The Role of Central Banks in Monitoring and Regulating Economies
The Central and commercial banks play a major role in improving any economy. Here are some of the roles that most Central Banks and Commercial Banks play in different countries.
Monitoring and Regulating Interest Rates
The Central Bank monitors and regulates the interest rates of an economy. It does this through regulating the interest rates that it offers to the commercial banks when they borrow from it. By charging high interest rates to these banks, the banks pass on even higher rates to their customers when they come seeking loans from them. Changing interest rates have huge effects on the economy of a country. High interest rates have the effect of lowering the economic activity of a country and lowering the inflation rates. Low interest rates have the exact opposite on the economy by increasing the economic activity and increasing the inflation rates. Through these variations in interest rates the central and commercial banks are able to facilitate a good atmosphere that helps a country improve its economy.
Creation of Capital
Banks have helped in the creation of capital from the deposits brought in by individuals and the companies who are their clients. These deposits are available to other businesses and individuals to borrow for productive purposes. They also offer financial services to the entrepreneurs for risky business ventures that other financial institutions are not able to offer due to their risky nature. They provide short and medium loans to such ventures and this helps to improve the production capacity of an economy by facilitating the creation of new enterprises.
Central banks are heavily involved with the commercial bank system. They perform various services for the banks such as interbank payments. In most countries the interbank payments must pass through the central bank, or through a clearing organization that has links to the central bank, or provides reports to it. The Central Banks also carry out swap arrangements between banks. These arrangements are done at the spot price and they also involve banks with assets denominated in foreign currencies or cash. This ensures fast and efficient services within banks and faster trading that ends up attracting and improving the economic activity of the country.
Regulating Statutory Requirements
The Central Bank in most countries also regulates the statutory requirements of the banks that are present in the country. They decide the requirements that a bank needs to attain before a bank is formed or the statutory requirements that banks need to fulfill to continue in business. All these measures are put up to ensure that the economy is not affected by banks collapsing or being bankrupt. The bank monitors the activities of the owners of banks and their licenses and supervises their operations and their liquidity. This is to ensure that the banks are stable and minimize illegal business and fraud. It also lends to the banks in cases of bankruptcy, as a last resort.
By altering banking policies, the Central Bank is able to regulate the amount of money that is in the financial market and in supply. It may increase the reserve requirements that the banks need to have at the Central Bank and therefore reduce the amount of money in circulation. All banks are required to deposit a certain amount of money with the central bank to ensure their stability and the stability of the economy. This also allows the Central Bank to reduce or increase inflation rates appropriately. By increasing the reservation requirement it reduces the amount of money therefore reducing inflation and vice versa to increase inflation.
Introduction of Virtual Banking
Banks in today’s world have introduced the element of virtual banking. This allows individuals, businesses and companies to gain the banking services through the use of information technology, without direct recourse to the bank itself. Internet banking has also been developed, together with other virtual banking services such as automated teller machines (ATM’s), phone banking etc. All these have helped make the banking services fast, efficient and reliable all over the world. The commercial banks have utilized these services enhancing trade and other financial services between countries with ease, and increasing economic activity within the country.
The Central Banks also regulates the capital and the resources that the bank has and owns. The Banks require that the commercial banks maintain a certain level of capital to ensure that the bank is stable. The banks are also required to maintain some levels of resources within their stocks.
Regulating Personal Loans
The Central Bank also has a say in the amount of loans that the banks should give to individuals. These loans referred to as the personal loans are normally secured by salaries and end of service benefits, or any other regular incomes that an individual obtains away from employment.