Author(s): Paul Fisher
Date published: Jun 2018
SUERF Policy Note, Issue No 38
By Paul Fisher, Senior Research Fellow, DAFM Centre, Kings College Business School
The balance sheet of a central bank is its defining feature, one that makes it the monopoly supplier of base money in the national currency; allows it to set interest rates for monetary policy purposes, and/or control the narrow money supply (including the issuance of bank notes); and be lender of last resort to the banking system (LOLR). Financial stability and prudential regulation normally do not require use of the central balance sheet and so those activities are not always and everywhere part of the same institution. However, synergies with central bank operations means that there are significant gains to be had from working closely together. Most central banks now have at least some financial stability responsibilities and, at a minimum, a strong interest in prudential regulation. This note outlines some ways in which those linkages have recently grown. Even where a central bank does not have financial stability explicitly in its remit, it has the ability to seriously affect it. Central bank balance sheets are typically similar across countries in certain key features, but with important variations such as in the management or not of foreign exchange reserves. But most central banks are responsible for at least two aspects of their national payments system: the domestic note issue and providing bank accounts for commercial banks to facilitate inter-bank payments. These two forms of liability represent ‘central bank money’ (which also one defines one measure of the narrow money supply).
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