Role of the Central Bank as Regulatory Authority of Financial Markets and Institutions

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Role of the Central Bank as Regulatory Authority of Financial Markets and Institutions

•A central bank is the term used to describe the authority responsible for policies that affect a country’s supply of money and credit.
• More specifically, a central bank uses its tools of monetary policy—open market operations, discount window lending, changes in reserve requirements—to affect short-term interest rates and the monetary base (currency held by the public plus bank reserves) and to achieve important policy goals.
As the first public bank to "offer accounts not directly convertible to coin", the Bank of Amsterdam established in 1609 is considered to be the precursor to modern central banks.
The central bank of Sweden was founded in Stockholm from the remains of the failed bank Stockholms Banco in 1664 and answered to the parliament ("Riksdag of the Estates") thus making it the oldest central bank still operating today.
Although central banks today are generally associated with fiat money, the 19th and early 20th centuries central banks in most of Europe and Japan developed under the international gold standard, elsewhere free banking or currency boards were more usual at this time. Problems with collapses of banks during downturns, however, was leading to wider support for central banks in those nations which did not as yet possess them, most notably in Australia.
The US Federal Reserve was created by the U.S. Congress through the passing of The Federal Reserve Act in the Senate and its signing by President Woodrow Wilson on the same day, December 23, 1913. Australia established its first central bank in 1920, Colombia in 1923, Mexico and Chile in 1925 and Canada and New Zealand in the aftermath of the Great Depression in 1934.
The People's Bank of China evolved its role as a central bank starting in about 1979 with the introduction of market reforms, which accelerated in 1989 when the country adopted a generally capitalist approach to its export economy.
The most recent bank model, was introduced together with the euro, involves coordination of the European national banks, which continue to manage their respective economies separately in all respects other than currency exchange and base interest rates.
Nepal Rastra Bank, the Central Bank of Nepal, was established in 1956 under the Nepal Rastra Bank Act 1955, to discharge the central banking responsibilities including guiding the development of the embryonic domestic financial sector.
Since inception, there has been a significant growth in both the number and the activities of the domestic financial institutions.
Nepal Bank Ltd. remained the only financial institution of the country until the foundation of Nepal Rastra Bank is 1956 A.D.
 Due to the absence of the central bank, Nepal Bank has to play the role of central bank and operate the function of central bank..
 Nepal Rastra Bank makes various guidelines for the banking sector of the country.
To achieve price and balance of payments stability, manage liquidity and ensure financial stability, develop a sound payments system and promote financial services. 
To formulate necessary monetary and foreign exchange policies to maintain the stability in price and consolidate the balance of payments for sustainable development of the economy of Nepal
Contd….
To develop a secure, healthy and efficient system of payments;
To make appropriate supervision of the banking and financial system in order to maintain its stability and foster its healthy development; and
To further enhance the public confidence in Nepal's entire banking and financial system.
To promote entire banking and financial system of the kingdom of Nepal system.
A central bank is a public institution that manages a state's currency, money supply, and interest rates.
Central banks also usually oversee the commercial banking system of their respective countries.
In contrast to a commercial bank, a central bank possesses a monopoly on increasing the nation's monetary base, and usually also prints the national currency, which usually serves as the nation's legal tender.
Examples include the:
Nepal Rastra Bank (NRB),
Reserve Bank of India (RBI),
European Central Bank (ECB),
Bank of England,
Bank of Japan,
Federal Reserve of the United States, 
People's Bank of China etc.
NRB, the central bank of Nepal, established in 1956 under the Nepal Rastra Bank Act 1955 is the monetary, regulatory and supervisory authority of banks and financial institutions.
The new Nepal Rastra Bank Act 2002 which replaces the erstwhile Act has ensured operational autonomy and independence to the Bank.
Key objectives of the Bank are to achieve price and balance of payments stability, manage liquidity and ensure financial stability, develop a sound payments system, and promote financial services.
The Board of Directors, chaired by the Governor, is the apex body of policy making and the Governor also discharges his duty as the chief executive of the Bank.
 
Vision
    To become “ A modern, dynamic, credible and effective Central Bank”

Mission
   To maintain macro-economic stability through sound and effective monetary, foreign exchange and financial sector policies.
Board of Directors
As per section 14 of Nepal Rastra Bank Act, 2002, the Board of Nepal Rastra Bank (NRB) comprises of seven members: four ex officio members - the Governor (who is the Chairman), the Secretary, Ministry of Finance, two Deputy Governors, and three other Directors, who are appointed from amongst the persons renowned in the field of Economics, Monetary, Banking, Finance and Commercial Laws.
The Governor, Deputy Governors and other Directors are appointed by Government of Nepal, Council of Ministers for term of five years. Government may, reappoint the retiring Governor for another one term and the retiring other Directors for any term, if it is deemed necessary.

Functions of a Central Bank
1. Bank of Note Issue:
 The central bank has the sole monopoly of note issue in almost every country. The currency notes printed and issued by the central bank become unlimited legal tender throughout the country.
The main advantages of giving the monopoly right of note issue to are :
(i) Brings uniformity in the monetary system of note issue and note circulation.
(ii) Increases public confidence in the monetary system.
(iii) Enables the central bank to exercise control over the creation of credit by the commercial banks.
2. Banker, Agent and Adviser to the Government:
The central bank functions as a banker, agent and financial adviser to the government,
a) As banker to government, the central bank maintains the accounts of the central as well as state government, receives deposits from it, makes short-term advances and collects cheques and drafts deposited in the government account.
b) As an Agent to the government, the central bank collects taxes and raises loans from the public and thus manages public debt.
c) As a financial adviser to the lent, the central bank gives advise to the government on economic, monetary, financial and fiscal matters.

3. Bankers' Bank:
    The central bank acts as the bankers' bank in three capacities:
    (a) custodian of the cash preserves of the commercial banks;
    (b) as the lender of the last resort; and
    (c) as clearing agent.

  In this way, the central bank acts as a friend, philosopher and guide to the commercial banks
Functions of a central bank
4. Lender of Last Resort:
In case if the commercial banks are not able to meet their financial requirements from other sources, they can, as a last resort, approach the central bank for financial accommodation.
- It increases the elasticity and liquidity of the whole credit structure of the economy.
- It provides financial help to the commercial banks in times of emergency.
- It enables the central bank to exercise its control over banking system of the country.
Functions of a central bank
5. Clearing Agent :
The function of clearing house in the central bank has the following advantages:
(i) It economies the use of cash by banks while settling their claims and counter-claims.
(ii) It reduces the withdrawals of cash and these enable the commercial banks to create credit on a large scale.
(iii) It keeps the central bank fully informed about the liquidity position of the commercial banks.
Functions of a central bank
6. Credit control:
 -  The significance of the function has increased so much that for property understanding. The central bank has acquired the rights and powers of controlling the entire banking.
 - Central bank can adopt various quantitative and qualitative methods for credit control such bank rate, open market operation, changes in reserve ratio selective controls, moral situation etc.
Functions of a central bank
7. Collection of Data:
  Central banks collects statistical data regularly relating to economic aspects of money, credit, foreign exchange, banking, economic growth etc.


Role of Central Bank
Role of Central Bank
Control of the money supply
Stabilizing the money and capital markets
Lender of Last resort
Maintaining and improving the payments mechanism
Maintaining a sound banking and financial system
Carrying out monetary policy
Providing information to the public
Control of the money supply:
  Central bank plays several important role
  in a modern economy. The most important role is control of the money supply.
§To control the inflation
§To change the economic activity
§To influence the growth rate of economy as a whole

Stabilizing the money and capital markets:
  Another important role of central  bank is stabilizing the money and capital markets. If the financial markets are unruly, with more fluctuation  in interest rates and securities prices or financial institutions are prone to frequent collapse, public confidence in the financial system might be lost.
Cont…
The flow of funds would dry up, resulting in a drastic slowing  in the rate of economic growth and a rise in unemployment.
Central bank play a vital role in fostering the mature development of financial markets and in ensuring a stable flow of funds through those markets

Lender of Last resort:
  Sometime, financial institutions may face the problems of funds. When alternative sources of funds dried up, the central bank provides the funds to the financial institutions  as per their needs at the time of financial crisis to solve the problem.

Maintaining and improving the payments mechanism:
This involves clearing cheque
Providing adequate currency
Wiring funds
Preserving confidence in the value of monetary units

Maintaining a sound banking and financial system:
By serving as a lender of  last resort
By providing reserves to depositary institutions

Carrying out monetary policy:
  Various tools are used to carry out the monetary policy:
Deposit reserve requirement
Discount rates
Open market operation etc

Providing information to the public:
Information related current economic and financial developments and changes in policies etc.
Daily, weekly, monthly, quarterly etc.
A central bank is a public institution that manages a state's currency, money supply, and interest rates.
NRB-the central bank of Nepal-established in 1956 -Nepal Rastra Bank Act 1955
It is the monetary, regulatory and supervisory authority of banks and financial institutions.
The new NEPAL RASTRA BANK ACT 2002 replaces the erstwhile Act has ensured operational autonomy and independence to the Bank.
Key objectives of the Bank are to achieve price and balance of payments stability, manage liquidity and ensure financial stability, develop a sound payments system and promote financial services.
The Board of Directors, chaired by the Governor, is the apex body of policy making and the Governor also discharges his duty as the chief executive of the Bank. 
Central bank plays the role of :
ØBanker, Agent and Adviser to the Government,
ØBankers' Bank,
ØLender of Last Resort,
ØClearing Agent
ØCredit controller
ØCollection of Data
ØBank of Note Issue
The major objectives of the central bank are to achieve price and balance of payments stability, manage liquidity, ensure financial stability, develop a sound payments system, promote financial services, formulate necessary monetary and foreign exchange policies, make appropriate supervision of the banking and financial system in order to maintain its stability and foster its healthy development, enhance the public confidence in banking and financial system and promote entire banking and financial system of the nation.

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