Unit 3.2 Regulatory Framework - International Perspective

1. International Perspective – Federal BankEuropean Central BankICC Guidelines

2. Federal BankEuropean Central BankICC Guidelines2Mrs. Charu Rastogi, Asst.Professor

3. 3Mrs. Charu Rastogi, Asst.Professor

4. What is the Fed? Central bank of theUnited States Established in1913 Purpose is toensure a stableeconomy for thenation4Mrs. Charu Rastogi, Asst. Professor

5.  Conduct the nation’s monetary policy Supervise and regulate bankinginstitutions Operate a nationwide payments system5Mrs. Charu Rastogi, Asst. Professor

6.  Board of Governors 12 Reserve Banks Federal OpenMarket Committee6Mrs. Charu Rastogi, Asst. Professor

7.  Seven members◦ Appointed by the president◦ Confirmed by the Senate◦ Serve 14-year terms Work includes:◦ Analyzing economicdevelopments◦ Supervising and regulatingthe operations of FederalReserve Banks◦ Exercising responsibility inthe nation’s paymentssystem7Mrs. Charu Rastogi, Asst. Professor

8.  Work includes (cont’d):◦ Administering consumercredit protection laws◦ Authorizing changes inbanks’ reserverequirements◦ Supervising Fed memberbanks and other financialentities◦ Authorizing changes inthe Fed’s discount rate8Mrs. Charu Rastogi, Asst. Professor

10.  Operate a nationwide paymentssystem Distribute the nation’s currencyand coin Supervise and regulate memberbanks and bank holdingcompanies Serve as banker for the U.S.Treasury Contribute to monetarypolicymaking through Bankpresidents’ participation in theFOMC10Mrs. Charu Rastogi, Asst. Professor

11.  Promote safety andsoundness of bankingsystem along with otherregulatory bodies◦ FDIC, OCC, OTS, state bankingregulators Ensure compliance with lawsand regulations Oversee internationalbanking interests Administer consumer creditprotection laws11Mrs. Charu Rastogi, Asst. Professor

12.  Supply currency andcoin to bankinginstitutions Clear more than one-third of nation’schecks Transfer fundselectronically (ACH,Fedwire) Serve as bank for theU.S. Treasury12Mrs. Charu Rastogi, Asst. Professor

13.  Gather, analyze anddisseminate economicdata Focus on all aspects ofthe economy (regionalto international levels) Analyze regional andnational markets andeconomic data Design and testeconometric modelsused to produce harddata that factor intopolicymaking decisions13Mrs. Charu Rastogi, Asst. Professor

14.  Policy changesaffect the nation’ssupply of moneyand credit. Actions have realshort- and long-term effects on theeconomy.14Mrs. Charu Rastogi, Asst. Professor

15.  Sets and directs U.S. monetarypolicy Seven governors Five presidents (New York andfour others on a rotatingbasis) Nonvoting presidentsparticipate fully Final interest rate decision ismade by the 12-memberFederal Open MarketCommittee (FOMC)15Mrs. Charu Rastogi, Asst. Professor

16. Stable PricesSustainableEconomic GrowthFullEmployment16Mrs. Charu Rastogi, Asst. Professor

17.  Discount Rate◦ The interest rate charged by the Federal Reserveto banks that borrow on a short-term (usuallyovernight) basis Reserve Requirements◦ The amount of money banks must keep onreserve at the Fed Open Market Operations◦ Buying and selling Treasury securities betweenthe Fed and selected financial institutions in theopen market◦ Most important tool; directed by the FOMC17Mrs. Charu Rastogi, Asst.Professor

18.  Federal Funds Rate◦ The market-based interest ratewhich banks charge each other onovernight loans of their reservebalances held at the Fed. The Fedachieves this rate through OpenMarket Operations.◦ A target rate Discount Rate◦ Applies to short-term loans madedirectly to commercial banks fromthe Federal Reserve System.◦ Typically set at 1 percentage pointabove the Federal Funds Rate.18Mrs. Charu Rastogi, Asst. Professor

19.  Each head office and branch of the FederalReserve System has a local Board of Directors.◦ 7–9 individuals Board members provide various perspectivesand economic data from different regions andindustries. Boards of directors vote on the discount rate. Boards of directors influence policymaking atthe national level through ―real-world‖ input.19Mrs. Charu Rastogi, Asst.Professor

20.  Generally, low interest ratesstimulate the economybecause there is moremoney available to lend.◦ Consumers buy cars andhouses.◦ Businesses expand, buyequipment, etc. Why does the Fed lowerinterest rates?◦ If inflation is in check, lowerrates stimulate economicactivity, thus boostingeconomic growth.20Mrs. Charu Rastogi, Asst. Professor

21.  The Fed raises interestrates as an effectiveway to fight inflation.◦ Inflation—a sustained risein the general price level;that is, all prices arerising together. Consumers pay moreto borrow money,dampening spending. Businesses havedifficulty borrowing;unemployment rises.21Mrs. Charu Rastogi, Asst. Professor

23.  The ECB is the central bank for Europessingle currency, the euro. It is one of the seven institutions of theEuropean Union (EU) listed in the Treaty onEuropean Union (TEU) The ECB’s main task is to maintain the eurospurchasing power and thus price stability inthe euro area. The euro area comprises the 17 EuropeanUnion countries that have introduced theeuro since 1999.23Mrs. Charu Rastogi, Asst.Professor

24.  The capital stock of the bank is owned by thecentral banks of all 27 EU member states. The bank was established by the Treaty ofAmsterdam in 1998, and is headquarteredin Frankfurt, Germany. The current President of the ECB is MarioDraghi, former governor of the Bank of Italy.24Mrs. Charu Rastogi, Asst.Professor

27.  the definition and implementation of monetary policy for the euro area; the conduct of foreign exchange operations; the holding and management of the official foreign reserves of the euro areacountries (portfolio management). the promotion of the smooth operation of payment systems. Banknotes: the ECB has the exclusive right to authorise the issuance ofbanknotes within the euro area. Statistics: in cooperation with the NCBs, the ECB collects statisticalinformation necessary for fulfilling the tasks, either from national authoritiesor directly from economic agents. Financial stability & supervision: the Eurosystem contributes to the smoothconduct of policies pursued by the authorities in charge related to theprudential supervision of credit institutions and the stability of the financialsystem. International and European cooperation: the ECB maintains working relationswith relevant institutions, bodies and forums both within the EU andinternationally in respect of tasks entrusted to the Eurosystem.27Mrs. Charu Rastogi, Asst.Professor

31.  It is the largest, most representative businessorganization in the world. The International Chamber of Commerce wasfounded in 1919 to serve world business bypromoting trade and investment, openmarkets for goods and services, and the freeflow of capital.31Mrs. Charu Rastogi, Asst.Professor

32.  Original guidelines issued in 1972 Revised guidelines were launched at theWorld Investment Forum, organized by theUnited Nations Conference on Trade andDevelopment (UNCTAD) in Doha, Qatar inApril 2012. The aim of the guidelines is to facilitatecross-border investment for investors andgovernments, as well as to harness the vastpotential of cross-border investment forstimulating balanced global growth.32Mrs. Charu Rastogi, Asst.Professor

33.  http://www.iccwbo.org/Data/Policies/2012/2012-ICC-Guidelines-for-International-Investment/33Mrs. Charu Rastogi, Asst.Professor