The evolution of central banking (English)

Institutions known as central banks emerged or were established as commercial banks or

government banks. Their evolution into central banks came with their monopoly issuing notes
and their role as lender of last resort, among other functions. Carrying out commercial business
on a large scale created a conflict of interest, so this practice was abandoned. Establishing the
right degree of dependence was difficult, and changed in times of crisis. Independence is
important: it helps to establish reputation, which is everything in banking. The Great Depression,
widely attributed to inept Central Bank behavior, interrupted central bank independence, but
poor price behavior brought about its return. In the 19th century, laissez faire and the gold
standard encouraged and sometimes allowed for considerable independence. Greater changes
came in the new dirigiste environment following the Great Depression and the rise of the
managed economy. Economies in transition confront high inflation and the problem of
maintaining monetary stability just as newly independent developing countries did in the 1960s.
How can inflation be controlled? Under fiat regimes, the money supply is controlled by the
domestic monetary authority. But can they control monetary growth? Prior and current records
are not encouraging. Will authorities have the credibility they need? Options include maintaining
a fixed exchange rate or reviving currency boards. Currency boards function like an independent
central bank, holding reserves and tying domestic currency to strong foreign currency. There are
drawbacks to currency boards, especially for countries in transition. They require a considerable
sacrifice of sovereignty, and are unlikely to appeal to countries that are only beginning to recover
lost sovereignty.

What is the evolution of central bank in Ethiopia?

In 1963, the State Bank of Ethiopia was split into the National Bank of Ethiopia and Commercial
Bank of Ethiopia thereby clearly demarcating central banking and commercial banking
operations. The National Bank of Ethiopia was established in 1963 by Proclamation 206 of 1963
and began operation in January 1964.
What is central banking system in Ethiopia?
The National Bank of Ethiopia is the central bank of Ethiopia. Its headquarters is in the capital
city of Addis Ababa. The bank's name is abbreviated to NBE. The bank is active in promoting
financial inclusion policy and is a member of the Alliance for Financial Inclusion (AFI)

What exactly is a Central Bank?

A central bank is an institution that provides financial services to other banks as well as the
government. Central banks are responsible for controlling a nation’s overall monetary supply as
well as interest rates. A nation’s monetary policy and financial system are both under the
jurisdiction of a government institution known as the central bank.
There are four essential components that make up a central bank. It is responsible for producing
a nation’s currency. Banknotes and coins that are currently in circulation are only be issued by
the nation’s central banks. They have complete command over the availability of currency in the
economy. It fulfils the role of a banker for the government. The financial affairs of the
government are overseen by central banks, which also provide financial assistance to the state.
They do this by purchasing government bonds, which contribute to the financing of government
deficits.

It fulfils the role of banker to commercial banks. The central bank serves as a lender of last resort
for commercial banks, and these banks keep accounts with the central bank. During times of
economic instability, the nation’s central banks extend loans to commercial banks. It exercises
authority over monetary policy. The growth of the economy, inflation, exchange rates, and
employment are all influenced by the actions of central banks, which include raising or lowering
interest rates and controlling the money supply.

When they want to make changes to the economy, they make use of tools such as open market
operations, reserve requirements, and interest rates.

The nation’s central bank does not offer banking services to private individuals or commercial
enterprises. They have unique regulatory and monetary policy powers, which allow them to do
more than simply maximise profits. The goals of central banks are to improve the overall health
of the financial system as well as the stability of the economy as a whole.

Central banks are essential to the functioning of modern market economies, despite the fact that
they are sometimes the subject of heated debate.
What are the functions of the Central Bank

1. Procures the last resort

The Central Bank provides emergency financial support to banks and financial institutions
experiencing liquidity issues, thus maintaining stability within the financial system and
preventing their collapse during a crisis.

Banks and financial institutions experience a sudden surge in depositor cash withdrawal requests
at times of financial distress. To meet this increased cash withdrawal demand, these institutions
turn to their central bank as lender of last resort for short-term loans at higher interest rates than
market rates in order to remain solvent and ensure stability within their financial systems.

2. Credit Control

The central bank plays an essential role in controlling credit supply by employing monetary
policy instruments like interest rates, reserve requirements, and open market operations to
manage inflation and promote economic growth. This function must remain intact for this
function to succeed effectively.

3. Currency Regulator

The central bank is accountable for issuing and overseeing national currencies. This involves
making sure there is enough currency in circulation while protecting its value from fluctuation or
counterfeit currency entering the financial system.

4. Bank to the government

The central bank functions as a government bank by offering banking services and managing
accounts of government departments and agencies, such as managing their debt, implementing
monetary policy decisions and offering advice regarding economic and financial matters.

5. Custodian of Cash Reserves

The central bank holds onto some deposits held by commercial banks as cash reserves, providing
essential insurance against banking system instability and solvency, and helping it control
monetary policy within its economic impact.

6. Custodian of International Currency

Central banks oversee their respective country’s foreign exchange reserves, consisting of foreign
currencies, gold and other assets held overseas. These reserves play an essential role in
maintaining currency stability as well as supporting international trade and investment activities.

7. Safeguarding depositor interests

The central bank plays an essential role in safeguarding depositor interests by supervising and
regulating the banking system. This involves setting prudential regulations, monitoring
compliance by banks and taking corrective actions when necessary to maintain the safety and
soundness of banking system operations.
8. Preparing to Transfer or Settle the House.

The central bank serves as a central clearing house to facilitate and settle payments between
banks and other financial institutions, helping ensure transactions are carried out efficiently and
securely. This is an integral component of financial system health; transactions that don’t settle
efficiently or securely would disrupt it significantly.

The above-mentioned functions make central banks a critical aspect of any economy.

What are the Monetary Policies of Central Banks?

Subheads don’t make sense, have tried my best

Monetary policy refers to actions taken by central banks to influence the availability and cost of
money and credit in an economy, in order to meet macroeconomic objectives such as controlling
inflation, stimulating growth and maintaining financial stability.

Four key aspects of central bank monetary policies are listed below.

1. Issuance of Currency

The central bank is the sole authority responsible for issuing national currency. This means the
central bank plays an essential role in maintaining an adequate and steady supply of money in
circulation. It does this by closely tracking demand for currency while simultaneously managing
interest rates and foreign exchange rates to preserve its value and ensure its proper usage by all.

2. Goals of Central Banks

Central banks’ goals when employing monetary policy typically include policy and financial
stability. Price stability involves controlling inflation to preserve a stable price level across the
economy, while economic growth refers to encouraging sustainable economic expansion by
creating an environment conducive to investment and job creation.

Financial Stability is protecting the financial system against crises by preventing them and
mitigating their effects when they do occur, whilst Exchange Rate Stability refers to managing
the value of one currency relative to others so as to facilitate international trade and investment.

3. Monetary Policy Instruments

Central banks rely on instruments to implement their monetary policy, including policy interest
rates, reserve requirements etc.

The central bank sets its policy interest rate, which has an impactful influence on borrowing
costs and savings returns within an economy. The central bank also requires commercial banks
to hold back a certain percentage of deposits as reserves, which impacts how much money can be
loaned out by commercial banks.

To influence money supply and interest rates, central banks purchase or sell government
securities on the open market to affect money supply and interest rates. Discount window
lending: Central banks also lend short-term loans directly to commercial banks that impact credit
costs and availability in their economy.

4. Unconventional Monetary Policy

Central banks may use unconventional monetary policy measures in times of severe economic
stress or when conventional tools of monetary policy prove ineffective.

Through quantitative easing, the central bank purchases large quantities of government securities
or other assets to increase the money supply and reduce long-term interest rates.

Central banks set negative policy interest rates to encourage commercial banks to hold onto
reserves while at the same time encouraging lending activity and stimulating economic activity.
To manage market expectations and provide clarity regarding interest rate movements.

To improve credit conditions and boost economic activity, central banks often purchase private
sector assets such as corporate bonds in order to ease credit conditions and boost economic
activity.