6 Ocak 2013 Pazar

The Tasks of Central Banks and the Concept of Central Banking

In the world every government must take important decisions to protect their economy. In many developed or emerging countries the governments leave the economic activities to their central banks. Since they are given a key mission they are trying to protect the stability in economy. This means that keeping the economy constant or increasing wealth and quality of the people. Some economists argue that price stability is the basic role of the central bank. Is it a necessary action as a primary role, for the president of a central bank to maintain price stability? It looks like an easy job but they examine hundreds of statistical graphs and integrate these information with the past experiences and also they must choose the right direction for their nation’s economical life in the times of crises or recession otherwise there will be a sharp decline from the level of welfare.

Regarding the above mentioned issues, we will be dealing with the central bank activity in this study. We will start with the concept of central banks, after that the president of the central bank and his/her responsibilities will be tried to be shown. In the later sections we will be dealing with his power on the economy, the relations with the governmental organizations and how he or she must react in case of crises in the economy.
Definition Of Central Banking

Before going into the definition we will try to discuss the history of central banking. One of the oldest banks that performed some of the duties of a central bank was the Bank of Sweden that was opened in 1668 with help from Dutch businessmen. This was followed in 1694 by the Bank of England, created by a businessman in the City of London at the request of the British government to help pay for a war. The concept of the modern central bank did not appear until the 20th century as problems developed in the commercial banking system. After the establishment of many important central banks in the 19th century, US Federal Reserve was created by the U.S. Congress through the passing of the Glass-Owen Bill, signed by President Woodrow Wilson on December 23 in 1913.[1]
After the brief explanation of their history, we can start to explain their importance in the economy. Central Banks are very important institutions not only for the economic development of the countries but also for the social and behavioral evolution of the publics. This is because of their roles in the economy and their reaction for the economic fluctuations. Since these institutions are seen to be crucial for the economic activities, they must be managed very well. The board which is managing the bank must be selected from economists who are very good in determination and crises management but before those they should have the capability of proactive decision taking. To assure this, the selection of president of TCMB is done according to the following terms:[2]
  • “The President shall be appointed for a term of five years by a decree of the Council of Ministers. The President may be reappointed at the expiration of this term.
  • The President shall be required to have received a higher education and to have acquired knowledge and experience in the fields of finance, economics and banking.”
Besides these the president of the central bank must be aware of the happenings around the local economy and the whole world. The rise in oil prices, potential rate increase of respected central banks and the other happenings must be foreseen and the policies must be clarified regarding these issues. Therefore central bank’s president must be aware of his or her responsibilities and the authorities. These are also related to the independency of the central bank.

After giving a brief explanation about central banks importance, we will try to indicate the major actors in the economy. As we know that there are four major players affecting monetary supply in an ordinary economy. These players can be stated as:[3]
  • Banks: Financial intermediaries that accept deposits from the individuals and institutions and make loans.
  • Depositors: These are the individuals or institutions that are holding money in their banks.
  • Borrowers: These are the individuals or institutions that borrow money from the deposit institutions.
  • Central banks
Before going into details we firstly state the definition of central banks. Central banks are known as banks of banks.[4] If banks need to borrow money they go to central banks just as when someone needs money, he or she goes to a neighbor. If there is a financial panic in the economy the central banks are there to prevent the economy to go worse by giving loans to the other banks.

It can be clearly seen that central banks are very important institutions for the economic activities. In most of the countries they are seen to be the key factors for the price stability. Therefore in our country, the prior objective of the central bank is stated as “to protect the price stability”[5]. It is announced in the official internet site of the bank.  To achieve these objective central bank cares about the happenings both in the world and in Turkey. This objective is about the inflation rates from which Turkish people have suffered for more than thirty years.

After defining central banking we must state their tasks. Their tasks are related to their objectives. The objective of the central banks are almost same between different countries but their priorities may be changed from country to country and from time to time. As discussed above our central banks priority is to protect the stability in prices. To give an example, Turkish central bank has the following tasks:[6]
  • Open market transactions
  • Determination of reserve requirement rates
  • Determination of discount rates
  • Advance transactionsa
  • Regulation of the emissions
  • Management of the foreign exchange and gold reserves

[1]Mehmet Takan, Bankacılık Teori, Uygulama ve Yönetim, Ankara, Nobel, 2001, p. 27.
[2]1211 numbered Act of Central Bank. Article 25.
[3]Frederic S.Mishkin, The Economics of Money Banking and Financial Institutions, US, Little and Brown, 1986, p.239.
[4] David C.Colander, Economics, US, Irwin, 1995, p. 328.
[5] TCMB, http://www.tcmb.gov.tr
[6] 1211 numbered Act of Central Bank, Article.4.

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