| Central banks are relatively new
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| | explain this statement:In most countries
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| inventions. An American President (Andrew
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| | in the world, bank supervision is a
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| Jackson) even cancelled its country's
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| | heavy-weight department within the
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| central bank in the nineteenth century
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| | central bank. It samples banks, on a
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| because he did not think that it was very
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| | periodic basis. Then, it analyses their
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| important. But things have changed since.
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| | books thoroughly and imposes rules of
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| Central banks today are the most
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| | conduct and sanctions where necessary.
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| important feature of the financial
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| | But the role of central banks in
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| systems of most countries of the
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| | determining the health, behaviour and
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| world.Central banks are a bizarre
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| | operational modes of commercial banks is
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| hybrids. Some of their functions are
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| | so paramount that it is highly
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| identical to the functions of regular,
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| | undesirable for a central bank to
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| commercial banks. Other functions are
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| | supervise the banks. As I have said,
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| unique to the central bank. On certain
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| | supervision by a central bank means that
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| functions it has an absolute legal
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| | it has to criticize itself, its own
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| monopoly.Central banks take deposits from
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| | policies and the way that they were
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| other banks and, in certain cases, from
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| | enforced and also the results of past
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| foreign governments which deposit their
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| | supervision. Central banks are really
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| foreign exchange and gold reserves for
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| | asked to cast themselves in the unlikely
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| safekeeping (for instance, with the
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| | role of impartial saints.A new trend is
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| Federal Reserve Bank of the USA). The
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| | to put the supervision of banks under a
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| Central Bank invests the foreign exchange
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| | different "sponsor" and to encourage a
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| reserves of the country while trying to
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| | checks and balances system, wherein the
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| maintain an investment portfolio similar
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| | central bank, its policies and operations
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| to the trade composition of its client -
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| | are indirectly criticized by the bank
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| the state. The Central bank also holds
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| | supervision. This is the way it is in
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| onto the gold reserves of the country.
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| | Switzerland and - with the exception of
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| Most central banks have lately tried to
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| | the Jewish money which was deposited in
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| get rid of their gold, due to its ever
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| | Switzerland never to be returned to its
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| declining prices. Since the gold is
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| | owners - the Swiss banking system is
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| registered in their books in historical
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| | extremely well regulated and well
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| values, central banks are showing a
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| | supervised.We differentiate between two
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| handsome profit on this line of activity.
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| | types of central bank: the autonomous and
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| Central banks (especially the American
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| | the semi-autonomous.The autonomous bank
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| one) also participate in important,
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| | is politically and financially
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| international negotiations. If they do
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| | independent. Its Governor is appointed
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| not do so directly - they exert influence
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| | for a period which is longer than the
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| behind the scenes. The German Bundesbank
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| | periods of the incumbent elected
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| virtually dictated Germany's position in
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| | politicians, so that he will not be
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| the negotiations leading to the
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| | subject to political pressures. Its
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| Maastricht treaty. It forced the hands of
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| | budget is not provided by the legislature
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| its co-signatories to agree to strict
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| | or by the executive arm. It is self
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| terms of accession into the Euro single
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| | sustaining: it runs itself as a
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| currency project. The Bunbdesbank
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| | corporation would. Its profits are used
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| demanded that a country's economy be
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| | in leaner years in which it loses money
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| totally stable (low debt ratios, low
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| | (though for a central bank to lose money
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| inflation) before it is accepted as part
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| | is a difficult task to achieve).In
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| of the Euro. It is an irony of history
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| | Macedonia, for instance, annual surpluses
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| that Germany itself is not eligible under
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| | generated by the central bank are
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| these criteria and cannot be accepted as
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| | transferred to the national budget and
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| a member in the club whose rules it has
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| | cannot be utilized by the bank for its
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| assisted to formulate.But all these
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| | own operations or for the betterment of
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| constitute a secondary and marginal
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| | its staff through education.Prime
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| portion of a central banks activities.The
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| | examples of autonomous central banks are
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| main function of a modern central bank is
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| | Germany's Bundesbank and the American
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| the monitoring and regulation of interest
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| | Federal Reserve Bank.The second type of
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| rates in the economy. The central bank
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| | central bank is the semi autonomous one.
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| does this by changing the interest rates
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| | This is a central bank that depends on
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| that it charges on money that it lends to
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| | the political echelons and, especially,
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| the banking system through its "discount
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| | on the Ministry of Finance. This
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| windows". Interest rates is supposed to
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| | dependence could be through its budget
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| influence the level of economic activity
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| | which is allocated to it by the Ministry
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| in the economy. This supposed link has
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| | or by a Parliament (ruled by one big
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| not unequivocally proven by economic
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| | party or by the coalition parties). The
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| research. Also, there usually is a delay
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| | upper levels of the bank - the Governor
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| between the alteration of interest rates
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| | and the Vice Governor - could be deposed
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| and the foreseen impact on the economy.
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| | of through a political decision (albeit
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| This makes assessment of the interest
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| | by Parliament, which makes it somewhat
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| rate policy difficult. Still, central
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| | more difficult). This is the case of the
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| banks use interest rates to fine tune the
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| | National Bank of Macedonia which has to
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| economy. Higher interest rates - lower
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| | report to Parliament. Such dependent
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| economic activity and lower inflation.
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| | banks fulfil the function of an economic
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| The reverse is also supposed to be true.
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| | advisor to the government. The Governor
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| Even shifts of a quarter of a percentage
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| | of the Bank of England advises the
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| point are sufficient to send the stock
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| | Minister of Finance (in their famous
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| exchanges tumbling together with the bond
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| | weekly meetings, the minutes of which are
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| markets. In 1994 a long term trend of
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| | published) about the desirable level of
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| increase in interest rate commenced in
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| | interest rates. It cannot, however,
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| the USA, doubling interest rates from 3
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| | determine these levels and, thus is
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| to 6 percent. Investors in the bond
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| | devoid of arguably the most important
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| markets lost 1 trillion (=1000 billion!)
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| | policy tool. The situation is somewhat
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| USD in 1 year. Even today, currency
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| | better with the Bank of Israel which can
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| traders all around the world dread the
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| | play around with interest rates and
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| decisions of the Bundesbank and sit with
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| | foreign exchange rates - but not entirely
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| their eyes glued to the trading screen on
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| | freely.The National Bank of Macedonia
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| days in which announcements are
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| | (NBM) is highly autonomous under the law
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| expected.Interest rates is only the
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| | regulating its structure and its
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| latest fad. Prior to this - and under the
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| | activities. Its Governor is selected for
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| influence of the Chicago school of
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| | a period of seven years and can be
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| economics - central banks used to monitor
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| | removed from office only in the case that
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| and manipulate money supply aggregates.
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| | he is charged with criminal deeds. Still,
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| Simply put, they would sell bonds to the
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| | it is very much subject to political
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| public (and, thus absorb liquid means,
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| | pressures. High ranking political figures
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| money) - or buy from the public (and,
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| | freely admit to exerting pressures on the
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| thus, inject liquidity). Otherwise, they
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| | central bank (at the same breath saying
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| would restrict the amount of printed
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| | that it is completely independent).The
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| money and limit the government's ability
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| | NBM is young and most of its staff -
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| to borrow. Even prior to that fashion
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| | however bright - are inexperienced. With
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| there was a widespread belief in the
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| | the kind of wages that it pays it cannot
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| effectiveness of manipulating exchange
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| | attract the best available talents. The
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| rates. This was especially true where
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| | budgetary surpluses that it generates
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| exchange controls were still being
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| | could have been used for this purpose and
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| implemented and the currency was not
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| | to higher world renowned consultants
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| fully convertible. Britain removed its
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| | (from Switzerland, for instance) to help
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| exchange controls only as late as 1979.
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| | the bank overcome the experience gap. But
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| The USD was pegged to a (gold) standard
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| | the money is transferred to the budget,
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| (and, thus not really freely tradable) as
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| | as we said. So, the bank had to do with
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| late as 1971. Free flows of currencies
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| | charity received from USAID, the KNOW-HOW
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| are a relatively new thing and their long
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| | FUND and so on. Some of the help thus
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| absence reflects this wide held
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| | provided was good and relevant - other
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| superstition of central banks. Nowadays,
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| | advice was, in my view, wrong for the
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| exchange rates are considered to be a
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| | local circumstances. Take supervision: it
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| "soft" monetary instrument and are rarely
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| | was modelled after the Americans and
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| used by central banks. The latter
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| | British. Those are the worst supervisors
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| continue, though, to intervene in the
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| | in the West (if we do not consider the
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| trading of currencies in the
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| | Japanese).And with all this, the bank had
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| international and domestic markets
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| | to cope with extraordinarily difficult
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| usually to no avail and while losing
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| | circumstances since its very inception.
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| their credibility in the process. Ever
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| | The 1993 banking crisis, the frozen
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| since the ignominious failure in
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| | currency accounts, the collapse of the
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| implementing the infamous Louvre accord
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| | Stedilnicas (crowned by the TAT affair).
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| in 1985 currency intervention is
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| | Older, more experienced central banks
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| considered to be a somewhat rusty relic
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| | would have folded under the pressure.
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| of old ways of thinking.Central banks are
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| | Taking everything under consideration,
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| heavily enmeshed in the very fabric of
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| | the NBM has performed remarkably well.The
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| the commercial banking system. They
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| | proof is in the stability of the local
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| perform certain indispensable services
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| | currency, the Denar. This is the main
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| for the latter. In most countries,
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| | function of a central bank. After the TAT
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| interbank payments pass through the
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| | affair, there was a moment or two of
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| central bank or through a clearing organ
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| | panic - and then the street voted
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| which is somehow linked or reports to the
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| | confidence in the management of the
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| central bank. All major foreign exchange
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| | central bank, the Denar-DM rate went down
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| transactions pass through - and, in many
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| | to where it was prior to the crisis.Now,
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| countries, still must be approved by -
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| | the central bank is facing its most
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| the central bank. Central banks regulate
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| | daunting task: facing the truth without
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| banks, licence their owners, supervise
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| | fear and without prejudice. Bank
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| their operations, keenly observes their
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| | supervision needs to be overhauled and
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| liquidity. The central bank is the lender
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| | lessons need to be learnt. The political
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| of last resort in cases of insolvency or
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| | independence of the bank needs to be
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| illiquidity.The frequent claims of
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| | increased greatly. The bank must decide
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| central banks all over the world that
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| | what to do with TAT and with the other
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| they were surprised by a banking crisis
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| | failing Stedilnicas?They could be sold to
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| looks, therefore, dubious at best. No
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| | the banks as portfolios of assets and
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| central bank can say that it had no early
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| | liabilities. The Bank of England sold
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| warning signs, or no access to all the
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| | Barings Bank in 1995 to the ING Dutch
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| data - and keep a straight face while
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| | Bank.The central bank could - and has to
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| saying so. Impending banking crises give
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| | - force the owners of the failing
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| out signs long before they erupt. These
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| | Stedilnicas to increase their equity
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| signs ought to be detected by a
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| | capital (by using their personal
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| reasonably managed central bank. Only
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| | property, where necessary). This was
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| major neglect could explain a surprise on
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| | successfully done (again, by the Bank of
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| behalf of a central bank.One sure sign is
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| | England) in the 1991 case of the BCCI
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| the number of times that a bank chooses
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| | scandal.The State of Macedonia could
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| to borrow using the discount windows.
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| | decide to take over the obligations of
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| Another is if it offers interest rates
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| | the failed system and somehow pay back
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| which are way above the rates offered by
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| | the depositors. Israel (1983), the USA
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| other financing institutions. There are
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| | (1985/7) and a dozen other countries have
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| may more signs and central banks should
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| | done so recently.The central bank could
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| be adept at reading them.This heavy
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| | increase the reserve requirements and the
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| involvement is not limited to the
| |
| | deposit insurance premiums.But these are
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| collection and analysis of data. A
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| | all artificial, ad hoc, solutions.
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| central bank - by the very definition of
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| | Something more radical needs to be done:A
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| its functions - sets the tone to all
| |
| | total restructuring of the banking
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| other banks in the economy. By altering
| |
| | system. The Stedilnicas have to be
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| its policies (for instance: by changing
| |
| | abolished. The capital required to open a
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| its reserve requirements) it can push
| |
| | bank or a branch of a bank has to be
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| banks to insolvency or create bubble
| |
| | lowered to 4 million DM (to conform with
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| economies which are bound to burst. If it
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| | world standards and with the size of the
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| were not for the easy and cheap money
| |
| | economy of Macedonia). Banks should be
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| provided by the Bank of Japan in the
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| | allowed to diversify their activities (as
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| eighties - the stock and real estate
| |
| | long as they are of a financial nature),
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| markets would not have inflated to the
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| | to form joint venture with other
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| extent that they have. Subsequently, it
| |
| | providers of financial services (such as
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| was the same bank (under a different
| |
| | insurance companies) and to open a thick
|
| Governor) that tightened the reins of
| |
| | network of branches.And bank supervision
|
| credit - and pierced both bubble
| |
| | must be separated from the central bank
|
| markets.The same mistake was repeated in
| |
| | and set to criticize the central bank and
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| 1992-3 in Israel - and with the same
| |
| | its policies, decisions and operations on
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| consequences.This precisely is why
| |
| | a regular basis.There are no reasons why
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| central banks, in my view, should not
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| | Macedonia should not become a financial
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| supervise the banking system.When asked
| |
| | centre of the Balkans - and there are
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| to supervise the banking system - central
| |
| | many reasons why it should. But,
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| banks are really asked to draw criticism
| |
| | ultimately, it all depends on the
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| on their past performance, their policies
| |
| | Macedonians themselves.
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| and their vigilance in the past. Let me
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| |
|
