THE MAIN TENDENCIES IN MODERN CENTRAL BANKING

Экономические науки/1.Банки и банковская система

Julia Davydova, Aleksandra Omelchenko

Donetsk National University of economics and trade named after Mikhail Tugan-Baranovsky, Ukraine

THE MAIN TENDENCIES IN MODERN CENTRAL BANKING

Today, central banks are public policy institutions whose main goals are to preserve monetary stability and promote financial stability. They provide the core components of payment systems: banknotes for use by the general public and settlement services for banks via accounts at the central bank. They also often manage the country’s gold and foreign exchange reserves. In cooperation with other authorities, central banks also play a major role in the oversight and development of the financial system.

Central banks have performed a multitude of other tasks, several of which remain part of the central bank’s functions in many countries. They often supply banking services and asset and debt management services for the state; and they sometimes provide analysis and advice regarding economic and development policies more generally.

The design of effective governance arrangements for central banks, especially for their core functions, can be quite complex. The process frequently requires making choices and compromises between competing societal objectives. The trade-offs, and the compromises they require, differ from one country to another. Yet there are common features. In recent decades, most notably in the monetary policy area, much has happened to:

· clarify objectives, especially for the monetary policy function, where price stability now is usually the paramount macroeconomic objective;

· embed appropriate monetary policy powers and effective decision-making structures in statute, including safeguards against influence from vested interests, either private or public. Typically this has meant increasing the formal independence of the central bank from executive government, at least with respect to monetary policy decision-making; and

· align the incentives of central bank decision-makers with the public interest.

Formal and informal accountability has been boosted by greater transparency in the conduct of monetary policy and operations. Whereas secrecy was once a hallmark of central banking, openness is now more widely seen as contributing to sustained success. The current crisis has raised important questions about the role of the central bank in the prevention, management and resolution of financial crises. Some of the leading central banks have engaged in new and unusual transactions with a far wider range of counterparties than ever before, and done so on a scale that is virtually without precedent. As a result, the composition and size of their balance sheets have changed dramatically, and they have assumed significant financial and reputational risks.

Once the now urgent questions of deciding how to manage and resolve the current crisis have been fully addressed, the question will arise about what role the central bank should play in reducing the risk of future crises, and in the management and resolution of the ones that do occur.

How any change in future roles will affect the formal responsibilities of central banks and their position in government and society remains to be seen. However, some governance issues have already been raised by observers.

The first such issue is the role the central bank will play in promoting financial stability. This issue, which was unsettled before the outbreak of the crisis, is an even livelier one now. Even the definition of financial stability has been a matter of debate. It is therefore hardly surprising that there is much less clarity and precision about the central bank’s objectives and powers in this area than in the monetary domain. Some observers argue that the central bank should be given a mandate that pays explicit heed to systemic risks within the financial system. According to this view, central banks are better placed to meet such a mandate than others because of their macro-economic orientation and their concrete knowledge of financial markets. This permits them to understand how the actions of individual financial institutions affect the financial system as a whole. Providing such a mandate could lead to important questions that remain to be addressed: Do central banks need new tools for such a purpose? If so, what tools? Should central banks on occasion use their monetary policy tools – over and above what current objectives would imply – to counteract threats to financial stability? Is there a risk that at times the two mandates (monetary stability and financial stability) would come into conflict?

A second major issue, closely related to the first, is how to structure decision-making on financial stability matters. Central banks generally make monetary policy decisions autonomously using procedures that are now fairly well honed. Decisions on financial stability matters require different information and expertise. They sometimes need to be made urgently and frequently require consultation and collaboration with other authorities. If the central bank is given an explicit systemic financial stability mandate, does that imply a need for more specialized and consultative governance arrangements?

Thirdly, how would the sizeable financial and reputational risks that arise from central banks’ financial stability operations be handled? Operations that constrain risk-taking would be very difficult to calibrate in advance of a crisis. This suggests that the prior design of macro-prudential “rules” (entailing some relation to the economic cycle) would be hard. Allowing discretion may create challenges, since prudential restrictions can also be unpopular in periods of euphoria. Would this require greater safeguards so that the central bank could pursue its mandated objectives?

Finally, the expansion of the scope and scale of central bank operations has increased their exposures to loss. In addition to issues of appropriate decision-making arrangements, these greater exposures raise questions concerning how losses will be borne should they occur, about indemnification, and about the amount of capital central banks should normally have. Should large-scale losses occur or policy actions be seen to have failed in achieving their objectives, the reputation of central banks as effective public policy agencies could be damaged.

Companies should also expect the financial institution to be able to provide products through a web-enabled delivery portal. Many of the best trade banks are already doing this. Additionally, international bank should also be able to offer information on the following value-added trade products and services such as:

· Prepayment and structured pre-export facilities: these services finance pre-export fabrication and provide export financing for a country’s key exports.

· Export receivables financing.

· Government-backed insurance and guarantee programs: These are available from government bodies such as Eximbank or private insurers and can help companies spread the risk.

· Programs offered by regional development banks and institutions: the IFC, ADB, World Bank, and other institutions support international sales by providing guarantees as credit support or enhancement.

· Linked exports and import financing: In some countries the export contract can act as security for essential imports. For example, in some countries that export value-added products (Asia has many), if imports (generally but not always raw materials) do not flow into the country then value-added exports stop. An international bank can credit-enhance the deal by using the export contract as security thus allowing country imports to continue.

· Global trade management: This allows to out-source the trade documentation preparation to others who are more familiar with it and who work with these forms daily.

· Option-linked financings for commodities: Again, these are risk spreading options. Examples are trade finance solutions that have interest rate, foreign exchange, and commodity-hedging options. These can be made part of the transaction if desired.

· Counter-trade transactions: commodities, durable and other goods are essentially bartered.

· Forfeiting: This is a provision of medium-term trade finance where trade contracts are sold into the secondary market.

· Multinational inter-company structured trade/tax facilities.

· Sending and Receiving International Payments.

· Foreign Exchange Online.

· Foreign Travel Currency.

· International Credit and Cash Management.

For a company dealing globally, the Internet is a critical tool for speed and efficiency of communications. One area where it is still in its infancy, however, has been in financing international deals. This is changing. Recently Imperial Bank launched its online SWIFTrade service. The site was in beta testing for two years prior to this so this is a very mature service at this point. With this service, Imperial Bank’s customers can obtain a letter of credit immediately and have it seen immediately by those who need to know about it.

The information in the system is not public and if fact most people wouldn't have access to it. For example, the system can be kept secure by a series of passwords. In the case of imports, the importer can let the person selling to him see the letter of credit online by supplying a password; the exporter then doesn’t have to wait to be advised by his bank in his home city and can begin production immediately. In the case of fast changing market requirements such as fashion or toys, this speed can be critical. The company receiving the letter of credit can also allow others to view the document such as freight forwarders, customs brokers or other specialists, so preparation and paperwork can begin in those areas, as well.

The Imperial Bank also has an online system for financing. The importing company can fill out an application online at the website.

SWIFTrade is still being enhanced but can already provide the following online services:

· Letter of credit issuance;

· Sending electronic copies of letters of credit to the beneficiaries via e-mail;

· Allowing shippers and other partners of the company acquiring the letter of credit to have access to specific portions of the information to speed their work;

· Tracking the status of letters of credit;

· Monitor account activity, even for accounts held with foreign banks.

The banking sector over the world has experienced growth by reaching the majority of people. Individuals participation in banking activities is on the rise. The development of a country's economy is largely dependent on its well-developed banking systems.

Important banking indicators among various countries are as follows:

· Number of Banks and Branches;

· Number of Branches and total population ratio;

· Bank Deposits/GDP (%);

· Bank Assets/GDP (%).

The list of World Largest Central Banks in various countries over the world contains:

So central banking plays an important role in business cycles. Demurrage currencies provide an alternative and perhaps complementary means towards central banking's goal of sustaining economic growth with different specific characteristics and a mechanism that follows naturally from the use of commodity currencies, is more uniform in operation, does not devalue the currency unit, and is more predictable and potentially more decentralized in its operation. Historically, the idea of demurrage influenced Keynes' prescription for net-inflationary central bank policy.

As for functions of central banks, they often supply banking services and asset and debt management services for the state; and they sometimes provide analysis and advice regarding economic and development policies more generally.

The future position of the central banks in modern world will be influenced by some issues. They are:

1. The role the central bank will play in promoting financial stability.

2. How to structure decision-making on financial stability matters?

3. How would the sizeable financial and reputational risks that arise from central banks’ financial stability operations be handled?

4. The expansion of the scope and scale of central bank operations has increased their exposures to loss.

At present time the top of the world’s central banks ranked in total assets is headed by The Royal Bank of Scotland Group plc. The second place took Deutsche bank, Germany; the third - Barclays PLC, United Kingdom. Unfortunately, banks of Ukraine are absent in the top 50 banks in this ranking.

So that, the international and central banks are integral part of our modern economic, financial activities, which propose us a wide range of products and services. Central banks are interconnected with many areas of national economies, involved in the processes of international banking and depend on world tendencies of development in financial sphere.

Литература:

1. Alan S. Blinder «Central Banking in Theory and Practice». - The MIT Press (January 29, 1999). – 108 pages.

2. Электронный ресурс. - http://www.bis.org/publ/othp04_1.pdf.

3. Электронный ресурс. –

http://www.business-in-asia.com/article_banking.html.

4. Электронный ресурс. - https://www.wellsfargo.com/biz/international/.

5. Электронный ресурс. - http://en.wikipedia.org/wiki/Central_bank.

6. Электронный ресурс. - http://finance.mapsofworld.com/banks/.