Ibrahim Apekhade Yusuf takes a look at how the apex bank in other countries work
CENTRAL Banks operate in different parts of the globe, from the USA, Britain, Germany, Belgium, Canada, Portugal, to Middle East Asia and in Japan, China, Malaysia, Saudi Arabia, Kuwait, to Brazil as well as the African continent.
For sure, most of these countries’ central banks are saddled with the onerous responsibility of ensuring that the economy is on a clean bill of health in terms of monetary policy formulation, among other fiscal functions.
But by far, the central banks in the USA and Britain remain, in the view of some economic and financial pundits, a model, in part, because of their socio-economic and technological advancement.
The making of Bank of England
From the middle of the 17th century, England, and London in particular, buzzed with ideas – indeed the era has been dubbed ‘the age of projects’ – but one which kept coming to the fore was the notion of a national bank.
People sensed that the country was on the brink of a tremendous expansion of trade, but one vital element was lacking: what was needed was a bank or “fund of money” – more liquidity, in modern parlance – to drive the trade of the country. They looked with some envy across to the continent at the example of the Dutch who were then pre-eminent in Europe.
Central to the success of the Dutch was the Amsterdam Wisselbank, which had been founded in 1609. It provided the motive power for the Dutch economy by lending to the City of Amsterdam, the State in the form of the Province of Holland and trade in the shape of the Dutch East India Company as well as being responsible for coinage and, of course, exchange. Much later, in 1683, it was empowered to lend to private customers. Payments over a certain amount had to pass through it and it therefore was convenient for the important finance houses to hold accounts with it. Thus, not only was it in a position to oversee the Dutch financial scene, it was also able to act as a stabilising influence on it.
Dutch William had brought to his adopted country, England, an understandable desire to help his native country in its war against the French and this proved to be the catalyst necessary for the idea of a national bank to be accepted, albeit grudgingly by some.
But it took a London-based Scots entrepreneur, William Paterson, to propose the scheme that eventually found favour: his first, proposed in 1691, had been rejected for several reasons. This was partly because, as he wrote in 1695, “Others said this project came from Holland and therefore would not hear of it, since we had too many Dutch things already.”
Thus, the Bank of England can be said to have experienced some chequered existence which dates back to its foundation.
But in 1997, the new government announced its intention to transfer full operational responsibility for monetary policy to the Bank of England. The Bank thus rejoined the ranks of the world’s “independent” central banks. However, debt management on behalf of the government was transferred to HM Treasury, and the Bank’s regulatory functions passes to a new Financial Services Authority.
Subsequently, in 2013, the Financial Services Act 2012 established an independent Financial Policy Committee (FPC), a new prudential regulator as a subsidiary of the Bank, and created new responsibilities for the supervision of financial market infrastructure providers. The reforms came into force on 1st April 2013 when the Financial Services Authority ceased to exist.
The Prudential Regulation Authority (PRA) at the Bank took responsibility for the prudential regulation and supervision of banks, building societies, credit unions, insurers and major investment firms. The PRA’s role was defined in terms of two statutory objectives to promote the safety and soundness of these firms and, specifically for insurers, to contribute to the securing of an appropriate degree of protection for policyholders.
In promoting safety and soundness, the PRA focused primarily on the harm that firms could cause to the stability of the UK financial system. A stable financial system is one in which firms continue to provide critical financial services a precondition for a healthy and successful economy.
The PRA worked alongside the Financial Conduct Authority (FCA) to create a “twin peaks” regulatory structure in the UK. The FCA was a separate institution and not part of the Bank of England. The FCA was responsible for promoting effective competition, ensuring that relevant markets function well, and for the conduct regulation of all financial services firms. This included acting to prevent market abuse and ensuring that consumers got a fair deal from financial firms. The FCA operated the prudential regulation of those financial services firms not supervised by the PRA, such as asset managers and independent financial advisers.
The USA experience
United States encompasses various bank regulations, from the early “wildcat” practices through the present Federal Reserve System.
The Federal Reserve System (also known as the Federal Reserve, and informally as the Fed) is the central banking system of the United States. It was created on December 23, 1913, with the enactment of the Federal Reserve Act, largely in response to a series of financial panics, particularly a severe panic in 1907.
Over time, the roles and responsibilities of the Federal Reserve System have expanded and its structure has evolved.
Events such as the Great Depression were major factors leading to changes in the system.
The U.S. Congress established three key objectives for monetary policy in the Federal Reserve Act: Maximum employment, stable prices, and moderate long-term interest rates. The first two objectives are sometimes referred to as the Federal Reserve’s dual mandate.
Its duties have expanded over the years, and today, according to official Federal Reserve documentation, include conducting the nation’s monetary policy, supervising and regulating banking institutions, maintaining the stability of the financial system and providing financial services to depository institutions, the U.S. government, and foreign official institutions. The Fed also conducts research into the economy and releases numerous publications, such as the Beige Book.
The Federal Reserve System’s structure is composed of the presidentially appointed Board of Governors (or Federal Reserve Board), the Federal Open Market Committee (FOMC), twelve regional Federal Reserve Banks located in major cities throughout the nation, numerous privately owned U.S. member banks and various advisory councils. The FOMC is the committee responsible for setting monetary policy and consists of all seven members of the Board of Governors and the twelve regional bank presidents, though only five bank presidents vote at any given time (the president of the New York Fed and four others who rotate through one-year terms). The Federal Reserve System has both private and public components, and was designed to serve the interests of both the general public and private bankers. The result is a structure that is considered unique among central banks. It is also unusual in that an entity outside of the Central Bank, namely the United States Department of the Treasury, creates the currency used. According to the Board of Governors, the Federal Reserve System “is considered an independent Central Bank because its monetary policy decisions do not have to be approved by the president or anyone else in the executive or legislative branches of government, it does not receive funding appropriated by the Congress, and the terms of the members of the Board of Governors span multiple presidential and congressional terms.”
The authority of the Federal Reserve System is derived from statutes enacted by the U.S. Congress and the System is subject to congressional oversight. The members of the Board of Governors, including its chair and vice-chair, are chosen by the president and confirmed by the senate. The federal government sets the salaries of the board’s seven governors. Nationally chartered commercial banks are required to hold stock in the Federal Reserve Bank of their region; this entitles them to elect some of the members of the board of the regional Federal Reserve Bank. Thus the Federal Reserve System has both public and private aspects.
The U.S. government receives all of the system’s annual profits, after a statutory dividend of 6% on member banks’ capital investment is paid, and an account surplus is maintained. In 2010, the Federal Reserve made a profit of $82 billion and transferred $79 billion to the U.S. Treasury. This was followed at the end of 2011 with a transfer of $77 billion in profits to the U.S. Treasury Department.
The primary motivation for creating the Federal Reserve System was to address banking panics.
Other purposes are stated in the Federal Reserve Act, such as “to furnish an elastic currency, to afford means of rediscounting commercial paper, to establish a more effective supervision of banking in the United States, and for other purposes.”
