Banking

1. Chapter Seven
Central Banking

2. Central Bank-Definition
 A central bank plays an important role in monetary and banking system
of a country.
 It is responsible for maintaining financial sovereignty and economic
stability of a country, especially in underdeveloped countries.
 A Central Bank is the bank in any country to which has been entrusted
the duty of regulating the volume of currency and credit in that country”
-Bank of International Settlement (BIS).
 “Central Bank may be defined as an institution which is charged with the
responsibility of managing the expansion and contraction of the volume
of money in the interest of general public welfare.” –Kent.

3. Central Bank-History
 The Central Bank, in one form or another, has a long history. It dates back at least
to the seventeenth century (1668) when the Swedish Riksbank, the first institution
recognised as a Central Bank, was established. It was charged with the
responsibility of lending funds to the government and acting as a clearing house
for commerce.
 Later, the most famous central bank of the era, the Bank of England was founded
in 1694 to purchase government debt.
 The central bank of France, Banque De France, was established in 1800 to stabilise
the currency after the hyperinflation during the French Revolution.
 A severe financial crisis that hit the United States in 1907 led to the creation of the
country's central bank, the Federal Reserve, in 1913. It was mandated to provide a
common currency which would respond to the changing seasonal, cyclical and
secular needs of the economy and to serve as a lender of the last resort.

4. Bangladesh Bank
Bangladesh Bank, the central bank and apex regulatory body for
the country's monetary and financial system, was established in
Dhaka as a body corporate vide the Bangladesh Bank Order, 1972
(P.O. No. 127 of 1972) with effect from 16th December, 1971.
Founded: December 16, 1971
Governor: Fazle Kabir
Reserves: US$42 billion
Headquarters: Dhaka, Office: 10
Subsidiary: The Security Printing Corporation (Bangladesh) Ltd.

6. Central Bank-Functions
The controller of Money Supply and Credit: The primary function of
the central bank is to control the supply of money and the flow of
credit in the market. It is facilitated through quantitative instruments
(bank rates, cash reserve ratio, statutory liquidity ratio and open
market operations) and qualitative instruments, i.e. fluctuating the
rate of interest for loans.
(https://www.thefinancialexpress.com.bd/economy/bangladesh/bb-
cuts-crr-repo-rate-to-enable-banks-to-implement-tk-7275b-stimulus-
1586439379#:~:text=Bangladesh%20Bank%20(BB)%20has%20re,effec
tive%20from%20April%2015%2C%202020.)

7. Central Bank-Functions
Printing Currency: The Bangladesh bank
has the authority of printing the notes
of all denominations except for Tk. 1 &
2 notes and the coins.
Custodian of Cash Reserve: All the
banks have accounts with the central
bank where they can maintain some
cash reserve for future needs.

8. Central Bank-Functions
 Custodian of Foreign Exchange Reserve: This bank is responsible for managing,
controlling and exchange of the foreign currency and gold in a country, by
maintaining the foreign exchange reserve to keep the exchange rates stable.
 Bangladesh Bank is empowered by section 7A of BB Order, 1972 to hold and
manage the official foreign exchange reserve of Bangladesh. It maintains its
foreign exchange reserve in different currencies. BB has established Nostro
account arrangements with different Central Banks. Funds accumulated are
invested in Treasury bills, repos and other government papers.
 Forex Reserve & Treasury Management Department (FRTMD) performs the
operational functions regarding investment. The Bank's assets held in foreign
investments amounted to BDT 2,243.97 billion, equivalent to 66.74% of the
Bank's total assets in FY 2018-19.

9. Central Bank-Functions
Clearing House: The central bank acts as a mediator between the two or
more commercial banks to settle their accounts at the time loss and
manage the transactions between the commercial banks.
https://www.bb.org.bd/fnansys/paymentsys/paysystems.php
(https://www.bb.org.bd/fnansys/paymentsys/bach.php#:~:text=Banglades
h%20Automated%20Clearing%20House%20(BACH)%3A%20BACH%2C%20
the%20first%20ever,Electronic%20Funds%20Transfer%20(EFT).&text=Digit
al%20Certificate%20has%20been%20formulated,Bangladesh%20for%20se
cured%20data%20communication.)
Lender of the Last Resort: One of the essential functions of the central
bank is to provide loans to commercial banks at the time of emergency,
loss and insolvency.

10. Central Bank-Functions

11. Central Bank-Functions
Lender of the Last Resort: One of the essential functions of the central
bank is to provide loans to commercial banks at the time of emergency,
loss and insolvency.
Theoretically, the central bank can assume the lender-of-last-resort
function in three main forms. First, it can lend liquidity to individual banks.
Second, it can lend liquidity to the market, rather than to specific individual
financial institutions. Third, it can inject risk capital into troubled banks,
which effectively also implies a takeover of the banks by the government

12. Central Bank-Functions
 Banking Services to Banks and Government: This bank provides all the general banking
services like accepting deposits and sanctioning loans to the other banks and the
government.
 Issuing Government Bonds: The central bank issues various government bonds to
generate funds, encourage public deposits and investments in the country.
 Formulates Banking Rules and Regulations: This bank performs various regulatory
functions like licensing banks, framing banking norms and policies, preparing a judicial
mechanism for debt recovery by banks, monitoring the banking operations, etc. The
central bank even practices moral suasion for making the commercial banks to abide
by the policies so framed. BRPD, FEPD.
 Financial Agent and Advisor to the Government: The central bank acts as a financial
advisor to the government by providing an expert opinion at the time economic crisis,
fiscal deficit, and advancing loans to other countries. At the same time, it also acts as
an agent by representing the country and the government in international conferences
and meetings, along with issuing the government bonds and securities on behalf of
the government

13. Bangladesh Bank-Functions
 BB performs all the core functions of a typical monetary and financial sector regulator, and a
number of other non core functions. The major functional areas include :
1) Formulation And Implementation Of Monetary And Credit Policies.
2) Regulation And Supervision Of Banks And Non-Bank Financial Institutions, Promotion And
Development Of Domestic Financial Markets.
3) Management Of The Country's International Reserves.
4) Issuance Of Currency Notes.
5) Regulation And Supervision Of The Payment System.
6) Acting As Banker To The Government.
7) Money Laundering Prevention.
8) Collection And Furnishing Of Credit Information.
9) Implementation Of The Foreign Exchange Regulation Act.
10) Managing A Deposit Insurance Scheme .

14. Central Bank vs Commercial Bank

15. Monetary Policy-defined
Monetary policy is the process by which the monetary
authority/central bank of a country controls the money supply
in the economy, by exercising its control over interest rate and
other instruments, in order to maintain price stability and
achieve high economic growth.
Monetary policy is referred to as either being expansionary or
contractionary.
MP operates with asymmetry(like a rope) and a lag (like a ship
constrained by domestic market development and global
price.

16. Monetary Policy-defined (contd.)

18. Core objectives of monetary policy
 Price stability
 GDP growth
 Investment
 Fight recession
 Exchange rate stabilization
 Desired level of unemployment rate

19. How these goals are achieved by controlling
money supply?
 Price Stability: for example, price is shooting up and we want to control it…
19
We
reduce
money
supply
Now
people
have
less
money
at
hand
So,
people
buy
less
amoun
t of
goods
Deman
d for
goods
falls
Producers
reduce
price to
maintain
sales

20. How these goals are achieved by
controlling money supply?
20
Investment can be induced by
controlling money supply

21. How these goals are achieved by
controlling money supply?
 GDP growth: for example, we want to increase GDP growth…
21
We
increas
e
money
supply
Now
people
have
more
money
at
hand
So,
people
buy
more
amoun
t of
goods
Deman
d for
goods
rise
Producers
produce
more
goods to
match
market
demand

22. How these goals are achieved by
controlling money supply?
 For example: our export is reducing and we want to increase it…
22
We
increas
e
money
supply
As a
result
banks
have
more
idle
money
So,
banks
reduce
interes
t rate
Cost of
investmen
t falls and
goods
become
cheaper
Export
rises

23. Monetary policy instruments- Quantitative
a. Open Market operation (OMO): Through OMO central bank
targets available liquidity flow in the market, routinely mop-
up excess liquidity and inject it as appropriate.
- buying & selling of securities
- buying & selling of bills
 Changes in the policy rates, i.e., repo and reverse repo rates.
Presently, the repo and reverse repo rates are 4.75% and 4.0
% respectively.
https://www.newagebd.net/article/105251/bangladesh-bank-
to-inject-tk-50742cr-in-government-stimulus-packages

24. 3.3 Monetary policy instruments-Quantitative
3.2.b. Reserve Requirement (RR): Reserve requirement involves
variations in reserve ratios (i.e. CRR and SLR) which are primarily
used to influence the quality of credit available in the banking
system.
According to Bangladesh Bank order 1972 section 36(1), Bank
Company Act 1991, Sec. (33) and MPD circular no 01/2014.
At present, CRR for all banks and SLR for conventional banks are
4% and 13% of their total demand and time liabilities.

25. 3.3 Monetary policy instruments- Quantitative
3.2.c. Bank rate or discount window: The interest rate which a
central bank charges on discounts or overdrafts (loans from the
central bank to commercial banks).
If the interest rate on such transactions is sufficiently low,
commercial banks can borrow from the central banks to meet
RR and use the additional liquidity to expand their credit
It is 5% since effect since November 06,2003, but now 4%.

26. 3.3 Monetary policy instruments- Qualitative
Regulation of consumer credit: Rules & regulations established by
central bank to increase/decrease purchasing power of consumer by
peeking or declining goods price and payment of installment.
Margin requirement (MR): Central bank ordered commercial banks to
restrict their loans to stock brokers by rising the MR.
Direct Action: Coercive measures taken by central bank against
individual bank, i.e.,
Moral suasion: Persuasion and request made by central bank to
commercial bank to follow the monetary policy.

28. Monetary policy
 https://tbsnews.net/economy/banking/bangladesh-bank-slashes-policy-
rates-support-banks-113122