The natural starting point is the responsibility of the Reserve Bank. Here are its central missions:
- To implement the monetary policy of a country by influencing the monetary and credit conditions in the economy to create a maximum of jobs, stable prices, and moderate long-term interest rates banking and financial system, and protect the credit rights of consumers.
- Maintain the stability of the financial system and contain systemic risks that may arise in financial markets unimportant role in the management of the country’s payment system
- The first important point is therefore that the Reserve Bank has indeed done a lot. You cannot just remove these functions.
If you do away with the central bank, you will have to push many of these functions to other regulators or private companies. For example, inflation must be controlled in one way or another. Careful monitoring is also important. The problem with getting rid of the Reserve Bank is that you need to delegate these responsibilities to another institution that can perform them better.
As a banking supervisor, the Reserve Bank supervises a number of financial companies such as the parent companies of the bank, state banks of the reserve system of the Reserve Bank and other foreign branches of member banks . Although the Reserve Bank is not the only banking watchdog there, it plays an important role in the supervision of these institutions.
requires a certain monetary policy. The government has chosen to allow the Reserve Bank to exercise a monetary policy with great independence, aimed at achieving two objectives: price stability and full employment. This means that the Reserve Bank has a great deal of freedom to play with interest, buy assets, and even conduct emergency lending operations to achieve these goals.
What if we just eliminated it?
Obviously, these tasks will still have to be done, so they will have to become the responsibility of someone or something else. I spoke with two former Reserve Bank officials who argued that assigning these responsibilities to the Reserve Bank was better than other alternatives. Bank participates in supervision. Until 2006, it was the main banking regulator of the Reserve Bank. He is currently the director of risk management, regulation, and services at Deloitte & Touche.
He explained that the Reserve Bank’s supervisory function is important for a number of reasons:
Supervision is absent, not just to find out what is happening in the financial system, the emerging points of losses. Systemic gaps, new weaknesses emerge but also for the central bank to play an important role in regulating financial policies and macro security. And all of this contributes to its broader responsibility for financial stability.
For the Reserve Bank, oversight is a two-way street. On the one hand, it gives the central bank a lot of additional information about the banking system, which it can use for its other functions such as financial stability. The Reserve Bank, on the other hand, has a unique perspective to offer when monitoring as it has a wealth of data and experience in financial markets, global regulation, and macroeconomics. Thus, supervision not only makes the central bank more efficient, but its foundation makes it an exceptionally knowledgeable custodian.
This is not to say that the Reserve Bank is necessarily the sole regulator in the market. Spillenkothen notes: “Managers offer their differing views. The Reserve Bank’s position is just one of many. Other regulatory bodies such as the Securities and Exchange Commission, the Reserve Bankeral Deposit Insurance Corporation, and others also make important contributions to oversight. But a group approach that includes the Reserve Bank will provide a robust supervisory framework. Banking veteran Donald Kohn? He is currently working as a Senior Fellow of the Brookings Institution. He believes that an independent central bank is the best way to control the money supply in order to achieve price stability.
There are, of course, other ways to conduct monetary policy. One option is to have a direct government monetary policy. For example, the Treasury could do this, or Congress could vote directly on interest rate changes or policy changes.
“There is an inflation bias in favor of the central bank when (monetary policy ) is tightly controlled in the political process, ”explained Kohn. . He said history has shown that politicians worried about re-election tend to engage in short-term monetary policy easing to stimulate the economy while ignoring long-term price stability. This can lead to excessive inflation.
Another way to conduct monetary policy might be to tie money to a commodity such as gold.
used this approach through the gold standard. With this strategy, some people think that you don’t need a reserve bank because the quantity and value of the currency depending on the number of goods. Kohn says this approach can be inflexible and dangerous:
Periodic bank runs have occurred under the gold standard; The Reserve Bank was established to solve these problems. And you are interested in the world supply of gold and its distribution between countries. You will have situations like what happened in the 1920s when some countries accumulated large amounts of gold and put downward pressure on the prices of other countries that did not have that large amount of gold. Only after abandoning the gold standard can we begin to emerge from the (major) recession. If not the reserve bank, then who?
This is not a comprehensive argument that an independent central bank is absolutely necessary. Instead, here are just a few reasons why those with first-time reserve banking experience feel that it’s better to have a central bank like a reserve bank than other alternatives. . And remember, asking what goals the central bank should aim for as part of its monetary policy philosophy is not an argument against the Reserve Bank; that is an argument in favor of reform. If you want to get rid of the central bank entirely, you will need to find other regulators and/or mechanisms to fulfill the core responsibilities of the central bank. And as the sources above explain, trying to do so can be daunting.