C ENTRAL B ANK

1. CENTRAL BANK General functions • Issuance of currency - The Central Bank normally has complete control over this function. However in some countries commercial banks also issue notes e.g. Northern Ireland and Scotland. This can lead to a problem where such notes are not recognised elsewhere in the UK • Management of Exchange Rates - The Central Bank has power to (artificially) influence the exchange rate of a currency. For example if a currency e.g. sterling is deemed too weak, the Central Bank (Bank of England) could use other reserve currencies such as euros and dollars to buy sterling on the foreign exchange markets. This would  increase the demand for sterling and thereby its price • Management of Gold Reserves - Though it is a relic of the past when commodity money was used Central Banks still have gold in their reserves which they are entrusted to guard safely

2. CENTRAL BANK (con) Government Bank • Holder of Government account - just as a commercial bank acts for the public, the Central Bank acts for the Government holding (and managing) its very large account • Management of Debt - The Government will generally require to borrow money which can be raised through the issuing of various types of government securities (gilts). The Central Bank generally manage this function though for some years now in Ireland it has beencarried out by a specialist body - the NTMA (National Treasury Management Agency). • Advises on economic policy - A considerable amount of research into economic developments in the economy is carried out by the Central Bank. It then advises the Government (usually advocating prudence and caution) in its conduct of economic policy. This advice (in Ireland) is contained in the Central Bank Bulletin (published each quarter).

3. CENTRAL BANK (con) Bankers Bank • Licensing and supervising authority - In order to operate a bank must obtain a license that is issued by the Central Bank which can be taken away in the case of misconduct. Also the Central Bank is generally entrusted with the day to day supervision of the financial system. In Ireland another special body - which is however closely associated with the Central Bank - has been set up for this purpose. It is called the Financial Services Regulatory Authority • HoldsDeposits of Financial Institutions - Banks hold their own accounts with the Central Bank. At the end of each day they settle up their own debts with each other through cheques drawn on these accounts (clearing accounts).Also for security reasons they need to minimise the amount of cash kept on the premises. So most of this cash is held for safe keeping with the Central Bank • Sets reserve requirements - Though vital for meeting customer requirements, the holding of cash is not profitable for banks. Thus there is a need for reserve ratios whereby they are legally required to hold a certain percentage of their reserves in cash. This ratio is set by the Central Bank.

4. CENTRAL BANK (con) • Provides Lending Facility - The Central Bank also provides a lending facility for the banks which enables them to obtain additional liquidity if in danger of running short of cash. The "Bank Rate" is the rate of interest charged by the Central Bank for this purpose and can represent an important use of monetary policy.Though the Central Bank can act as "lender of last resort" in a dire emergency, normally this is not exercised • AppliesAdditional Measures when Required - The Central Bank can call for additional deposits to be made with it (for example when too much credit is extended). Also in certain cases it may impose penalty restrictions on banks for extending too much credit.

5. MONETARY POLICY Central Bank Responsible for Monetary Policy: Key elements – • Control of money supply. It is important to control the amount of money in circulation. Though putting extra money into circulation can stimulate economic activity, too much money can lead to inflation 2.Changing the interest rate.  Interest rates throughout the financial sector are closely related to each other. Therefore if The Central Bank lowers its own rate  this usually leads to a general reduction in interest rates which stimulates economic activity (through additional investment and consumer spending) 3. Managing the exchange rate. The value of the exchange rate with other currencies is very important as it affects trade. For example due to the recent rise of the euro against the dollar, it is now cheaper to import goods from the US (and to visit there on holiday). However it is more expensive to sell goods into the US market. Though the Central Bank can affect the exchange rate, it generally does not intervene in this manner 4. Other measures.Formerly credit controls were widely used in Ireland, though with the single financial market in Europe these are no longer used. However other measures such as reserve ratios and banking legislation can also impact on monetary policy.

6. EUROPEAN CENTRAL BANK Since 1998 all national Central Banks are part of the European system.This federal arrangement is referred to as the European System of Central Banks (ECSB) with decisions taken by an executive board - referred to as the European Central Bank (ECB) Most of the traditional functions of national Central Banks are now controlled by the ECB. • Currency i.e. the Euro is now issued through the ECB; our national Central Bank then acts as an agent for the ECB in printing notes and minting coins for the Irish economy • The power to control exchange rates for Eurozone countries has now ceased • The terms (interest rate) on which lending to other banks is now set is through the European Central Bank. Therefore the ECB can control the overall amount of credit extended • The European Central Bank also controls the reserve ratio of the banks

7. EUROPEAN CENTRAL BANK (con) However the national Central Bank still can play a regulatory role though this now exercised through The Financial Services Authority of Ireland • The National Central Bank still acts a banker to the Government. • However the amount which can be lent out (and the manner in which borrowing takes place) is again controlled at a European level • So overall now the role of the national Central Banks (within the EMU) is to carry out the policy that has been agreed at a European level • In other words independent monetary policy - with respect to money supply, interest rates or exchange rates - has now ceased for Eurozone countries