Unit 3.2 Regulatory Framework - International Perspective

International Perspective – Federal Bank
European Central Bank
ICC Guidelines

Federal Bank
European Central Bank
ICC Guidelines
2
Mrs. Charu Rastogi, Asst.
Professor

3
Professor

What is the Fed?
 Central bank of the
United States
 Established in
1913
 Purpose is to
ensure a stable
economy for the
nation
4Mrs. Charu Rastogi, Asst. Professor

 Conduct the nation’s monetary policy
 Supervise and regulate banking
institutions
 Operate a nationwide payments system

 Board of Governors
 12 Reserve Banks
 Federal Open
Market Committee

 Seven members
◦ Appointed by the president
◦ Confirmed by the Senate
◦ Serve 14-year terms
 Work includes:
◦ Analyzing economic
developments
◦ Supervising and regulating
the operations of Federal
Reserve Banks
◦ Exercising responsibility in
the nation’s payments
system

 Work includes (cont’d):
◦ Administering consumer
credit protection laws
◦ Authorizing changes in
banks’ reserve
requirements
◦ Supervising Fed member
banks and other financial
entities
◦ Authorizing changes in
the Fed’s discount rate

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Professor

 Operate a nationwide payments
system
 Distribute the nation’s currency
and coin
 Supervise and regulate member
banks and bank holding
companies
 Serve as banker for the U.S.
Treasury
 Contribute to monetary
policymaking through Bank
presidents’ participation in the
FOMC

 Promote safety and
soundness of banking
system along with other
regulatory bodies
◦ FDIC, OCC, OTS, state banking
regulators
 Ensure compliance with laws
and regulations
 Oversee international
banking interests
 Administer consumer credit
protection laws

 Supply currency and
coin to banking
institutions
 Clear more than one-
third of nation’s
checks
 Transfer funds
electronically (ACH,
Fedwire)
 Serve as bank for the
U.S. Treasury

 Gather, analyze and
disseminate economic
data
 Focus on all aspects of
the economy (regional
to international levels)
 Analyze regional and
national markets and
economic data
 Design and test
econometric models
used to produce hard
data that factor into
policymaking decisions

 Policy changes
affect the nation’s
supply of money
and credit.
 Actions have real
short- and long-
term effects on the
economy.

 Sets and directs U.S. monetary
policy
 Seven governors
 Five presidents (New York and
four others on a rotating
basis)
 Nonvoting presidents
participate fully
 Final interest rate decision is
made by the 12-member
Federal Open Market
Committee (FOMC)

Stable Prices
Sustainable
Economic Growth
Full
Employment

 Discount Rate
◦ The interest rate charged by the Federal Reserve
to banks that borrow on a short-term (usually
overnight) basis
 Reserve Requirements
◦ The amount of money banks must keep on
reserve at the Fed
 Open Market Operations
◦ Buying and selling Treasury securities between
the Fed and selected financial institutions in the
open market
◦ Most important tool; directed by the FOMC
17
Professor

 Federal Funds Rate
◦ The market-based interest rate
which banks charge each other on
overnight loans of their reserve
balances held at the Fed. The Fed
achieves this rate through Open
Market Operations.
◦ A target rate
 Discount Rate
◦ Applies to short-term loans made
directly to commercial banks from
the Federal Reserve System.
◦ Typically set at 1 percentage point
above the Federal Funds Rate.

 Each head office and branch of the Federal
Reserve System has a local Board of Directors.
◦ 7–9 individuals
 Board members provide various perspectives
and economic data from different regions and
industries.
 Boards of directors vote on the discount rate.
 Boards of directors influence policymaking at
the national level through ―real-world‖ input.
19
Professor

 Generally, low interest rates
stimulate the economy
because there is more
money available to lend.
◦ Consumers buy cars and
houses.
◦ Businesses expand, buy
equipment, etc.
 Why does the Fed lower
interest rates?
◦ If inflation is in check, lower
rates stimulate economic
activity, thus boosting
economic growth.

 The Fed raises interest
rates as an effective
way to fight inflation.
◦ Inflation—a sustained rise
in the general price level;
that is, all prices are
rising together.
 Consumers pay more
to borrow money,
dampening spending.
 Businesses have
difficulty borrowing;
unemployment rises.

22
Professor

 The ECB is the central bank for Europe's
single currency, the euro.
 It is one of the seven institutions of the
European Union (EU) listed in the Treaty on
European Union (TEU)
 The ECB’s main task is to maintain the euro's
purchasing power and thus price stability in
the euro area.
 The euro area comprises the 17 European
Union countries that have introduced the
euro since 1999.
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Professor

 The capital stock of the bank is owned by the
central banks of all 27 EU member states.
 The bank was established by the Treaty of
Amsterdam in 1998, and is headquartered
in Frankfurt, Germany.
 The current President of the ECB is Mario
Draghi, former governor of the Bank of Italy.
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Professor

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Professor

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Professor

 the definition and implementation of monetary policy for the euro area;
 the conduct of foreign exchange operations;
 the holding and management of the official foreign reserves of the euro area
countries (portfolio management).
 the promotion of the smooth operation of payment systems.
 Banknotes: the ECB has the exclusive right to authorise the issuance of
banknotes within the euro area.
 Statistics: in cooperation with the NCBs, the ECB collects statistical
information necessary for fulfilling the tasks, either from national authorities
or directly from economic agents.
 Financial stability & supervision: the Eurosystem contributes to the smooth
conduct of policies pursued by the authorities in charge related to the
prudential supervision of credit institutions and the stability of the financial
system.
 International and European cooperation: the ECB maintains working relations
with relevant institutions, bodies and forums both within the EU and
internationally in respect of tasks entrusted to the Eurosystem.
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Professor

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Professor

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Professor

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Professor

 It is the largest, most representative business
organization in the world.
 The International Chamber of Commerce was
founded in 1919 to serve world business by
promoting trade and investment, open
markets for goods and services, and the free
flow of capital.
31
Professor

 Original guidelines issued in 1972
 Revised guidelines were launched at the
World Investment Forum, organized by the
United Nations Conference on Trade and
Development (UNCTAD) in Doha, Qatar in
April 2012.
 The aim of the guidelines is to facilitate
cross-border investment for investors and
governments, as well as to harness the vast
potential of cross-border investment for
stimulating balanced global growth.
32
Professor

 http://www.iccwbo.org/Data/Policies/2012/2
012-ICC-Guidelines-for-International-
Investment/
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Professor

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Professor

Unit 3.2 Regulatory Framework - International Perspective

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