Free

Money and banking - Essay Example

Comments (0) Cite this document
Summary
The government through its Central Bank provide lender of last resort (LLR) facilities to the financial system because the costs of a banking panic is large. The government also does LLR functions to maintain financial stability by implementing specific and directed actions in…
Download full paperFile format: .doc, available for editing
GRAB THE BEST PAPER91.4% of users find it useful
Money and banking
Read TextPreview

Extract of sample "Money and banking"

The government through its Central Bank provide lender of last resort (LLR) facilities to the financial system because the costs of a banking panic is large. The government also does LLR functions to maintain financial stability by implementing specific and directed actions in the monetary system. A country’s central bank is the ultimate provider of currency liquidity in the country’s financial system. The central bank’s role is supported by a law or charter governing its mandated functions. The Central Bank implements deposit insurance and a capital adequacy standard for banks in order to make them share in the cost of risk taking.
The Central Bank can grant overnight credit on a regular basis through a standing liquidity facility to banks and non-bank institutions in the financial system as part of its functions. This automatic provision of liquidity provides assurance to all participants in the system that they will be able to cover provisional shortfalls in settlement balances. The Central Bank provides emergency lending assistance to various deposit-taking institutions that are deemed solvent and which require additional credit. This assistance is given to institutions which have a significant share of their liabilities as deposits and hold assets that are illiquid. In an economic crisis where the Governor of a country’s Central Bank believes that there is a severe stress on a financial system, he can allow the Bank to be a supplier of liquidity by purchasing securities issued by local and foreign entities. The Central Bank makes this move to maintain financial stability. (Sharma, 2003) The loans granted by the Central Bank are made on a secured basis. The collateral eligible to secure credit from the Bank refers to highly liquid assets such as government securities.
New issues may impact on the lender of last (LLR) resort role. One issue is with respect to the expansion of the types of institutions eligible to become members of the financial system and able to participate directly in the payments system. A second issue is the international linkages created with the entry of foreign bank branches into the country. The third issue is the greater sensitivity to the potential need by local institution for foreign currency liquidity changes in the supervisory framework. The fourth isssue is to craft a lender of last resort regime in a globalized banking environment as a way to promote financial stability. The lender of last resort (LLR) facility cannot be handled by the financial banks of the private sector since it will be difficult for private institutions to assess how a given economic crisis will affect all of the financial institutions. Moreover, the problem of moral hazard is evident for private lenders.
In order to improve LLR efforts, the government officials must hammer out strategies to establish a sound supervisory framework which is critical for emergency lending decisions. This supervisory framework brings with it a supervisory role, a supervisory authority, and a strong program of early intervention in financially distressed banks. Without a clear framework, and information-sharing agreements, it is challenging for the Bank to make precise assessments on solvency. (Daniel et.al., 2005) A strong supervisory framework lessens the incentives for supervisors to delay dealing with a problem institutions. Othervproblems of the LLR set-up pertain to solvency concerns as shown by the inability of the financial institution to generate the needed funds from the private sector. In some cases, the collateral used to secure emergency assistance is not of certain value. An international lender of last resort is difficult to establish since it has to deal with various types of foreign currency.
An efficient lender of last resort of a country does two tasks: provide liquidity to cover all obligations within the financial system and to provide a means of intervention whenever and wherever needed to maintain financial stability.
References:
Daniel Fred, Walter Engert, and Dinah Maclean. (2005).The Bank of Canada as Lender of Last Resort. Bank of Canada Review. Winter.
Sharma, Shalandra. (2003). Asian Economic Crisis: Reforms. New York:Manchester University Press. Read More
Cite this document
  • APA
  • MLA
  • CHICAGO
(“Money and banking Essay Example | Topics and Well Written Essays - 500 words”, n.d.)
Money and banking Essay Example | Topics and Well Written Essays - 500 words. Retrieved from https://studentshare.org/miscellaneous/1552083-money-and-banking
(Money and Banking Essay Example | Topics and Well Written Essays - 500 Words)
Money and Banking Essay Example | Topics and Well Written Essays - 500 Words. https://studentshare.org/miscellaneous/1552083-money-and-banking.
“Money and Banking Essay Example | Topics and Well Written Essays - 500 Words”, n.d. https://studentshare.org/miscellaneous/1552083-money-and-banking.
  • Cited: 0 times
Comments (0)
Click to create a comment or rate a document

CHECK THESE SAMPLES OF Money and banking

Money and banking

...?Money and Banking Money and Banking The role of government in the banking industry Government involve in the industrial affairs for many reasons. For instance, its role in the banking industry originates from microeconomic matters over the capability of bank depositors or creditors to monitor the risks brought about by the lending side and from macro and microeconomic concerns. In addition to administrative and statutory regulatory provisions, the banking industry has been subject to pervasive “informal” regulation. The major argument against government’s involvement in this industry has been that the...
6 Pages(1500 words)Book Report/Review

Money and Banking

... Money and Banking 1A When we suppose that, there are differences in interest rates between countries and prices are comparatively close then we expect exchange rates to change because of the BOP inequality. Interest rate parity supposes that the asset markets have more effect on exchange rates than the goods market. Interest rates fluctuate because of macroeconomic shocks like fiscal policy and monetary policy, because monetary policy is only a tool for economies with floating exchange rates. For economies with a fixed exchange rate, monetary policy is only used to support the fixed exchange rate or offset changes of the interest rate because of fiscal policy. One of the shortcomings of an economy with a fixed exchange rate... for the...
7 Pages(1750 words)Essay

MONEY AND BANKING

...? Money and Banking Part The movements in the current accounts for most economies are based primarily on thetrade deficits. Current account deficits are usually financed by the net capital inflows. Mostly, the trade deficits are caused by the rise in the current account deficits as well as the booming stock markets. For instance, the surge in productivity in US enhanced the boom in investment as GDP share. The rapid response was due to increased technological advancement that enhances increased productivity for several organizations (Agur 2008, p. 67-69). Trade deficit in a country is an economic condition, which results when a country imports more goods than it exports. The deficit is equivalent to the...
4 Pages(1000 words)Essay

Money and banking

...used the tool of open market operations with an objective of supporting proper functioning of credit markets, reduce the pressure on long-term financial markets and make financial conditions accommodative by selling long-term securities for the Fed’s portfolio. Figure 2: The Open Market Operations Graph (Source: Stock and Mark 21) i represents the nominal rate of interest, Dm represents money demanded and Ds represents the money supplied. The Federal Reserve varies the rates of interest to ensure maintenance of demand and supply of money with the aim of preventing financial crises. Discount Rate The second tool of monetary control that Fed used during the financial crisis is the discount...
4 Pages(1000 words)Research Paper

Money and banking

..., D (2005) Features of an effective central bank: some lessons of the past decade, Bank for International Settlements. Retrieved from the website: http://www.bis.org/speeches/sp050330.htm Minella, A., de Freitas, P.S., Goldfajn, I., Muinhos, M.K. (2003) Inflation targeting in Brazil: constructing credibility under exchange rate volatility, Journal of International Money and Finance, vol.22, pp. 1015-1040 Bevilaqua, A., and Loyo, E (2005) Brazil's stress test of inflation targeting, BIS papers no.23, retrieved from the website: http://www.bis.org/publ/bppdf/bispap23f.pdf on 26th March, 2006.... (Word count: 2653) Success of Banco Central in managing the rate of inflation The implementation of floating exchange rate regime and of the...
6 Pages(1500 words)Essay

Macroeconomics: Money and Banking

...Macroeconomics: Money and Banking Introduction Macroeconomics is the part of economics that deals with the economy as a whole, as opposed to microeconomics that deal with individual industries and sectors. Fluctuations in the economy as a whole, that is, in aggregate output, cause fluctuations in the unemployment rate, interest rates, and average prices. Monetary theory studies the demand and supply for money and the natural tendency of the macroeconomic system to balance the supply and demand to reach monetary equilibrium (Thurman, 2006). The figure below shows the diagrammatic representation of monetary equilibrium. The aggregate demand curve (AD) describes the total volume of...
6 Pages(1500 words)Essay

Money and Banking

...Money and banking, and asset bubbles The article starts by explaining the cause of the global financial crisis, which is the sub prime mortgage crisis in the United States and the measures that the government has taken in order to address the crisis. According to the authors, while the US government has announced bail outs which are seen as the most appropriate measure, the problem proves to be so much deeper and the solution will not lead to creating the effect that the government aims to promote through the measure. According to the article, as the government addresses the crisis by channeling more funds into the affected industries, hoarding of more capital instead of increase in spending in investment...
3 Pages(750 words)Essay

Money and Banking

...Money and Banking The Worker-Community Reinvestment Act is a United s federal regulation intended to support commercial banks and reserves interaction to gather the needs of borrowers in the entire segments of their communities, together with small - and reasonable -income neighborhoods. Congress approved the Act in 1977 to decrease unfair credit practices opposed to small -income vicinity, an exercise known as redlining. The Act necessitate the proper centralized financial supervisory group to persuade synchronized financial organization to meet up the credit wants of the neighboring communities in which they stay chartered, reliable with secure and safe operation. To put into effect the...
3 Pages(750 words)Essay

Money and Banking

... Money and Banking a. What are three ways that South Africas Central bank differs from the US Federal Reserve? Although South Africa’s Central Bank has similar economic policy making roles to the country like the US Federal Reserve, they differ in some ways. The first aspect of this difference is structure of the bank’s management. The US Federal Reserve System consists of a seven-member board of directors in Washington, D.C while South African central Bank has one governor in Pretoria. While South Africa’s central Bank is only one in the entire country, US Federal Reserve has 12 regional banks, each controlled by its own directors. The governor has final say in South African’s central Bank decision but in the US Federal Reserve... such...
1 Pages(250 words)Assignment

MONEY AND BANKING ASSIGNMENT

...Money and banking assignment Contents Question Monetary Policy 3 Question 2: International finance and the exchange rate 10 References 14 Question1: Monetary Policy I. The central banks around the world set a target interest rate to influence growth and control inflation. The interest rate target i.e. GDP growth rate and inflation rate are incumbent on the money supply of the economy. Central banks across the world such as the US Federal Reserve, European Central Bank, Bank of England, Bank of Japan, Reserve Bank of India, etc use various interest rate measures like the lending rate,...
9 Pages(2250 words)Assignment
sponsored ads
We use cookies to create the best experience for you. Keep on browsing if you are OK with that, or find out how to manage cookies.

Let us find you another Essay on topic Money and banking for FREE!

Contact Us