system, through which the exchange rate is determined
by the supply and demand positions in the foreign exchange market. The surrender requirement
of foreign exchange receipts on account of exports and services, previously had to be made to
State Bank through authorized dealers, but now this has been scrapped and thus commercial
banks and other authorized dealers have been allowed to hold and undertake transaction in
foreign currencies.
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As the curator of the country’s external reserves, the State Bank is also responsible for managing
the foreign exchange reserves. The task is performed by an Investment Committee which, after
taking into account the overall level of reserves, maturities and payment obligations, takes
appropriate action to make investment of surplus funds in such a way that it ensures liquidity of
funds in addition to maximizing the earnings. These reserves are also being used for intervention
in the foreign exchange market. For this purpose, a Foreign Exchange Dealing Room has been set
up at the Central Directorate of State Bank of Pakistan and services of a ‘Forex Expert’ have been
obtained.
Developmental Role of State Bank
The duty of a Central Bank in a developing country goes well beyond the regulatory duties of
managing the monetary policy in order to attain the macro-economic goals. This role covers not
only the development of important aspects of monetary and capital markets but also to facilitate
the process of economic growth and promote the more efficient utilization of a country’s
resources. Ever since the creation of the State Bank of Pakistan, aside from discharging its
traditional roles of regulating money and credit, has played an active developmental role to
encourage the realization of macro-economic goals. The explicit acknowledgment of the
promotional role of the Central Bank evidently comes from a desire to re-orientate all policies
towards the goal of rapid economic growth. Accordingly, the orthodox central banking functions
have been united by the State Bank with a well-recognized developmental role.
The scale of SBP’s operations has been increased considerably by including the economic growth
goal in its statute under the State Bank of Pakistan Act 1956. The Bank’s involvement in the
development process has been in the shape of rehabilitation of banking system in Pakistan,
development of new financial institutions and debt instruments in order to promote financial
intermediation, establishment of Development Financial Institutions (DFIs), directing the use of
credit according to selected development priorities, providing subsidized credit, and
development of the capital market.
Governance
The Board of Directors
The State Bank of Pakistan is governed by an independent Board of Directors, which is
responsible for the general management and direction of the affairs of the Bank. The Board is
chaired by the Governor SBP and consists of 8 non-executive Directors and Secretary Finance to
the Federal Government. Non-executives Directors of the Board are appointed by the Federal
Government for a 3-year period.
Monetary Policy Committee (MPC): Monetary Policy Committee of the State Bank of Pakistan is
an independent body with the purpose of formulating the monetary policy of the SBP. More
importantly, MPC determines the policy interest rate of the SBP and approves the Monetary
Policy Statement. MPC comprises of ten members: The Governor (Chairman), three members of
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the Board, nominated by the SBP Board, three senior executives of the SBP, nominated by the
Governor, and three External Members (economists) appointed by the Federal Government on
recommendation of the SBP Board. The External Members are appointed for a term of three
years.
Management of the SBP
The Governor SBP is the Chief Executive Officer (CEO) of the Bank and on behalf of the board of
directors, manages the affairs of the Bank. The Governor is appointed by the President of
Pakistan for a period of three years which can be renewed once. He is assisted by one or more
Deputy Governors appointed by the Federal Government for a period not more than five years.
In addition to the Governor and Deputy Governors, the management hierarchy includes
Executive Directors, Chief Economic Advisor, and Directors of various departments.
The hierarchy for SBP is also shown on the following page:
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Role of SBP Towards the Development of Economy of Pakistan

The State Bank of Pakistan has a crucial role in the development of the economy of Pakistan.
This statement is evident from the following facts:
Issuance of Notes
The SBP is the only source in issuing the currency notes for the country. The denominations of
rupee notes include 10,20,50,100,1000,5000. The SBP has three offices of issue which are located
in Karachi, Peshawar and Lahore.
Banker to the Government
The SBP is the bank of both the federal and provincial governments of Pakistan. It performs for
the Government in the following manners:
• It issues new notes on the Governments' behalf

• It accepts the cheques and drafts from the Government
• The State Bank of Pakistan has the responsibility of transferring the funds of Government
at both local and international levels.
• The bank must arrange the public debts of both the provincial and federal Governments.
• It works for the Government at a rate of zero commission.
• The bank holds the government securities of the federal as well as the provincial.
• The bank has the liability to pay the salaries as well as the pensions of the employees of
the Government of Pakistan.
Banker's Bank
The SBP is also the bank of all the commercial banks that are operating in the country. The SBP
had invested USD 24 million in 2002 for the development, data warehousing and networking
growth in the banking industry of Pakistan with the assistance of the World Bank. It acts the
lender of last resort if any commercial bank needs loan and is not able to manage the loan from
other commercial banks. The SBP strictly regulates all the commercial banks as they have the
deposits of the public that needs to be taken care of. The SBP also has the right to sell, purchase
or hold the debentures of any bank or even a financing corporation.
Clearing House
The SBP acts as the clearing house for the commercial banks and show their financial position. It
helps in decreasing the excessive usage of cash and allows the banks to settle off their interbank
transactions. This way, the competition between the bank is also controlled which could be
proven harmful otherwise.
Advisor to Government
The SBP helps the Government of Pakistan in the matters of economy and finance and advises
them on these issues. It assists in the regard related to many credit schemes and reports the
Government about the fiscal and monetary situations of the economy. Moreover, it helps the
Government in making various investment decisions.
Page | 33
Controller of Credit
In 1972, a national credit consultative council was formed for monitoring and controlling credit.
The investments and credit are a very crucial variable in terms of economy. The SBP facilitates in
these investment and credit. For this purpose, the SBP has taken the following measures and
formed these tools to control credit.
Bank Rate Policy
Open Market Operation
Changes in Reserve Ratio
Moral Persuasion and Publicity
Changes in Liquidity Ratio
Changes in Margin Requirements
Economic Growth
The bank has been playing a vital role in the growth of the banking infrastructure in the country.
It helps the development of the capital market in Pakistan. It guides the Government in the
development plans and assists them on how they could reduce poverty through different
programs. The GDP growth rate also depends on the policies set by the State Bank of Pakistan.
Growth of Credit Institutions and Money Market
It created an atmosphere for the growth towards credit institutions. These institutions are much
significant for meeting both short- and long-term credit needs of the various sectors belonging
to the economy. These institutions include HBFC, ICP, NDFC, EPF, NIT, IDBP & ZTBL etc. The SBP
has to give much importance in the flourishing of the money market because the growth in
economy would not be possible if the growth of money market is ignored.
Value of Rupee
The SBP has the utmost responsibility of overlooking the value of rupee internationally. It is the
main controller of the rate of exchange. Initially, the Pakistani rupee was linked to the UK Pound
but after 1971, it got linked to the US Dollar.
Special Funds for Development
The primary aim for the SBP is not to earn profits but rather to allocate those profits in the
establishment of different funds for the progress in economy and prosperity. E.g., the Rural Credit
Fund was established in 1961 while the Export Credit Fund was formed in 1972.
Debt Management
The SBP has to make all the necessary arrangements on the behalf of the Government of the
country for taking loans from IMF, WB, ADP, etc. for the development of the country.
Page | 34
Foreign Exchange Reserves

The SBP has the custody of gold, silver and foreign exchange reserves. It has placed regulations
for foreign exchange reserves in accordance with the Foreign Exchange Act 1947. Pakistan has a
shortage in these reserves due to which the Government has to take loans from the IMF more
often.
Exchange Centre
The SBP has allowed some commercial banks and issued them licenses to hold foreign currency.
They are also permitted to deal in the foreign exchange at the rates that are authorized.
International Relations
The SBP has to maintain its relations with financial institutions at international level. These
include IMF, WBG, ADB, etc. It makes negotiations with such institutions on behalf of Pakistan
and signs different contracts.
The SBP also collects daily information, both local and international, and publishes a report on
annual basis and helps in making future economic plans for the betterment of the country and in
the hope of making a better and prosperous Pakistan. Hence, the SBP is the backbone for
managing the economic and financial matters of Pakistan.
Page | 35

Financial Crisis

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Financial Crisis

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Financial Markets and Institutions - 1940

TO BE ONLY USED FOR INFORMATION

Branches and Linkages .............................................................................................................. 18

Issuance of Notes .................................................................................................................. 33

The Reserve bank of Australia

Main Types of Financial Institutions

• Authorized Deposit-taking Institutions (ADIs)

Role of the Reserve Bank in Maintaining Financial Stability

The Bank of England

Structure of Bank of England

About the Governor

Role of Bank of England in Economy

Financial Conduct Authority

The Reserve Bank of India (RBI)

(From Ministry of Finance)

Branches and Linkages

Regulator and supervisor of the financial and banking system

RBI and the Economic Growth of India

GDP Growth and Nominal GDP

National Financial Board & Board of Directors

Duties and Functions

Bank of Russia’s Role to Economy

Who Holds the Real Power?

The State Bank of Pakistan (SBP)

Subsidiaries of the SBP

Ensuring the Soundness of Financial System

The hierarchy for SBP is also shown on the following page:

Role of SBP Towards the Development of Economy of Pakistan

• It issues new notes on the Governments' behalf

Foreign Exchange Reserves

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