1. What are the objectives and functions of Central Banking?

The Central Bank is responsible for administering the monetary, banking, and credit
system of the country. It has been given the task of attaining the following principal
objectives:

1. Primarily to maintain internal and external monetary stability in the Philippines, and
to
preserve the international value of the peso and its convertibility into other freely
convertible currencies; and
2. To foster monetary, credit, and exchange conditions conclusive to a balanced and
sustainable growth of the economy.

Functions of a Central Bank

1. It is a bank of issue. A central bank has a complete monopoly of note issue, although
there are still very few central banks which do not enjoy such privilege. The main
reasons
for granting the central bank the sole power to issue notes are: (1) to ensure uniformity
in
money, (2) to effect government supervision over money supply, (3) to give prestige on
the
central bank, and (4) to become a good source of profit for the government. Our own CB
prints money for our use. However, caution must be observed as overprinting can lead
to
inflation.
2. It is the government's banker, agent and adviser. As a government's banker, the
central bank conducts the banking accounts of government agencies and
instrumentalities.
It pro vides foreign exchange to the government for the importation. of goods and
services,
and for payment of foreign loans. In case foreign exchange (like dollars) is not available
in
the country, the central bank has to borrow from international financial institutions such
as
the World Bank and the International Monetary Fund.
As agent of the government, the CB performs a variety of financial services for the
former.
The central bank lends money to the government, buys and sells securities, administers
and manages national debts, and acts as the government's agent when there is
exchange
control. And as financial adviser to the government, the central bank informs the top
officials
of the government, like the President and the finance minister, about the monetary and
financial conditions of the country.
3. It is the custodian of the cash reserves of banks. This is the legal reserve requirement
imposed on the deposit liabilities of banks. They are required to deposit at the central
bank
a certain percentage of their bank deposits as a means of con trolling money supply.
When
there is oversupply of money which creates inflation, the legal reserve requirement is
higher.
In the Philippines, for instance, to cut down liquidity or too much money in circulation,
the
legal reserve requirement has been raised to 24%. This means that for every one peso of
their deposits, they can only lend 76 centavos. Bank officials are not happy about this
monetary policy because their cash reserves at the Central Bank earn only 3% interest.
Their millions of pesos can earn more if these are loaned out to investors businessmen.
But
the national interest takes the priority. Such cash reserves, aside from regulating money
supply, can be utilized during periods of financial crises.
4. It is the custodian of the nation's reserves of international currency. During the early
years of central banking, a central bank was required by law to maintain minimum
reserves
of international currency against its note issue and deposit liabilities (cash reserves of
commercial banks). When many countries were under the gold monetary standard (until
1914), a central bank had to keep sufficient gold to be able to pay its notes (paper
money)
which would be presented for payment. This means the money in circulation was
supported
by an equivalent amount of gold. At present, international reserves refer to gold and
foreign
exchange. In the Philippines, the acceptable foreign exchange are the US dollars, the
Swiss
francs, the Japanese yen, the German mark, and the British pound.
The purposes of keeping gold and foreign exchange are to meet problems in balance of
payments and to maintain the external value of the local currency. Evidently, a central
bank
which can meet its local and international payments can create confidence in the local
money both at home and abroad.
5. It is a bank of rediscount and lender of last resort. The central bank's function as a
lender of last resort came from the rediscounting function. The CB has the duty to assist
banks in distress. However, it lends funds to other banks only if they have exhausted all
other available sources and methods of solving their financial problems. This function is
associated with rediscounting in which the central bank lends money to the banks in
distress
on the basis of their promissory notes or those of the borrowers (loan applicants). The
central bank charges interest on its loans to the banks. This is called rediscounting
because
the documents of indebtedness of loan applicants which are presented to the central
bank
are promissory notes that were discounted by the bank when it granted the loans to the
applicants.
6. It is a bank of central clearance and settlement. settlements among banks are easier
and more convenient if these are performed by a central bank. Various banks have paid
cash to many checks owned by other banks. To obtain payments, the banks just send
their
representatives the Clearing House at the central bank where claims are demanded
against
one another. The banks have their individual boxes at the Clearing House. All checks
placed
in the boxes are payables to the banks which cashed them. For example, the
representative
of bank B has the check of bank A. He has to place the check of bank A in the box of
bank
A. This means bank B demands payment from bank A. Through the process of
bookkeeping
(debit and credit) bank's claims against one another are settled. The deposit reserves
maintained by the banks at the Central Bank serve as the basis for the clearing of checks
and the settlement of interbank balances.
However, in the case of checks issued and cashed by banks within Metro Manila,
clearing
of checks is conducted by the Philippine Clearing House Corporation. This is a private
firm
conducting its operations on the ground floor of the Central Bank building in Manila. The
processing, sorting, and clearing of checks are done by computers. The clearing of
checks
however, between provincial banks and Metro Manila banks is done manually. Checks
are
placed at the boxes of banks at the Manila Clearing/Regional Clearing Unit of the Central
Bank. In Cebu, Davao, and Bacolod Clearing Units, the banks pick up "On Region" checks
at 9:00 A.M. and deliver "On Manila" checks. In Manila, banks deliver "On Region"
checks
at 4:00 P.M.
7. It controls credit, The central bank has to control credit in order to regulate money
supply at an acceptable level. More money supply in relation to production of goods
means
high prices. On the other hand, when prices are low, producers are not encouraged to
produce more. This is the law of supply. However, if low prices are the results of market
competition and technology, then the economic situation is favorable
 2. Create a real-life situation that demonstrates the importance of a central bank.

A situation in which a nation suffers an unexpected economic downturn as a result of a

worldwide financial crisis. Similar to what we witnessed with COVID19, businesses are having
trouble, unemployment is on the rise, and banks are experiencing a liquidity crisis. The central
bank acts in this scenario by decreasing interest rates, adding liquidity to the banking system,
and putting policies in place to stabilize the economy. These steps demonstrate the crucial
function of a central bank in times of crisis and help to restore trust, boost borrowing and
investment, and stop a further collapse of the economy.