The Role of Central Banks in Banking Crises

Central banks are relatively new inventions. U.S. President (Andrew Jackson) even canceled the country’s central bank in the nineteenth century, because they think it was very important. But things have changed since then. Central banks today are the main financial systems in most countries. Central banks are strange hybrids. Some of its features are identical to the normal functions of commercial banks. Other functions are unique to the Central Bank. On certain functions it has a legal monopoly.

Central banks take deposits from banks and others, in some cases, foreign governments which deposit their foreign exchange and gold reserves for safety (for example, the U.S. Federal Reserve). The Central Bank invests the foreign exchange reserves of the country to try an investment portfolio of the brand to maintain a similar composition of their clients – the state. The central bank also has gold reserves of the country. Most central banks have recently sought to get rid of their gold because of its low price. Since gold is inscribed in their books in historical values, central banks have a good profit in that division. The central banks of participation (especially Americans) and in major international negotiations. If they do not directly – influence between racks. The German Bundesbank virtually dictated the position of Germany in the negotiations on the Treaty of Maastricht. Forced the hand of his co-signatories to strict conditions for membership in the Euro currency project to take over. The Bunbdesbank demanded that the economy of a country (low debt, low inflation) is completely stable before it is accepted as part of the €. It is an irony of history that Germany does not qualify under these criteria and can not be formulated to be admitted to the club, whose rules helped. But this is a secondary and marginal area of central banking.

The main function of a modern central bank is the monitoring and regulation of interest rates in the economy. The central bank does it for the speed at which it lends money to the banking system through its “discount window.” The interest rate is expected to affect the level of economic activity in the economy. This link is supposed to have shown unequivocally by the economic research. In addition, there is usually a time lag between changes in interest rates and the expected impact on the economy. This makes assessment of interest rate policy difficult, however, central banks use interest rates to adjust the economy of higher interest rates -.. lower economic activity and lower inflation. The reverse is also true. Also change shift points enough to send stock markets falling bond market. In 1994 he began a long-term trend of rising interest rates to U.S. interest rates 3-6 percent doubled. Investors in the bond markets lost one trillion (= 1 billion!) Dollars in one year. Even today, currency traders around the world fear the decisions of the Bundesbank and eyes glued to the screen trading days in which announcements are expected to sit.