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Yes, We Need A Central Bank! 
Nida Naeem 
Dr.Madiha Sohail
Overview: 
 Financial System 
 Central Bank 
 Functions 
 Financial Stability 
 Financial Crisis 
 Origin of Central Banking 
 Significance 
 State Bank of Pakistan
Financial System: 
 Of a country comprises entities engaged in 
transactions involving financial instruments 
in money, capital and foreign exchange 
markets. 
 Serves as a strong linkage with the other 
sectors of economy like external, fiscal and 
real sectors.
Central Bank: 
 The apex financial institution in every 
country is it’s central bank and the state 
bank of Pakistan functions as our central 
bank.
Functions of Central Bank: 
 Conduct of monetary policy: it’s major task is 
to contribute to sustainable economic growth 
through maintaining low inflation. 
 Financial stability oversight: means reducing 
vulnerability to the financial fragility and preventing 
the financial crisis. 
 The relationship of the twin goals i.e price stability 
and stability of the financial system can be 
problematic. The two of them can traverse each 
other’s paths in terms of stability. 
 The linkage is that the monetary policy transmission 
is wholly based on the financial system, it should be
Functions:
Financial fragility: 
 If there is unsound asset structure of 
financial institutions (reflecting subsided 
credit and insider loans), changes in relative 
prices, including interest rates & exchange 
rates, that are influenced by viability of 
regulations & supervision, that facilitates 
unnecessary risk taking.
Financial Stability: 
 Means the least possibility fragility in the 
financial system of the country and its 
capability to avoid a financial crisis. 
 The ultimate objective is the avoidance of 
financial crisis that are likely to cause 
significant costs to other sectors of the 
economy.
Significance: 
 A well functioning financial sector is critical 
to an economy’s well being because it is so 
intimately connected to every other sector 
of the economy through it’s role of providing 
a host of financial services from facilitating 
the trading, lodging, diversifying, and 
pooling of risk; allocating resources; 
monitoring managers; mobilizing savings; to 
facilitating the exchange of goods and 
services.
Financial Crisis: 
 Also termed as “bank runs” or “banking 
collapses”. 
 Term financial is used because with, with 
today’s financial systems, the source of the 
crisis could be the capital market or a non-bank 
financial institution rather than a bank. 
 In some circumstances, the failure of one or 
even a few financial institutions might be a part 
of the normal market mechanism while in some 
cases, the failure of a single financial institution 
might create financial crisis. 
 Systemic financial crisis is when crisis spreads
Avoiding financial instability: 
 The world has faced a number of business 
cycles, and although we wish that the cycle 
could be abolished, most of us are resigned 
to the fact that expansions cannot go on 
forever, and they will be followed by a 
recession. 
 May these recessions not be frequent or 
deep, public confidence in the legitimacy of 
the economic system remains intact. 
For example the collapse of the US Banking
Origin of central banking: 
 Establishment of the federal reserve system 
in 1913 in direct response to bank runs and 
financial panics of 1907. 
 In 1850s and 1860s, the bank of England 
freely lent to institutions to prevent financial 
panic. 
 In 1882, Banque de France providing 
secured loans to the Paris bourse to avoid 
speculations in stock market.
State Bank Of Pakistan: 
 To enhance it’s effectiveness, a credit 
information bureau CIB was established to 
keep credit records. 
 An NBFIs department was established that 
issued “Rules Of Business” to supervise 
them. 
 “Monetary Policy Operational Independence” 
was given to SBP. 
 Dissolution of Pakistan Banking Council was 
done. 
 Supervisory roles were further enhanced by 
placement of CAMELS & CAELS framework.
 Various monetary management measures were 
taken to dismantle the system of financial 
repression & establish a market based 
mechanism of monetary control. 
 Credit deposit ratio was introduced. 
 Caps on lending rates of banks and NBFIs were 
eliminated t pave the way for implementation of 
monetary policy indirectly through signals of 
liquidity & short term interest rate changes. 
 Banking laws underwent changes e.g various 
amendments in SBP Act 1956 and other 
regulatory bodies.
Yes, we need a central bank!

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Yes, we need a central bank!

  • 1. Yes, We Need A Central Bank! Nida Naeem Dr.Madiha Sohail
  • 2. Overview:  Financial System  Central Bank  Functions  Financial Stability  Financial Crisis  Origin of Central Banking  Significance  State Bank of Pakistan
  • 3. Financial System:  Of a country comprises entities engaged in transactions involving financial instruments in money, capital and foreign exchange markets.  Serves as a strong linkage with the other sectors of economy like external, fiscal and real sectors.
  • 4. Central Bank:  The apex financial institution in every country is it’s central bank and the state bank of Pakistan functions as our central bank.
  • 5. Functions of Central Bank:  Conduct of monetary policy: it’s major task is to contribute to sustainable economic growth through maintaining low inflation.  Financial stability oversight: means reducing vulnerability to the financial fragility and preventing the financial crisis.  The relationship of the twin goals i.e price stability and stability of the financial system can be problematic. The two of them can traverse each other’s paths in terms of stability.  The linkage is that the monetary policy transmission is wholly based on the financial system, it should be
  • 7. Financial fragility:  If there is unsound asset structure of financial institutions (reflecting subsided credit and insider loans), changes in relative prices, including interest rates & exchange rates, that are influenced by viability of regulations & supervision, that facilitates unnecessary risk taking.
  • 8. Financial Stability:  Means the least possibility fragility in the financial system of the country and its capability to avoid a financial crisis.  The ultimate objective is the avoidance of financial crisis that are likely to cause significant costs to other sectors of the economy.
  • 9. Significance:  A well functioning financial sector is critical to an economy’s well being because it is so intimately connected to every other sector of the economy through it’s role of providing a host of financial services from facilitating the trading, lodging, diversifying, and pooling of risk; allocating resources; monitoring managers; mobilizing savings; to facilitating the exchange of goods and services.
  • 10. Financial Crisis:  Also termed as “bank runs” or “banking collapses”.  Term financial is used because with, with today’s financial systems, the source of the crisis could be the capital market or a non-bank financial institution rather than a bank.  In some circumstances, the failure of one or even a few financial institutions might be a part of the normal market mechanism while in some cases, the failure of a single financial institution might create financial crisis.  Systemic financial crisis is when crisis spreads
  • 11. Avoiding financial instability:  The world has faced a number of business cycles, and although we wish that the cycle could be abolished, most of us are resigned to the fact that expansions cannot go on forever, and they will be followed by a recession.  May these recessions not be frequent or deep, public confidence in the legitimacy of the economic system remains intact. For example the collapse of the US Banking
  • 12. Origin of central banking:  Establishment of the federal reserve system in 1913 in direct response to bank runs and financial panics of 1907.  In 1850s and 1860s, the bank of England freely lent to institutions to prevent financial panic.  In 1882, Banque de France providing secured loans to the Paris bourse to avoid speculations in stock market.
  • 13. State Bank Of Pakistan:  To enhance it’s effectiveness, a credit information bureau CIB was established to keep credit records.  An NBFIs department was established that issued “Rules Of Business” to supervise them.  “Monetary Policy Operational Independence” was given to SBP.  Dissolution of Pakistan Banking Council was done.  Supervisory roles were further enhanced by placement of CAMELS & CAELS framework.
  • 14.  Various monetary management measures were taken to dismantle the system of financial repression & establish a market based mechanism of monetary control.  Credit deposit ratio was introduced.  Caps on lending rates of banks and NBFIs were eliminated t pave the way for implementation of monetary policy indirectly through signals of liquidity & short term interest rate changes.  Banking laws underwent changes e.g various amendments in SBP Act 1956 and other regulatory bodies.