Unit 8 Central Banking - Key Before you read Lead in 1.

In most countries, the functions of the central bank include: - To act as banker to the government and the commercial banks; - To decide the minimum interest rate; - To keep minimum deposits of commercial banks; - To issue banknotes; - To issue securities for the government; - To occasionally lend money to banks in difficulty; - To maintain financial stability; - To manage reserves of gold and foreign exchange markets to attempt to influence the exchange rate; - To publish monetary and banking statistics; and - To supervise the banking system. In some countries it is the government rather than the central bank that makes interest rate decisions, but there is a trend towards central bank independence. (In some countries, inclg Britain, the government sets the inflation target underlying interest rate changes; in other countries, such those in the Eurozone, the central bank (the European Central Bank) sets this target too.) In some countries the central bank in involved in clearing cheques between commercial banks, in others it is not. In some countries, financial supervision is undertaken by another agency, for example in Britain this role is shared between the central bank and the Financial Services Authority. 2.Central bank decisions regarding interest rates have repercussions on how much people pay for their mortgage, how much they receive from savings accounts in banks, investments, etc. If the central bank is able to influence the exchange rate, this can affect the price of imports and foreign holidays.

Discussion 1A 11N 1c 2S 3S 4A 5N 6S 7N 8A 9A 10S 12A 13A 14N 15A 16A 2g 3h 4a 5d 6e 7i 8b 9f

Vocabulary

Reading tasks The Bank of England 1. The text mention the following functions: 2,4 (though it says official interest rate rather than minimum) 9, 10, 12, 13 and 16 2 Complete the text with the words (1-9) from the Vocabulary exercise opposite. 1 core 2 inflation 3 target 4 remunerated 5 sterling 3 According to the text, are the following statements true or false? 1T 6T 2T 7F 3F 8T 4T 9F 5F 6 policy 7 threats 8 sound 9 oversight

Reading tasks A Understanding main points Read the two short texts on the European System of Central Banks (ESCB) and complete the information below.
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The ESCB is composed of the European Central Bank and the EU national central banks. 2 The ECB is run by the __executive board__. 3 The organization of the ECB executive board:
1 ______President_______ ________Vice-President_____

c) __Member__

c) ___ Member _

c) __ Member _

c) __ Member _

4 The members of the executive board are in charge of: a)payment systems e)statistics b)banking supervision f) banknotes c)international relations g) information systems d)organisation 5 The ECBs governing council consists of: b) the presidents of the NCBs of participant countries Of these c) the presidents of the NCBs have the majority. 6 The main objective of the ESCB is to maintain price stability. 7 The NCBs fulfil all functions except setting interest rates. 8 Interests rates are set by the ECBs governing council. B Understanding details Mark these sentences T (true) or F (false) according to the information in the texts. Find the part of the text which gives the correct information. 1F 2T 3T 4T 5F 6F Vocabulary tasks A Word fields Write these words and phrases in the appropriate columns. organisational structure ___consist of________ to responsibility contribute to change give rise
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a)the executive board

be composed of be run by be headed by comparison: relatively small B Definitions

be in charge of undertake ensure

shift transition take over from

Match these terms with their definitions. 1d 2c 3a 4e 5b C Collocations Match these verbs and nouns as they occur in the texts. 1d 2g 3b 4c 5a 6e D Word families Complete the chart. 2 advisory 3 participant 5 (de)stabilising 6 influence 4 participation 7f

Reading tasks US Federal Reserve System by Alexander Davidson Answer the following questions. 1 Are the Feds policies directly influenced by the US Congress? No. It is an independent, central government agency.
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How many Federal Reserve Banks are there in the United State? 12 What are the obligations and rights of commercial banks toward the regional Fed bank? Paragraph 3
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How many main monetary policy instruments does the Fed use to control the money supply? What are they? What is the most important instrument? Three. They are: Open market operations; the discount rate; and the reserve requirement. Open market operations tool is the most important.

What can the Fed do with government securities if it wants the banking system to have extra reserves? It buys government securities Who issues government securities in the United States? the US Treasury

What short-term open market operations that were used by the Fed in the credit crisis of 200709? The Fed has bought toxic mortgagebacked securities from banks, which has increased the money supply. What can banks do when they want to increase their reserves? They can go to the Feds discount window and borrow what they need at the discount rate (not usually), or they can otherwise borrow at the federal funds rate from other banks

What are reserve requirements? The proportion of deposits a bank must hold in its reserves as it lends the rest out. What people tend to do with money under the gold standard? Change money into gold

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11 Why do some people worry about Feds methods in the credit crisis of 200709? Printing money to stimulate the economy can lead to rampant inflation in the long run, as in Weimar, Germany in the 1920s and in Zimbabwe today. In the credit crisis of 200709, some feared that the Fed, with its rescue programmes, was moving in that direction.
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How did the chairman of the Fed justify these methods? Last paragraph.

Discussion Go back to the first Discussion exercise. According to what you have learnt from the Reading tasks, which of the 16 activities listed are done by central banks? Practice Decide what you think a central bank would typically do in the following situations, and then explain why to the class. 1 A provincial savings bank has had debts of $300 million and may go bankrupt because it lent too much money to property speculators, and the value of their investments has gone down by 40%. In a situation like this, the central bank might let the bank go bankrupt, or hope that another bank would take it over, because although savers will lose their money in case of a bankruptcy, there might not be many further effects on the financial system. The central bank cannot be seen to underwrite irresponsible lending. 2 Inflation has increased by 1.25% in three months, which is half the countrys annual inflation target. The economy seems to be working at full capacity.
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This would be a typical situation in which the bank might increase interest rates (if it had the power to do so), in order to slow down economic growth. 3 A trader at a large universal bank has lost $450 million in disastrous derivatives trades. This bank now has absolutely no liquidity. In these circumstances the central bank would probably try to intervene and prevent bankruptcy, as the collapse of a large universal bank would have enormous effects on the entire financial system. 4 Demand for consumer goods has declined for the sixth successive month, and unemployment has increased by 1.75% in three months. This would be a typical situation in which the bank might lower interest rates (if it had the power to do so), in order to encourage increased spending and investment.