Structure of the Central Bank for Gulf Council Countries - Assignment Example

? Executive Summary Gulf Council Countries (GCC) Central Bank Brings together Central Banks of Bahrain, Kuwait, Oman, Qatar and the Saudi Arabian Monetary agency under one platform in more sophisticated system to help in handling their banking needs in the U.A.E zone. Unlike any straight forward banking system, this has to integrate all most of the characteristics of all its affiliates to promote efficiency and effectiveness in banking within the region. The structure would therefore be quite different from those of single country central banking systems. They would only majorly borrow traits from systems like that of the EU central Banking system. Formulation of the likely structure is therefore of fundamental and of primary concern and ensuring that the structure is the most suitable and applicable is paramount. Proper systems would ensure that the costs of banking within the region are highly regulated and that tight controls are ensured of money and money operations. Introduction Our main task in this assignment is to discuss the likely structure of the suggested GCC Central Bank. We are also required to its similarity and differences with the European Central Bank. Furthermore, we have to find the arguments supporting and those against such a system and most importantly the objectives of the system. The GCC central bank has the main aim of bringing together the operations of the 5 central banks within the U.A.E in a regulatory manner. It would therefore be modeled in a closed system of financial accounts; this means that the equilibrium volume of banks intermediation between the households and corporate would show structural measures like preferences to households, cost structures, loan demand by corporate (Cobham & Dibeh 2011). Inclusive in the structure would be the integration of the differences in borrowing and deposit rates of the central banks of the five countries (Grauwe & Dewachter 1999). The structure also is inclusive of the width of the central bank standing facilities corridor as well as the stance of the monetary policy. This is to enable the system be in the position of cushioning the U.A.E against any form of financial crisis (Rajan & Zingales 1998). The banking systems of the GCC countries is mostly dominated by a very small number of both domestic and foreign commercial banks making any dealing involving finances to be quite of an uphill task. This system is designed in manner to help provide better and more information to enhance decision making hence enhance the efficiency of the U.A.E economy in terms of resource allocation hence general improvement of welfare (Hamori & Hamori 2010). It has a monetary policy unit mandated with the task of designing monetary policy for the promotion of price stability, sustainable economic growth and a stable financial system within the UAE. Policies established have the impact of reducing by a wider margin a level of uncertainty and the established monetary policy unit is expected to reduce the noise because of policy makers in an economic environment (Levine & Renelt 1992). The proposed GCC central bank is formulated by an act prepared by the 5 member countries. This is due to the desire of the countries to form one central bank body for the sake of uniformity in the monetary and fiscal policies governing their financial systems. The Acts confers the GCC central bank with the responsibilities of formulating monetary policy, ensuring price stability, issuing a common currency and performing any other functions conferred to it by the Act (Rajan & Zingales 1998). It has a central head office with branches located in each of the countries that have come together to form this form of financial organization. The system will also run currency centers in specified locations within the UAE region. The suggested arrangement will have assistant governors to support the activities and decisions by a central governor (Smits 1997). The directors will still be there with the governor at the head office to help in the daily routines of the office. GCC banking systems is never not just a single homogeneous block as it is made up of a web of varied structures and circumstances. This enables the realization of a GCC central bank with a structure that has the ability of bringing together the banks within the region to operate under one framework. Some of the banks in the region have experienced a shock due to the bubble experienced within the property and real estate sector (Hamori & Hamori 2010). However, due to the non-homogeneity in structure, the other does not feel the strain that is normally felt in one region. The proposed structure of the central banking system would ensure shocks felt in other regions could be shared equally across. In addition, it has the impact of making it possible and easier to determine the health of the financial system at a glance. This ensures that a swift action can be taken to correct any form of trouble detected in a timely manner (Cobham & Dibeh 2011). The European central bank and the GCC proposed central bank have a lot of similarities and differences. This range from their formulation, reasons behind their formulation and their structural operations. The formation of the central banks involves agreements between countries within a given region to form a single regulatory framework for their banking operations (Hamori & Hamori 2010). The banks within each respective region therefore operate under similar policies. The structures of both the central banking systems both operate with the governor as the head and assistant governors representing the minor regions. There is uniformity in the manner in which the daily operations are done within each of the central bank regions (Smits 1997). While the European central bank helped the countries in Europe struggle to come out of the 2007 financial crisis, the GCC was formed to form a stronger regulatory framework to help combat such a crisis incase it encroached and reached the region (Espinoza & Prasad 2010). The region is made up of smaller banks, which have the tendency of possessing weaker structures, and given that the region has vastly invested in real estate; it requires a stronger banking system (Alrahoomi 2011). Both central banks use a single currency and it is speculated that the single currency system for GCC is tricky and would have negative impacts for the central bank in its operations incase of a debt crisis (Levine & Renelt 1992). This is the essence of the assistant governors as they still uphold the operations of the minor currency within respective countries within the UAE (Cevik & Teksoz 2012). Supporters of the GCC Central bank formulation argue that the banking system has the impact of strengthening the private sector in the region. A stronger private sector means more employment opportunities are created and the per capita income of each member of the working population is busted (Ergungor 2003). This leads to the general growth of the economy as more taxes can be collected from the citizens to aid in the infrastructural development of the country. Due to a single regulatory system, control of the financial sector is made much easier (Smits 1997). Conclusion A single central bank system has set backs, which revolves about the possibility of failure of the system. If for example, a debt crisis faces any country within the GCC given that most of their investments are in the volatile real estate sector. The shock is felt by the whole system and the financial system may even crush completely (Cevik & Teksoz 2012). The integration of a variety of systems into one could be as well tricky as the formation a formidable strong block may be difficult. The use of a single currency also exposes a financial system into havoc in case the currency is disfavored in the market. Lack of cooperation in the bloated structure may also make decision making about a financial system and actions to be taken may cause a collapse of the entire system (Alrahoomi 2011). References Alrahoomi, J, 2011, The policing of money laundering the role of Dubai police, Northumbria University: Berlin. Cevik, S, & Teksoz, K, 2012, Lost in transmission? The effectiveness of monetary policy transmission channels in the GCC countries, International Monetary Fund: Washington, D.C. Cobham, DP, & Dibeh, G, 2011, Money in the Middle East and North Africa: monetary policy frameworks and strategies, Routledge: Milton Park, Abingdon, Oxon. Ergungor, O, 2003, Financial System Structure and Economic Development: Structure Matters, Working Paper 0305, 1(1), 45-49. Espinoza, RA, & Prasad, A, 2010, Nonperforming loans in the GCC banking system and their macroeconomic effects, International Monetary Fund: Washington, D.C. Grauwe, Pd, & Dewachter, H, 1999, The European Central Bank: decision rules and macroeconomic performance, Centre for Economic Policy Research: London. Hamori, S, & Hamori, N, 2010, Introduction of the euro and the monetary policy of the European Central Bank, World Scientific Pub. Co.: Singapore. Levine, R, & Renelt, D, 1992, A Sensitivity Analysis of Cross-country Growth Regressions, American Economic Review, 82(4), 942a€“63. Rajan, R, & Zingales, L, 1998, Financial Dependence and Growth, American Economic Review 88, 88(1), 559-586. Smits, R, 1997, The European Central Bank: institutional aspects, Kluwer Law International: The Hague. Read More