As the old saying goes; “money makes the world go round,” but when it comes down to itmonetary policy, interest rates and the availability of credit, it is the central banks that ensure that money circulates. So what is a central bank, how many central banks are there, what are the largest central banks and what exactly do they do?
What is a central bank?
A central bank is the central financial body responsible for monitoring, formulating and implementing financial policies and establishing themtenantbetween countries. Central banks also supervise and regulate other member banks.
Moreover, it is worth noting that central banks are often portrayed as politically independent, even though some of them have been nationalized. Nevertheless, its privileges are established and protected by law, even though it is not legal, even though the government does not own or control a central bank.
The main difference between a central bank and other banks is mainly that the former has a legal monopoly on banknotes and cash. In addition to imposing requirements on the banking system, such as maintaining sufficient liquidity reserves, central banks can also lend money to insolvent financial and government entities as a last resort.
What are the most important central banks?
There are approximately 214 central banks in the world from officially recognized countries. Although the number of central banks in the world is countless, there are a few prominent names that always manage to make headlines and are considered to be the most influential institutions in the world.
The US Federal Reserve, theEuropean Central Bank (ECB)the Bank of England (BOE), the Swiss National Bank (SNB), the Reserve Bank of Australia (RBA) and the Bank of Japan (BOJ) are considered some of the largest and most influential central banks.
How many central banks are there?
There are approximately 222 central banks in the world from different countries and regions, and 8 of them are from partially or unrecognized countries such as Abkhazia, occupied Northern Cyprus, Kosovo, Somaliland, South Ossetia, Taiwan and Transnistria.
The US Federal Reserve System (Fed)
The Federal Reserve (Fed) is perhaps one of the most important and powerful monetary policy figures in the world. It is considered very popular because this central banking system controls interest rates and influences the US dollar, which is used in about 90% of the world's transactions. It is also responsible for regulating monetary policy in the world's largest economy.
That's why traders and investors wait with bated breath for the Federal Reserve's monetary policy meetings as they can directly influence theminflation,CPIand more in the US.
The Fed is divided into three entities: the Board of Governors, the Federal Reserve Banks, and the Federal Open Market Committee (FOMC).
Board of Directors
The Board of Governors is the Fed's most important unit as it directs and influences the Fed's policy decisions. The Board of Directors is located in Washington, D.C. and consists of seven members appointed by the U.S. President and approved by the Senate. Each governor would have to come from a different Federal Reserve district and region. In addition, the responsibilities set forth in the Federal Reserve Act, the law that established the Federal Reserve System in 1913, are fulfilled by the Board of Governors. In addition, the Federal Reserve Act stipulates that each governor must represent a specific sector of the economy, namely the financial, agricultural, industrial, and commercial sectors.
Although each of the governors may serve for a longer period of time, their terms are typically fourteen years. Nevertheless, the appointment of governors tends to rotate every two years to prevent US presidents from appointing governors who only support their policies. Among some of the crucial economic issues the governors are dealing with are affordable housing, consumer protection laws and more. Central bank governors also oversee member banks and commercial banks and participate on the FOMC committee.
Federal Reserve Bank
There are twelve Federal Reserve banks governed by nine-member boards of directors. Each Reserve Bank is located in a different district of the United States, namely Chicago, New York, St. Louis, Philadelphia, Minneapolis, Dallas, Boston, Richmond, San Francisco, Atalanta, Cleveland and Kansas City to ensure that the diverse needs of different communities are treated equally. The twelve banks have 24 branches that provide services to the public, banks and the U.S. Treasury Department.
Federal Open Market Committee (FOMC)
Federal Open Market Committee (FOMC)is the monetary policy committee of the Federal Reserve. This committee directs the Fed's open market operations (OMOs), that is, the buying and selling of securities on the open market. There are twelve members on the FOMC, seven of whom are from the Board of Governors, four are presidents of the Reserve Bank, and one is president of the Federal Reserve Bank of New York. This FOMC holds monetary policy meetings eight times a year and is known for its hawkish or hawkish stancedualopinions. Hawkish Fed members are those like Fed Chairman Jerome Powell who favor monetary tightening, while dovish members are those who favor moderate monetary policy.
FOMC meetings are events that both market watchers and traders look forward to in general and this past year in particular. This comes in light of the fact that inflation has increased,recessionFears have increased and economic turmoil, caused by a co*cktail of factors ranging from the war in Ukraine to high interest rates and market sell-offs, has taken its toll on the economy. Therefore, the FOMC meetings are usually awaited to see if anything changes in the market while they monitor rates.
Recent FOMC meetings have seen more aggressive monetary policy and raising interest rates to combat inflation. As a result of higher interest rates, many technology sector stocks fell and had to move ondismissed. This is because in times of inflationary pressures and higher interest rates, traders and investors tend to shy away from tech-heavy stocks and opt for inflation hedges.safe assets.
European Central Bank (ECB)
The European Central Bank (ECB) is located in Frankfurt, Germany and is theEurozone (EZ)the central banking system. It has been the central bank of the European Union (EU) since 1998 and is responsible for monetary policy and controlling inflation in the 19 European countries of the eurozone.
The ECB is divided into three main bodies; The board, the executive board and the general council. The Governing Council is the main board and consists of the Executive Board and the governors of the EU national central banks. The Executive Board carries out the day-to-day tasks of the ECB and consists of the President of the ECB, Christine Lagarde, and four other members appointed by the leaders of the EU countries for a term of eight years.
Furthermore, the ECB aims for an inflation rate of 2% in the medium term to avoid economic destabilization due to deflation. To this end, six executive members of the ECB meet monthly with three governors of the national central banks to discuss monetary policy.
Bank of England (BOE)
You may wonder what the central bank of Great Britain is. The BOE is headquartered in London and was founded in 1694. Stabilizing the British cost of living, curbing inflation, producing banknotes, regulating and supervising major banks and financial institutions, and monitoring payment systems such asview (5)InMastercard (MA)are among the areas of responsibility of the Bank of England.
Additionally, the BOE is administered by Governor Andrew Bailey. Governors typically hold the highest leadership positions, participate in all committees, and are elected from the bench. In terms of the hierarchical structure, the BOE consists of the central bank governor and the court, the central body that regulates the bank's activities. In addition to the above entities, there are a handful of subcommittees within the BOE, including the Monetary Policy Committee (MPC), which is responsible for interest rates and monetary policy, the Prudential Regulation Authority (PRA), which oversees the financial sector, and the Fiscal Policy Committee (FPC), which maintains the financial system.
Who owns the Central Bank of England?
The Central Bank of England, BOE, is owned by the British government, while its capital is controlled by the Treasury Solicitor, appointed by HM Treasury. Nevertheless, it may be surprising to know that despite the fact that the Bank of England is owned by the British government, the BOE claims that its decisions are free from immediate political interference and influence.
Bank of Japan (BOJ)
The Bank of Japan (BOJ), based in Nihonbashi, Tokyo, issued its first coin and became the central bank of Japan in 1885 and has been operating ever since, except for a brief period after World War II. The BOJ is neither a private company nor a government agency, but a legal entity under the Bank of Japan Act. Like most central banks, the BOJ sets monetary policy, regulates and supervises currencies and government bonds, and sets interest rates to address inflation or deflation.
In addition, the Bank of Japan collects economic data, researches and disseminates information. Subsequently, the BOJ's decisions and interest rates can influence the value of the Japanese yen, which can therefore have a direct effect onUSD/JPY.
The Bank of Japan is also led by Governor Haruhiko Kuroda and has two deputy governors, six members of the Policy Board, the BOJ's decision-making board, about three auditors, advisors and about six general managers.
Swiss National Bank (SNB)
Switzerland is known for its impartiality in both political and economic matters and, like Britain, although it is in Europe, it is not included in the EU and does not count as a Eurozone country.
This means that the Swiss central banking system is not the European Central Bank. Instead, the central bank is called the Swiss National Bank (SNB). The Swiss National Bank is headquartered in Zurich and Bern and is responsible for conducting monetary policy in accordance with the obligations of the Swiss Constitution. Although the SNB complies with the Swiss Constitution, it is considered an independent entity.
Furthermore, the SNB, like all central banks, aims to maintain economic stability and prosperity while monitoring the supply of the Swiss franc (CHF). In addition, SNB was founded in 1906 and is led by chairman Thomas Jordan, who heads the board. SNB is a public limited company, which means that it can be traded.
Deutsche Bundesbank (DBB)
The Deutsche Bundesbank (DBB) translates as "German Federal Bank" and is the central banking system of the Federal Republic of Germany and is part of the European System of Central Banks (ESCB). Founded in 1957, DBB is the world's first fully independent central bank, on which the European Central Bank model was built in 1998, when the Eurozone was formed.
Therefore, many note that although the German central bank is the DBB, Germany has a significant influence on the latter's decisions because the ECB was influenced by the DBB model.
Furthermore, like the ECB, the DBB is based in Frankfurt, Germany. The DBB is led by the Board of Directors, which consists of DBB President Joachim Nagel and Vice President Claudia Buch, together with four other members, all appointed by the German President.
People's Bank of China (PBoC)
The People's Bank of China (PBoC), based in Beijing, is the central bank of the People's Republic of China. The PBoC was founded in 1948 and is responsible for monetary regulation, law enforcement, and management of the treasury and financial markets, including in mainland China.
This central bank is led by Governor Yi Gang, an inspector general, and five vice governors and is considered one of the largest in the world, with an astonishing $3 trillion in foreign exchange reserves.
What is the difference between a commercial bank and a central bank?
The main difference between the two banks is their authority and agency. While central banks play a role in monetary policy and economic decision-making, the focus of commercial banks is on the flow of money in the economy and on providing deposit and credit facilities to financial institutions, companies and individuals. Furthermore, even though commercial banks may be public, they may be privately or publicly owned, and while each country has a central bank, there may be numerous commercial banks within each country. country.
In addition, central banks serve governments and other commercial banks, with the latter serving companies and private individuals. Most importantly, central banks can set interest rates that directly affect the economy, while commercial banks cannot directly influence economic policy.
As fears of inflation and recessions continue to dominate the economy, traders and investors will now be keeping an eye on central banks' decision-making more than ever as they can directly impact the above-mentioned economic obstacles.
