Banking Theory and Practice Session 2 1st March 2019

Federal Reserve’s Balance sheet (Central Bank)

Assets Liabilities
Government Securities Currency in circulation
Discount Loans Reserves

Central banks are responsible for the liquidity of commercial banks, reserves are called the
minimum reserve requirement.

Third Party Funds (Dana Pihak Ketiga(DPK)) is all the money that is collected by the banks,
such as saving deposits (tabungan), current accounts (giro) and time deposits (deposito).

When supply of Rp. is too

 Purchase of bonds increases the money supply much the fed needs to
 Making discount loans increases the money supply absorb the liquidity of Rp.
in the market by selling
Open Market Operations (OMO) government securities or
1. Dynamic: Meant to change reserves bonds to reduce the
2. Defensive: Meant to offset other factors affecting Reserves, supply of Rp. in the
typically uses repos market and vice versa.

Open market operations at the Trading Desk

 The trading desk typically uses 2 types of transactions to implement their strategy:
o Repurchase Agreements: The fed purchases securities, but agrees to sell
them back within about 15 days. So, the desired effect is reversed when the
Fed sells the securities back – good for taking defense strategies that will
reverse.
o Matched sale-purchase transaction: essentially a reverse repo, where the fed
sells securities and agree to buy it back

Discount Loans
The Fed’s discount loans are primarily of three types
 Primary Credit: Policy whereby healthy banks are permitted to borrow as they wish
from the primary credit facility.
 Secondary Credit: Given to troubled banks experiencing liquidity problems.
 Seasonal Credit: Designed for small, regional banks that have seasonal patterns of
deposit.

Lender of last resort

1. To prevent banking panics
2. When no one else wants to lend money, the commercial banks can borrow from
central bank
Reserve Requirements
 Everyone is subject to the same rule for checkable deposits:
 3% of first $48.3M, 10% above said amount
 Fed can change the 10%
 Rarely used as a tool
1. Raising liquidity problems for banks
2. Makes liquidity management unnecessarily difficult

For BI, 6.5% of total Third-Party Funds

Loan to funding ratio 80-92% -> if more than 92, must put more on reserve requirement

BI -> 7 Days reverse repo rate

Interbank overnight rate

Bank’s interest rate

Price stability goal and the nominal anchor

Policymakers have come to recognize the social and economic costs of inflation.
 Price stability, therefore, has become a primary focus
 High inflation seems to create uncertainty, hampering economic growth
 Indeed, Hyperinflation has proven damaging to countries

Other goals of monetary policy

 Goals
1. High employment
2. Economic growth
3. Stability of financial markets
4. Interest rate stability
5. Forex market stability