Central Bank financial policy

instruments and their impact to CBs

(Commercial Banks)
 Content
• Banking systém
• Central bank
• Commercial bank
• Monetary policy
• Policy instruments
• Interest rates
• Open market operation
• Capital and Reserve requirements
• Example of reserve requirment regulation
• References
 Banking system

Two tier banking system

• Central Bank
• Commercial banks
 Central Banks
• implementation of monetary policy
• supervise the other banks
• provides for the exchange rate
• emits (gives) cash (notes and coins)
• provider of accounts for commercial banks
• keep an account of the state budget
• manage foreign exchange reserves

Instruments of central bank:

• open market operation

• bank reserve requirement
• interest rate policy
 Commercial bank
• business entities makes business for profit
• controlled by central bank or state agency

• deposit services
• landing operation
• money transfer
 Monetary policy

instrument of economic policy controlled by

central bank

Goals
• Keeping price stability
• Support economy growth
• Interest rate stability
• Stability of foreign exchange market

Expansionary policy increasing money

supply
Restrictive policy decreasing amount of
money supply
 Policy instruments

• Interest rates
• Open market operations
• Capital requirements
• Reserve requirements
 Interest rates

• Express condition for landing from central

bank and between commercial banks

• Marginal landing rate – cost of landing from

central bank
• Deposit rate – rate from storing money to
central bank
 Open market operation
Direct influencing of amount of money in
economy by buying securities

– Temporary lending of money for collateral

– Buying or selling securities
– Foreign exchange operations
Capital requirements

• Obligation upon the banks to maintain a certain percentage of their assets as

capital
• The percentage to be followed by commercial banks is set by the central bank

Reserve requirements
• Banks are required to keep a percentage of their deposits as reserves
• Indicator for measuring amount of physical money in economy
• Expressed in banking terminology, is real money M1 and M2 component of
banking system

M1 = Physical currency + demand deposits

M2 = M1 + small time deposits, savings deposits, and non-institutional money-market
funds
Example of reserves requirment
 References
Books
• HLADÍK, René. Ekonomie : základní kurz (pro bakalářský stupeň vysokých škol). 2. vydání. Nové
Město nad Metují : RENECO, 2006. Peníze a bankovnictví, p. 153-159. ISBN 80-86563-11-1.
WWW
• Česká Národní Banka [online]. 2011, 27. february, 2011 [cit. 2011-02-27]. www.cnb.cz. Available
from WWW: <cnb.cz/cs/o_cnb/>.
• Obchodní banky a jejich podnikání [online]. 2011, 27. february, 2011 [cit. 2011-02-27].
www.cnb.cz. Available from WWW: <
http://www.ceed.cz/makroekonomie/22_obchod_banky.htm
• Monetarni politika [online]. 2011, 27. february, 2011 [cit. 2011-02-27]. www.cnb.cz. Available
from WWW: < http://www.ceed.cz/makroekonomie/16_monet_politika.htm
• Wikipedia contributors. Central bank [Internet]. Wikipedia, The Free Encyclopedia; 2011 Mar 18,
09:36 UTC [cited 2011 Mar 18]. Available from: http://en.wikipedia.org/w/index.php?
title=Central_bank&oldid=419437985.
• Deposit interest rate (%) [online]. 2011, 27. february, 2011 [cit. 2011-02-27]. www.cnb.cz.
Available from WWW: < http://data.worldbank.org/indicator/FR.INR.DPST
• Functions of Commercial Banks [online]. 2011, 27. february, 2011 [cit. 2011-02-27]. www.cnb.cz.
Available from WWW: < http://www.nios.ac.in/srsec319/319-33.pdf
• Functions of Commercial Banks [online]. 2011, 27. february, 2011 [cit. 2011-02-27]. www.cnb.cz.
Available from WWW: <
http://www.finance.cz/ekonomika/informace/mena-a-penize/monetarni-politika/