few pages about the central banks

1. Central Bank
Introduction: Central bank is the most important
monetary and banking institution in any state. It is at the top of
the banking system as it has the authority of imposing, directing
and controlling the monetary and credit policies. Also, it has the
authority of issuing the banknotes. In co-operation with the
economic authorities, central bank also put economic, financial,
monetary and banking policies. In addition, it is regarded as the
economic and financial state's advisor, besides keeping and
controlling the national currency, therefore, the central bank is
regarded as the back bone and basis of the banking system in
the national economy.
1Section
1# Origin
2# Nature and Characteristcs
3# Definition

2. The central bank arises at first as commercial bank in a lot
countries in the world. Generally, it arises as a result of the
monetary and banking development internationally and locally
in particular. So, it has some special qualities and names in each
state according to the characteristics, circumstances and
development of each country. There are 4 central banks all over
the world have different names and they are;
In USA --) Federal Bank
In France --) Bank of France
In Russia --) Bank of estate
In England --) Bank of London
However, there are some characteristics in all central banks in
each state that concern;
(1) Its nature
(2) Its ownership (by the state)
(3) Issuing and releasing banknotes.
(4) Participating in the basic functions in the national economy.
(5) Its Control of credit.
(6) Advisor of state.
(1) According to its aim:
1# Origin
Nature and Characteristics

3. Central bank: It aims to achieve a group of national,
economic and political goals which include; (1) putting basis of
monetary and banking policies that leads to the monetary
stability and maintaining the national currency and (2) linking
the monetary and banking policy with the state's public
economic policy. Achieving profits are regarded as a secondary
aim.
Commercial bank: it aims at achieving the maximum
possible profits.
(2) According to the nature
of clients:
Central bank: it does not deal with individuals, except in rare
cases, but it deals with functional characteristics not as
individuals.
Commercial bank: it deals with all clients either they are
natural or moral persons.
(3) According to the nature
of operations:
Central bank: its jobs are; (1) the control of credit
(2) Putting the basis of the monetary and banking policy

4. (3) It is regarded as the bank of banks.
Commercial bank: its jobs are; (1) Accepting deposits from
individuals. (2) Discounting commercial papers. (3) Granting
operations.
(4) According to the
ownership:
Central banks: They are often publicly owned by the state.
In some countries they take the form of a joint stock company,
where the state owns the majority of its shares to carry out the
economic and control functions.
Commercial banks: They have individual properties.
(5) According to the bank
administration:
Central banks: they are usually owned by the state as it acts
as one of the state's instruments in performing its monetary and
banking policy. Also, it participates in contracting conventions
and agreements besides representing the state in many various
negotiations and conventions. They have the full independency

5. from the state to put or impose economic, banking and financial
policies. (art.88 year2003).
There are many definitions for central bank;
1# it is the monetary and banking institution that represents the
top of the banking system and its basic pillar that it has a public
legal personality and it has its own independency in spite of its
ownership to the state.
2# it is the institution or organization that issues the banknote
controlling the banking system, managing, directing and
controlling the monetary and credit policy.
3# it is the institution that aims at achieving monetary and
economic stability in the general policy frame of the state.
Section 2
The functions of the central
bank
(1) Issuing banknotes.
(2) The bank of state (the state bank).
(3) The bank of banks.
(4) The control of credit.
Definition
First Function: Issuing money

6. It is the oldest and important function as it has an exclusive right
to issue paper money (banknote) according to the prevailing
monetary and banking laws. Putting the right of issuing money
in one situation due to the following considerations:
1# unification and consolidation of the circulating money in
the society: as it leads to easy handling and prevent disorders
that may arise from the multiplicity of issuers and currencies.
2# enabling the state to make an effective control on credit.
3# controlling the supply of money in circulation:
And changing any of its amounts according to the prevailing
economic conditions.
4# providing greater confidence in the issued banknotes.
That leads to a greater confidence to accept the bank notes
and deal with them legally.
5# the presence of only a single issuer and having it under
the state control: but with an independency, makes it a way
of its using as an instrument to achieve the state's political
and economic aims.
6# concentrating the issuing of money in the central bank:
Leads to achieving a great profits and proceeds for the state.
How we can regulate the issuing of
banknotes?

7. 1# the full gold cover's system:
This system is represented when the gold reserve is equal to
the banknotes issued by the central bank (100%). But this
system has no more used by all countries.
2#the partial gold cover's system:
That means that the state limits the maximum of issuing
without a gold cover, as it is covered by governmental
securities and bonds. If the issued banknotes are exceeded
the limits, they must be covered by gold. This system is more
flexible than the full gold cover but this flexibility is vanished
when the central bank issued particular amount without a
gold cover.
3#proportional gold cover's system:
This system keeps only a certain percentage of gold equals a
certain percentage of issued banknotes (25%) and the rest
percentage of the issued banknotes is covered by foreign
currencies which could be converted by gold, governmental
bonds, treasure bills and guaranteed commercial securities.
Egypt has followed this system but abandoned it in 1916 as it
did not reached the required level of gold cover so, the state
replaced it by British treasury bills.
4# the maximum issuing system:
This system requires determining the maximum limit of how
much the central bank issued the banknotes without gold
covers.
5# free issuing system:

8. It means removing all restrictions for covering the issuing of
banknotes. The central bank is free to issue any amount of
banknotes as they covered by any kind of assets, there is no
absolute freedom, but there are some restrictions;
1) The quality of financial and commercial papers.
2) The state sets the maximum limits for issuing by the
central bank.
3) Central bank must keep or reserve an amount of gold
or foreign currencies.
(THERE IS NO DOUBT THAT ''FREE ISSUING'' IS USED BY
MOST COUNTRIES.)
It is one of the most important and basic functions of the
central bank and its elements are:
1# Central bank keeps the state ministers, departments,
units and institutions accounts.
2# it acts as a commercial bank, dealing with clients or
agencies concerning, accepting deposits, collecting their own
checks and withdrawing from other banks.
3# offering short-term loans and advances.
4# offering loans in cases of crises, disasters and wars.
5# providing the state with foreign currencies.
6# buying the extra foreign currencies.
7# organizing and keeping the state reserves and foreign
currencies.
8# issuing the public loans on behalf the state.
Second function: The bank of state

9. 9# administrating the internal and external public debt.
10# ensuring the state bonds which are not sold.
11# issuing and organizing the process of selling the treasury
bills.
12# acting as an economic, financial and monetary advisor.
13# managing the foreign debt for the state.
14# contracting international agreements on behalf the state.
15# participating in economic feasibility studies.
16# law imposes some restrictions on the state authority of
borrowing from the central bank.
The main lines of this functions are:
A: maintaining the reserves of others banks at the central.
Commercial banks keep part of their cash balances in a form
of cash, credits or current accounts in the central bank. Such
reserve is called ''Optional reserve''. The banking law
obligated the commercial banks in Egypt to maintain a
certain percentage of their monetary obligations in the form
of cash reserves.
B: lending commercial banks.
The central bank offer loans or credits to the commercial
bank in the form of short-term credits or enough guarantees.
The bank who lends, pays an interest on its loan determined
by the central bank. The most important is offering credits in
Third function: The bank of banks

10. unusual circumstances such as; economic crises. So, central
bank stills the only shelter or lender whatever the conditions
or situations.
C: rediscounting the commercial papers and treasury bills.
The commercial banks had discounted this commercial paper
before. Now, they requested the re discounting of such
securities to increase the liquidity and flexibility in the credit
structure. The central bank receives an interest that is called
''Rediscount rate''
D: making settlements of accounts among commercial banks.
Settling the accounts among commercial banks is done in
central bank through the "Clearing house" which is
supervised by the central bank. Doing the clearing process
and controlling it leads to (1) Facilitate payments between
banks. (2) Using money in the banking process settlements.
Through it, the central bank can control the monetary and
credit state's policy and it supervises and controls directly
and indirectly on the entire banking system. Credit control
maybe quantitative or qualitative.
Fourth function: the control of credit

11. QUANTITVE CONTROL :
It is represented by using the central bank a sum of means
which are called the central bank''arms'' through;
changing the reserve rate. Commercial banks are
obligated to keep a part of their funds and cash reserve in the
central bank then, the law determines the minimum rate of
such reserves. Also central bank has full legal authority to
change the amount of this rate which affects the size of
credit in commercial banks.
controlling the rediscount rate. If the central bank does
not want to expand the credit limit, it raises the price of the
rediscount rate for the commercial banks which ask for such
credit. Such process leads the commercial banks to raise the
interest rates that they have from their clients and vice
versa.
open market operations. It means that the central bank
interfers by buying and selling directly the bills, securities and
governmental financial papers in the open market to affect
size of credits and so, controling them. Such operations lead
to increasing or decreasing the amount of circulating money
and monetary reserve of the commercial banks. But, these
operations are subjected to various factors which are:

12. {i} The prevailing interest rate and its effects by such
operations.
{ii} The expansion and limitation of the market.
{iii} The volume of transations.
QUALITATIVE CONTROL :
Qualitative control is distinguished as it aims at:
1# directing the credit towards specific users.
2# affecting particular kinds of credit.
3# the discrimination between the importan and
unimportant uses of credit and banking debts.
4# the particular credit dealings for sensitive sectors in the
national economy without affecting the whole national
economy.
5# reducing the excess of some consumer's request for some
commodities by using the system of installment.
6# affecting the balance of payment in favor.
7# controlling all types of financial and commercial credits,
can be achieved through qualitative control.
Kinds of qualitative control:
1- Arranging the borrowing (lending): by guaranteeing bonds
through the limitation of the required margin which is the
difference between the cost of the loan and the market
value.

13. 2- Restricting the consumer credit: by raising the rate that
must be paid of the commodity price and vice versa.
3- Credit controlling by issuing the instructions: that issued by
the central bank to commercial banks on the activities in
lending and investing fields and limiting the rate between
loans, investments and capital.
4- Literary and moral effect: it does not based on any law, but
it is based on understanding, friendship and good will in
implementing the monetary and credit policy as a request.
And also, asking the commercial banks not to finance
5- Dealing directly with the public (individuals): Originally, the
central bank does not deal with the public but, if the interest
of public necessitates sometimes the interation of the central
bank to provide credits in certain aspects. So, the central
bank interfers directly to (1) offer credits and (2) to make
discussion with the commercial bank.