Text 3 The Regulation of International Banking

International banking activities are closely monitored and regulated by both home and host countries all over the globe. However, there is a strong trend toward deregulation of banking and the related fields of securities brokerage and securities underwriting. Moreover, an increasing number of nations have recently recognized the necessity of coordinating their regulatory activities so that, eventually, all banks serving the international financial markets will operate under similar rules.

International banking activities are regulated for many of the same reasons that shape the character of domestic banking regulations. There is an almost universal concern for protecting the safety of depositor funds, which usually translates into laws and regulations restricting bank risk exposure and rules specifying minimum amounts of owner’s equity capital to serve as a cushion against operating losses. Regulations frequently limit nonbanking business activities( such as underwriting corporate securities, underwriting or brokering insurance, etc) also to avoid excessive risk taking. Then, too, to the extent that international banks can create money through their lending and deposit-creating activities, international banking activity is regulated to promote stable growth in money and credit in order to avoid threats to each nation’s economic health.

However, international banking regulations are unique to the field itself – that is, they don’t apply to most domestic banking activity. For example, foreign exchange controls protect a nation against loss of its foreign currency reserves, which might damage its prospects for repaying international loans and purchasing goods and services from abroad (e. g., petroleum, food, machinery, etc.). Another instance would be rules that restrict the outflow of scarce capital funds that some governments see as vitally necessary for the health of their domestic economy and as a key element in strengthening their balance of payments position with the rest of the world. There is also a strong desire in many parts of the world to protect domestic financial institutions and financial markets from foreign competition. Many countries prefer to avoid international entanglements and excessive dependence on other countries for vital fuels, raw materials, food, and other goods and services. This isolationist philosophy often leads to outright prohibition of outside entry into full-service banking and may also restrict the international operations of domestic banks.

Text 4 What is a Central Bank?

Just as a prudent driver keeps an eye on the road and a hand on the wheel, every country’s central bank watches economic data carefully and adjusts the money supply in an effort to keep the economy headed in the right direction.

Instead of taking deposits and making loans as normal banks do, a central bank controls the economy by increasing or decreasing the country’s supply of money. Cranking up the printing presses is not the only way for a central bank to increase the economy’s supply of money. In fact, in most modern economies printed notes and coins are only a small percentage – often less than 10 percent – of the money supply. Central banks usually print only enough currency to satisfy the everyday needs of businesses and consumers.

Since most “money” is actually nothing more than a savings or checking account at a local bank, the most effective way for a central bank to control the economy is to increase or decrease bank lending and bank deposits. When banks have money to lend to their customers, the economy grows. When the banks are forced to cut back lending, the economy slows.

Once a customer deposits money in a local bank, it becomes available for further lending. A hundred dollars deposited at a bank in, for example, doesn’t lie idle for long. After setting aside a small amount of each deposit as a “reserve”, the bank can lend out the reminder, further increasing the money supply – without any new currency being printed. When these loans are redeposited in banks, more money becomes available for new loans, increasing the money supply even more. A bank’s supply of money for lending is limited only by its deposits and its reserve requirements, which are determined by the central bank.

Another way of controlling the money supply is to raise or lower interest rates. When a central bank decides that the economy is growing too slowly – or not growing at all – it can reduce the interest rate it charges on the loans to the country’s banks. When banks are allowed to get cheaper money at the central bank, they can make cheaper loans to businesses and consumers, providing an important stimulus to economic growth. Alternatively, if the economy shows signs of growing too quickly, a central bank can increase the interest rate on its loans to banks, putting the brakes on economic growth.

If a central bank allows the economy to expand too rapidly by keeping too much money in circulation, it may cause inflation. If it slows down the the economy by removing too much money from circulation, an economic recession could result, brining unemployment and reduced production. A central bank serves as a watchdog to supervise the banking system, in most cases acting independently of its government to provide a stabilizing influence on the country’s economy.

The activities and responsibilities of central banks vary widely from country to country. For example, Britain’s Bank of England is responsible for printing the money as well as supervising the banking system and coordinating monetary policy. In the United States, the duties of a central bank are divided among different agencies: the U.S. Treasury borrows the government’s money through Treasury bond and note issues, while the Federal Reserve Board is put in charge of monetary policy and overseas the printing of money at the Bureau of Printing and Engraving.

The French central bank prints and issues the money, but the French treasury makes the decisions regarding monetary policy and bank supervision. In Germany the central bank is noted for its active policy of strict monetary control, limiting money supply growth in order to control inflation.

The Bank of Japan, like many of the world’s central banks, acts as banker to the government. This activity is a major source of revenue for the bank since fees are charged for issuing the government’s checks.

Questions:

1. What are the main functions of a central bank?

2. In what way can a central bank control the economy?

3. How can central banks control the money supply?

4. Do the activities and responsibilities of central banks vary from country to country? Give your examples.