Financial Institutions
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Definition of Central Bank
Role of the Central Bank of Jamaica
Main Functions of the Central Bank
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The Central Bank is the head of the financial sector in any
economy and is also regarded as the government’s bank.
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The Central Bank twofold purpose is:
-To oversee the operations of all financial institutions
-To implement monetary policy on behalf of the
government
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It has the sole rights to issue notes and coins
It acts as the government’s bank
It acts as the banker to commercial banks
Manages the foreign exchange reserves
Provides economic and financial advise to the government
It is a lender of last resort
Implements monetary policy on behalf of the government
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The central bank is the sole issuer of new notes and coins in
the economy. It also accepts and replaces unfit notes and
coins.
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As banker to the Government, the Bank:
administers some of the Government's main deposit accounts
services the Government's external public debts
acts as agent for the Government. This involves the
maintenance of accounts of the Central Government and the
subsidiary accounts of some public sector agencies.
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All commercial banks must keep a percentage of their deposits as
cash reserves at the central bank.
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The central bank lends to the commercial banks when necessary.
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Commercial banks also seek and accept advice from the central
bank. They have to report regularly to the central bank on various
aspects of their operations.
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As banker to commercial banks the BOJ exercises oversight
responsibilities for a clearing system, which provides for the
clearance and settlement of transactions between banks.
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The Central Bank looks after the foreign exchange reserves. It
ensures that the country always has sufficient reserves and if
it does not, it advises the government on the appropriate
policy.
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The Governor of the Central Bank advises the Minister of
Finance on macroeconomic and financial matters.
In fulfilling this function, the Bank maintains an extensive
economic database and conducts research on areas relevant
to economic policy.
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The central bank lends to sectors of the financial system when
they are unable to borrow from elsewhere. This is particular
important during a recession
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Monetary policy refers to the actions taken by a Central Bank
with the Ministry of Finance to create and manage the quantity
of money in the economy and interest rate.
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To implement monetary policy various monetary tools/ instruments are use.
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Monetary policy tools are designed to influence the level of liquidity in the financial
system.
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Monetary Policy Tools include:
 Reserve Requirement
 Open Market Operations
 Moral Suasion
 Interest Rate
 Discount Rate
The Central Bank acts as an umbrella bank for all the banks in the
country, therefore all the banks are obliged by law to have accounts
with the Central Bank. Such accounts are called cash reserve
requirement (CRR) accounts.
 The banks are required to keep a certain percentage of their deposit
at the Central Bank.
 It facilitates transactions between the Central Bank and commercial
banks, and further ensures liquidity and safety of banks.
 The CRR therefore acts as a monetary policy instrument, i.e.
increasing/decreasing the CRR affects banking liquidity and credit
extension.
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Open Market Operations (OMO) forms part of the arsenal of tools that the Bank
uses to manage liquidity in the economy. Through OMO, the Bank buys and sells
debt securities in the market to influence the liquidity conditions.
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The Open Market Operations refers to the sale and
purchase of government securities and treasury bills by the central bank
of the country with a view to regulate the supply of money in the economy.
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Simply, the process in which the central bank requests or persuade the
commercial banks to comply with the general monetary policy of the central
bank is called a moral suasion.
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The discount rate is the interest rate at which commercial banks borrow money
from the Central Bank, in turn, affects other interest rates in the economy.
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The interest rate is the percent of principal charged by the
lender for the use of its money.