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1 The Banks

Here is a summary of what Wikipedia has to say about central banks which is a little more detailed but less explanatory then my descriptions.

Central Banks

All modern economies are based on fiat money which is managed by the central bank.

The central bank is responsible for;

  1. Creating and destroying money in the form of notes and coins.
  2. Providing bank accounts for the commercial banks in which to place their reserves. (The central bank can influence the money supply by modifying reserve requirements, which is the amount of funds commercial banks must hold against deposits in bank accounts. By lowering the reserve requirements, banks are able loan more money, which increases the overall supply of money in the economy and visa versa.)
  3. Lending to the commercial banks at an interest rate known as the discount rate or interbank rate,
  4. Buying and selling government bonds and other financial instruments on behalf of the government.
  5. Managing the country's foreign exchange and gold reserves and the Government's stock register (foreign government bonds I think)
  6. Regulating and supervising the banking industry.

In the exercise of these responsibilities the central bank's monetary policies are generally directed towards;

  1. Maintaining stability of the currency meaning price stability, moderate interest rates, stable exchange rates and financial market stability.
  2. Achieving economic growth (Encouragement of savings supplies funds that can be drawn upon for investment.).
  3. Maintaining full employment, and ensuring the welfare of the people.
And these directives must be achieved through;
  1. Modifying the reserve requirements for commercial banks.
  2. Changing the interbank lending rate.
  3. Buying and selling government bonds and other securities. (Selling bonds takes liquid money out of the system replacing it with solid money to be redeemed in the future.)
  4. Buying and selling foreign exchange and gold reserves.

Other Banks

After the great depression, the U.S. Congress required that banks were divided into commercial banks and investment banks but this separation is no longer mandatory.

  • Commercial banks accepted deposits and made loans, as well as other fee based services.
  • Investment banks were limited to capital market activities.

Today commercial banking means a bank that largely deals with corporate checking accounts, savings accounts, and money market accounts and that accepts time deposits.

  • Retail banking deals with the public offering savings and checking accounts, mortgages, personal loans, debit cards, credit cards, and so forth. Retail Banking services are also termed as Personal Banking services.
  • Community development bank are regulated banks that provide financial services and credit to under served markets or populations.
  • Private banks manage the assets of high net worth individuals.
  • Offshore banks are banks located in jurisdictions with low taxation and regulation. Many offshore banks are essentially private banks.
  • Savings banks accept savings deposits.
  • Postal savings banks are savings banks associated with national postal systems.

In modern economies other banks engage in the following activities:

  1. Processing of payments by way of telegraphic transfer, EFTPOS, internet banking, or other means
  2. Issuing bank drafts and bank cheques
  3. Accepting money on term deposit
  4. Lending money by overdraft, instalment loan, or other means
  5. Providing documentary and standby letter of credit, guarantees, performance bonds, securities underwriting commitments and other forms of off balance sheet exposures
  6. Safekeeping of documents and other items in safe deposit boxes
  7. Sale, distribution or brokerage, with or without advice, of insurance, unit trusts and similar financial products as a “financial supermarket” investing in capital markets (investment banking).
  8. Traditionally, large commercial banks also underwrite bonds, and make markets in currency, interest rates, and credit-related securities, but today large commercial banks usually have an investment bank arm that is involved in the mentioned activities.


(c) The information under this section is edited from Wikipedia and is used under the following licence http://creativecommons.org/licenses/by-sa/3.0/







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