International currencies, international payments, inflation, GDP growth, nation’s economy, monetary policies and complete governance of banking sector are all some of the most important issues of central banks and financial institutions. Each nation is governed by its banking policies which are reformed according to the global financial market conditions. This paper discusses about role of central bank, non-financial firms and the risks that banks are confronted apart from the techniques that banks use in risk management.
A special discussion about banking institutions in Belgium is also detailed herein. 1. Role of Central Bank Central Bank is an independent monetary authority holding a great responsibility of controlling and maintaining currencies, flow of currency, supply and demand for money and fixing loan interest rates. Central Bank also monitors over the functioning and performance of other banks both commercial and nationalized banks.
Most of the Central Banks are state owned in which, government intervention is possible in issues of monetary policies whereas if a Central Bank is named as “independent central bank” it does not permit any political or government interference and functions as independent authority for considering any decisions in terms of money, currency, interest or in international financial dealings. Some of the independent central banks that are functioning at present are Reserve Bank of Australia, European Central Bank, Bank of Canada, the Banco de la Republica de Colombia, Central Bank of the Republic of Turkey and the Federal Reserve.
Some of the major and responsible activities of Central Bank are : keeping a record of flow of money in a nation and its supply, acts as a government’s banker and also to consider the responsibility of Bankers’ Bank, maintainance of gold and foreign exchange reserves and Government’s stock register, regulating and superivising the entire banking industry and taking note of inflation and country’s exchange rate.
In order to perform all the activities with efficiency, Central Bank is permitted to take considerable steps in reformation of its monetary policies both within and in designing the other banks which are within its purview of authority. Guiding principles of Central Bank are, price stability , fiscal policies and monetary policies, avoiding problems that come with time inconsistencies, forward and future outlook on monetary policies, accountability for all its transactions, taking note of price fluctuations in monetary policies and financial instability in economic downturns.
The rise and fall of Stock exchanges, credit policies, interest-lending rates, gold and currency reserves, have a deep impact on role of Central Bank whether it is performing in a progressive manner. Especially Central Bank influences market interest rates, which is fixed by Central Bank. The Federal Reserve is the head of Central Bank since U. S Dollar is the key currency for carrying international trade.
Presently global economy and business is being transacted taking the base of U. S. Dollar currency either in currency exchange or in terms of customs duties or any other foreign exchange tariffs. The following are the present interest rates of Central Bank : 1. Marginal Lending Rate : 5 percent in the Eurozone. 2. Main Refinancing Rate : 4 percent in the Eurozone. 3. Deposit Rate : 3 percent in the Eurozone. All the banks operating under the prescribed rules of Central Bank are required to maintain a portion of assets as established by Central Bank. Similarly, all banks are required to a fixed percentage of Reserves.
In order to keep the flow of currency in much more volumes, Central Bank is authorized to purchase local currency either at market-set rate or that is arbitrarily fixed by Central Bank itself. By practicing this, whenever Central Bank purchases foreign currency by selling local currency, money supply increases for the Central Bank. Central Bank reduces money supply by implementing various means such as, by issuing selling bonds or foreign exchange disputes or conflicts.