CZECH UNIVERSITY OF LIFE SCIENCES

PRAGUE
INSTITUTE OF TROPICS AND SUBTROPICS

Banking and financing

Central banks

Prague, 2012
 Table of Contents

Table of Contents 2

1. Introduction 3

2. Function of central bank 3

2.1. Monetary policy of central bank 4

3. Czech National Bank 4

4. European Central Bank 5

5. Central banks in developing countries 7

6. Conclusion 8

References 9
1. Introduction

Nowadays, central banks have been powerful more than ever. The instrument of
monetary policy have changed; today more importance is attached to the transparency
of the Bank´short – and mid-term objectives, more than intermediate targets. Monetary
policy has become the main tool of macroeconomic stabilization and in many countries
it is in the hands of an independent central banks.

2. Function of central bank

There are certain objectives in monetary policy – output stability, low inflation, external
balance and instrumets which influence bank reserves or short-term interest rates. The
central bank is forced to strike a balance among these objectives. The central bank
manages the currency of given state with the exception of the Eurozone countries -
where the European Central Bank tooks over this role, oversees the activities of
commercial banks providing them with loans, and also license and all conditions for the
activities of commercial banks. Keep an account of the state budget.
Central bank also monitors the amount of money (issued and withdraws money from
circulation, the amount of money in circulation also affects the issue or purchase bonds),
manages the reserve, gold and foreign currencies. The main tool is the determination of
bank interest rates, by deriving rates by commercial banks.

There other functions of a central bank:

* Implementation of monetary policy
* Performs banking supervision over the other banks
* Sets the exchange rate
* Emits banknotes and coins in circulation
* Commercial banks in the accounts have their
* Keep an account of the state budget
* Manages the foreign reserves

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2.1. Monetary policy of central bank

Monetary policy is a regulation of the amount of money in the economy for certain goals,
foremost of which is promoting stability in the price level. It may not be the only goal,
however, the other would be: to promote economic growth, promote employment,
exchange rate stability, etc. However, these objectives can in the short term to get to
mutual contradictions in the sense that their achievement may require contradictory
solutions. In these cases, there must be a preference that one or more goals at the
expense of other goals.

Central banks´ monetary policy can divide into folowing groups:

• restrictive monetary policy, which slows down the growth rate of money supply
• neutral monetary policy as a stabilization of the "reasonable" rate of growth of money
supply
• expansionary monetary policy increases the growth rate of money supply

Objective of monetary policy and monetary policy charakter:

- Internal stability of the currency - the fight against inflation → restrictive or neutral
character
- Promotion of economic growth → expansion character
- Employment support → expansion character
- Balance of current account deficit → restrictive or neutral character
- Stability of exchange rate → restrictive or neutral character
- Stabilization of interest rates → neutral character
- Stability of financial markets → neutral or expansionary character

3. Czech National Bank

CNB is the central bank of the Czech Republic and the supervisor of the financial market.
Its headquarters in Prague. It is established by the Constitution of the Czech Republic. It
has the status of a public entity based in Prague. Competences conferred upon it by the
administrative authority to the extent provided by law. Independently and with due

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diligence of assets entrusted to it by the state. In its activities are only permissible under
the law. The supreme governing body of the CNB Bank Board, whose members are the
governor, two vice-governor and four members of the board.

All board members appointed by the President for six years. Its main objective is to
maintain price stability. Achieving and maintaining price stability, ie low-inflation
environment in the economy, is a permanent contribution to the central bank to create
conditions for sustainable economic growth. Prerequisite for the effectiveness of
monetary instruments to price stability the central bank independence. CNB also
supports the general economic policies of the Government, unless the secondary
objective in conflict with the main objective.

In line with its primary objective, the CNB determines monetary policy, issues banknotes
and coins, circulation control, payment and clearing banks, supervises the banking
sector, capital market, insurance, pension funds, credit unions, electronic money
institutions and foreign exchange supervision. As a central bank CNB provides banking
services for state and public sector. Keep the accounts of organizations connected to the
state budget, which are: financial and customs offices, Czech Social Security
Administration offices, organizations, state funds, accounts linked to the budget of the
European Communities, etc. Based on behalf of the Ministry of Finance carries out
operations associated with government securities .

4. European Central Bank

European Central Bank was founded in Frankfurt in Germany in 1998. Its primary
function is to manage the Euro and maintain price stability in the European Union. The
ECB is also responsible for the development and implementation of economic and
monetary policy. The European Central Bank is working with central banks in all 27 EU
member states. Together they form the European System of Central Banks (ESCB). It
also develops a close cooperation between central banks of the euro area countries,
which consists of 17 Member States that have adopted the euro. Cooperation of this
smaller group of banks and semknutější is called the Eurosystem.

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The European Central Bank has two major functions. Firstly, it takes care of price
stability (to keep inflation at low levels), especially in countries that use the Euro.
Secondly, the bank maintains the stability of the financial system to ensure proper
supervision of financial markets and institutions

The ECB's main tasks include: main set interest rates prevailing in the Euro area and
control the money supply, manage the foreign reserves of the euro area and buy or sell
currencies, if necessary to maintain exchange rate stability. It adequately assists the
member states' supervisory authorities of financial markets and institutions and assist
the smooth operation of payment. The bank also allow the central banks in the euro area
countries issue Euro banknote. Moreover, it monitors price developments and assess the
risks to price stability.

The main bodies of Central European Bank are the Executive Board, the Governing
Council, the General Council and President. The decision-making bodies of the ECB
include the Executive Board, which oversees the daily operations of the bank. It consists
of six members; one President, one Vice-President and four other members. They are
appointed for a term of eight years the leaders of the eurozone countries. The Governing
Council determines the monetary policy and setting interest rates at which commercial
banks can obtain money from the central bank. Sit in the members of the Executive
Board of the ECB and central bank governors of 17 states eurozone. The General Council
shall contribute to the advisory and coordinating the activities of the ECB and helps new
countries to prepare for entry into the eurozone. The Board meets the president and
vice president of the ECB and national central bank governors of all 27 EU member
states.

European Central Bank is the independent body. Neither the ECB nor the national
central banks of the Eurosystem, nor any member of their decision-making bodies can
ask for or accept instructions from any other authority. This principle shall comply with
all EU institutions and national governments.

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5. Central banks in developing countries

The central bank in developing country has wider role than in developed economies.
The central bank has responsibility for economic growth and stability in country´s
economy. In case of not well-organised capital and money markets, the central bank has
to develop the financial and banking system of given country. The traditional objectives
of central bank in developing country are: note and coins issue, servá ny as bankers´
bank and bank to government, lender of the last resort, the credit controller and
regulator and external stability. The central bank should also support the economic
growth which requires sufficient financial resources. The bank may provide credit or
funds for investment in the public sector which supports the economic growth of the
developing country. The other objective of central bank is to maintain internal price
stability by adopting such a monetary policy that may control inflation and ensure price
stability.
The economies of developing countries do not have often well developed banking
system so the bank should not hesitate undertaking the commercial banking functions.
Unfortunately, the commercial banks concentrate their branches predominantly in
urban areas. The central bank should support the branch support in rural areas as well.
Other aim of central bank in developing countries should be development of leading
sectors of the economy such as industry, agriculture and foreign trade. To contribute
their expansion and growth the specialised financial institutions should be founded
which would provide them term-loans to these sectors. One of the problems in banking
sector in developing countries is the lack of trained staff. That is the reason why the
central bank should provide training facilities and asistence to support the education of
the stuff in bank sector. To influence the direction of investment in given country, the
central bank may help in founding a suitable interest rate structure. By adopting
different interest rates, the bank may decrease uproductive investments and on the
other hand it may support productive investments.

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6. Conclusion

Central banks are independent institutions which have an important role in their
countries, especially in developing countries. The main objectives of central bank are
bank and notes issue, output stability, low inflation, external balance and instrumets
which influence bank reserves or short-term interest rates. In developing countries, the
central bank play much more wider role than in developed economies. Besides its
traditional role it should support economic growth, internal stability, develop the
banking system, to expand bank brach, develop financial institutions or contribute to
training of stuff. The role of central banks in each state is negligible. Moreover, it can
significantly affect the domestic economy in times of economic crisis, which is a very
timely topic for today.

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References

Česká Ná rodní Banka. O ČNB. [online]. [cit. 2012-03-30]. Accessible at:

http://www.cnb.cz/cs/o_cnb/

CUKIERMAN, Alex (1998). Central Bank Strategy, Credibility and

Independente. [online]. [cit. 2012-04-03]. Accessible at:
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Evropská Centrá lní Banka. ECB, ESCB a Eurosystém. [online]. [cit. 2012-03-
29]. Accessible at: http://www.ecb.int/ecb/orga/escb/html/index.cs.html

GOODHARD, C.A.E. (1995). The Central Bank and The Financial System.
[online]. [cit. 2012-04-03]. Accessible at: http://books.google.cz/books?
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MIZEN, Paul (2003). Central Nankiny, Monetary Theory and Practice.

[online]. [cit. 2012-03-30]. Accessible at: http://books.google.cz/books?id=j5pg-
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TOBIN, James (2000). Some Thoughts on Central Banking in Developing

Countries: The Art of Central Banking and its Prospective Challenges.
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