The Roles of the Central Bank, Assessment Example

The central bank controls other banks’ inflation rates and is essential in drafting policies to govern transactions, money transfer, lending, and inflation rates. The bank’s policies protect people from a lack of places to get money by ensuring constant and fair circulation among all banks. Rahman et al. (2020, p. 24) add that central banks are critical in the industry and regulate it by enforcing policies to ensure fair competition. Banks do not necessarily operate within their countries; hence they must conform to their host countries’ rules. Rahman et al. (2020, p. 24) argue that most international banks have more financial capabilities than local ones; hence, the regulation and limitation of competition terms ensure that they survive and have a fair competing ground with their international counterparts.

The central banks are also crucial in the renewal and destruction of old notes and coins. Alsuwaidi et al. (2020, p. 681) add that banks are essential in transfer, raising issues when fake currencies start circulating. They are the custodian of the governments in ensuring currencies are legit and have legal government stamps.

The central bank imposes sanctions for banks that do not attain a certain level of liquidity and asses, forcing them to invest the little money they have to meet those requirements. Such measures as those imposed by central regulatory bodies can cause the sinking of income and collapse of a bank. Corporate governance issues include ensuring a bank’s policies and banking strategies are aligned to the central bank’s regulations. A bank’s performance can be measured using an analysis of its equity return, the cost to income quotient, and asset returns. These intermediation functions of a bank are critical performance indicators and show growth and potential interest margins.

The bank is the center of transmission and monetary policies. They are the most reliable mechanism for the government to ensure legal and free flow of money and other tools of the trade for steady economic growth and with limited or controlled inflation rates. Taskinsoy 2019, p. 9) states that transactions in other money transfer methods, such as digital, rely heavily on banks. Carmona et al. (2019, p. 304) write that over 85% of the money of most states in developing countries is stored in banks. The transactions through banks account for 78% of all monies transfers in the US.

Alkali and Rjoub (2020, p. 1284) write that bans are the focal point of transactions and financial systems. They allocate funds to borrowers and save in a very efficient and reliable manner. The specialized financial transaction methods, including traditional, digital, and global capabilities, determine a specific bank’s strength. According to Taskinsoy 2019, p. 12), even financial markets rely on banks for storage, transfer, borrowing, and deposits that the investors can use later. Umar and Dikko (2018, p. 13) explain that one of the safest methods of transferring money is through a bank. Banks give their customers the capability to deposit money at one location and withdraw it in another, ensure the money is transferred safely efficiently, and reduce tear and wear in physical transactions. Previously, when banks were few in the industrialized countries, Alfadli and Rjoub’s (2020, p. 1285) analysis indicates the level of tear and wear that occurred because people held to the money for long periods before they could access it a bank increased. However, banking has become more accessible and readily available in the modern world, and more people can access banks, their outlets, or agents. This transfer ensures more secure transfers, a lesser rate of tear and wear, and more vigilance in preventing the spread of fake currencies.

Alsuwaidi et al. (2020, p. 682) argue that besides the money transaction, bans steer the economy forward by borrowing from other institutions or governments and investing the money in another economic sector. For example, Taskinsoy 2019, p. 33)   notes that Barclays bank is one of the largest owners of real estate projects in the United Kingdom. These side projects raise more capital and are invested in states and other international platforms. The money it lends to its customers provides interest that improves the national economy. Banks also pay taxes to the government, contributing directly to the gross domestic product.

Banks usually channel money and funds to various projects of Individuals, institutions, corporations, and government projects. The withdrawal statement indicates the success of the bank. The statement increases accountability since such records are accessible to authorities even after long periods. Alsuwaidi et al. (2020, p. 684) explain that a statement from a bank in the commercial industry gives vital information about a country’s money market and trends. Customers’ consumption is critical in the evolution of economic classes of people, and they provide unique information to the government when making economic decisions.

Leadership in the bank’s industry includes access to the correct information, cultivation of the right culture, and intelligent decision-making processes. These factors influence key performance metrics in asset, income, profits, and equity returns.

Equity return

Equity returns include earning assets amount, cost funds, and average returns from assets. These returns are vital in determining the critical performance and ability to maintain its services. The analyst uses financial review to make meaningful metrics that help organize and interpret equity returns. Alsuwaidi et al. (2020, p. 690) explain that equity return measures a bank’s efficiency and ability to generate profits through innovative services and businesses. Many effective bans focus on the growth of the earnings per share in the national market. To evaluate rates of equity returns, banks analyze every quarter and make projections for future transactions. The equity return metric is a critical revelation of influential corporations that banks or investors can use to increase their net income and shareholder equity. Oyewumi et al. (2018, p. 199) add that more investors will be willing to put their money in an institution with good equity return statements. Earning performance is significant in projections of future investments as these statements are more readily available at the end of a financial year.

Cost income quotients

The cost-income ratio is a division of the operating cost by income. When the cost-income quotient is low, a bank performs well, and the profits are high. The operating and income balance indicates efficiency in managing financial investments, which is critical for running a bank. Alkali and Rjoub (2020, p. 1287) state a relationship between a bank’s profit level and its cost to income ratio. Good management of operating costs, including income from interest, fees and brokerage charges, discounts, and commission balancing to avoid loss, is a strength that every bank must learn.

Asset return

According to Alsuwaidi et al. (2020, p. 690), banks assemble financial reports from various investments and analyze that data for financial decision-making. Most banks’ financial decisions are data-driven and portray customers’ needs on a bottom-up scale. These impactful decisions influence the policies and services that the banks make to strengthen the banking tendencies of their customers. The bank gets more asset returns from various profits with the right mix of services. Salient investments such as digital banking and international money transfer are decisions that generate interest. Rahman et al. (2020, p. 15) argue that net margins emanate from assets and increase profit margins. Revenue-generating investments include diversification of services in the financial world and other sectors. While a banking institution may consist primarily of financial services, it can double in another sector, increasing its asset returns.

Carmona et al. (2019, p. 311) argue that the higher the asset return, the better the liquidity ratio. Banks with more assets ordinarily have better capabilities to pay any outstanding loans or liabilities in the agreed time. Overall liquidity ratios are higher in older banks since most have significant investments and assets that generate finance over a long time. Assets that are more than liabilities give a bank better chances of obtaining funds to offset the liabilities of the investment that did not bring in the expected profits. Even financial institutions make terrible investment decisions; hence assets balance the liabilities and prevent them from sinking the bank’s future.

Transmission of monetary policy from the central bank and its impact on the economy

Structural risks are many in the banking sector. The central makes policies passed to national banks to regulate competition and protect customers. The most effective competition mechanism is through strategic pricing of their product and services—a slight discrepancy in amount influences customers’ decision-making. Customers consider transacting with banks whose range of prices for withdrawals, investment rates, and share is fair and customer friendly. Pricing completion has to be carefully strategized. Otherwise, the bank risks making losses.

Vicente-Ramos et al. (2020, p. 2045) explain that another common type of competition is the inefficiency standard among banks. One of the ways of increasing efficiency is by increasing access. The increment in access is done by opening many-branched partnerships with other methods of digital money transfers. Other banks have decentralized operations to mandate agents to carry out several transaction procedures for specific banks. One advantage of these agents and small outlets is that they reach the ordinary person better and can inform or educate them or provide services that suit them better. Lipson’s (2019, p. 320) survey argues that most new customers who used services invested in the last decade were informed of them by banks agents or got the information from small outlets in urban and rural centers.

Competition-fragility aspect is essential in the banking industry. The difference in the processes and strictness of central bank’s regulations force banks to have some order. Carmona et al. (2019, p. 317) state that banks have a range for pricing their product and services in the modern world. The difference among banks is very slight. Another reason for order amidst the competition is the government’s central authority regulation. Increment in financial competition creates fair service pricing and concentration of similar services across the banking sector. Subprime lending, for example, contributes to much financial turmoil if competition is unregulated. The potential hazard in this finance sector is that only too big institutions can fair well in this sector is unregulated.

Central bank’s nature of financial statements

Financial statements are for the presentation of data over a specific period. They are reports that the bank prepares for references and manages progress. These statements are the focal point of critical evaluation in the banking industry. Vicente-Ramos et al. (2020, p. 2052) explain that financial statements are logical and offer consistent accountability of money used from an account or the bank. Balance sheets, for example, give detailed information and a breakdown of the use of money from a person’s account. Other statements are the income reports that account for the loss of profits from one’s investments. The accounts owner can review the management of one finance can and evaluate if the bank is suitable for further business. The reports between bans help compare and contrast of pricing of services and products at the bank.

During audit sections, experts request financial statements whose analysis gives information on various banking behaviors and can point to fraud, loss, or areas of losses in the balance sheets and other financial statements. According to Rahman et al. (2020, p. 25), financial statements are the end product of accounting and purport to reveal position and enterprise decisions through analyzing the bank’s processes. The bank provides interim financial statements upon request and can be final or partial for monitoring transactions at a specific period or with a specific person or institution. Lipson (2019, p. 325) states that analysis of historical cos helps banks prepare for future decisions or make better ones on similar matters. In sum, financial statements are recorded facts with which a customer can raise a claim with the bank or legal system if discrepancies are evident. They are conventions of bank accounts to the customer, and their technique postulates brief but specific information on money management. Financial statements are factual and not subject to personal judgments, which is the most applicable and expectable explanation in the financial world.

Umar and Dikko (2018, p. 25) assert that financial statements are vital in the banking world and are the best way of communication with a customer about their monetary explanations. Any other means is prone to personal judgment, bias, and exaggeration, unavailable in the statements. American Accounting Principles Board provides room for reliable statements as the chief source of information in the economic sector. Even the government should give a financial statement on allocating and using public funds. Statement help one analyze their most useful financial resources and reduce obligations where necessary since there is enough decision to help the customer. The customer’s financial information is private and should only be accessed. However, in fraud cases or involvement in illegal activity, the courts can subpoena a bank to provide a financial statement of a person, group, institution, or government, especially in national security matters.

Corporate governance control by the central bank

According to the BCBS regulations of 1999, banks must have a corporate governance perspective to manage business affairs between several financial instructions. The board of governors comprises senior managers from various banks and directors of banks. The management also selects and monitors employees to oversee and supervise the bank’s operations. According to Zulfikar et al. (2020, p.137), banks have various branches whose operationists are coordinated and aligned with the central organization’s goals, mission, and vision statement. These require corporate governance skills from a senior manager or director. This type of governance is critical in protecting the bank’s interest and representing it in the global arena. Lipson (2019, p. 334) argues that corporate governors are responsible for the image set of the banks and respond to matters that better their reputation. Corporate governance executes control functions and makes drastic measures to prevent the bank from undergoing losses. Zulfikar et al. (2020, p.137) add that this department assesses the proportionality, differences, and applicability of services at a specific time and makes necessary adjustments. The board has the overall responsibility to engage the bank in any financial venture and expose it to interaction in the external environment. The board also oversees e development and approves upcoming projects while rejecting those deemed unfit in the current economic markets.

Corporate governance is an oversight role that the CEO or board of governors use to evaluate personnel and members of the senior management committee. The board ensures that every department is functional and meets the performance indexes for collective profitability. The oversight committees handle succession cases such as the CEO and ensure a smooth transition by implementing the banks’ principles and regulations on such matters. This corporate governance body is responsible for structuring and change in the practice of the bank. Umar and Dikko (2018, p. 26) argue that banks can change their primary objective or service and give customers to conform to the changes. The changes that corporate bodies implement are evidence-based and in the interest of the bank or conformity issues imposed by the government or other regulatory bodies.

Reference

Alsuwaidi, M., Alshurideh, M., Kurdi, B.A. and Salloum, S.A., 2020, October. Performance appraisal on employees’ motivation: A comprehensive analysis. In International Conference on Advanced Intelligent Systems and Informatics (pp. 681-693). Springer, Cham.

Carmona, P., Climent, F. and Momparler, A., 2019. They predict failure in the US banking sector: An extreme gradient boosting approach. International Review of Economics & Finance, 61, pp.304-323.

Lipson, C., 2019. The IMF, commercial banks, and third world debts. In Debt and the Less Developed Countries(pp. 317-333). Routledge.

Oyewumi, O.R., Ogunmeru, O.A. and Oboh, C.S., 2018. Investment in corporate social responsibility, disclosure practices, and financial performance of banks in Nigeria. Future Business Journal, 4(2), pp.195-205.

Rahman, A., Islam, H., Islam, R. and Sarker, N.K., 2020. The effect of management by objectives on performance appraisal and employee satisfaction in commercial banks. European Journal of Business and Management, 12(20), pp.15-25.

Vicente-Ramos, W., Reymundo, K., Pari, L., Rudas, N. and Rodriguez, P., 2020. The effect of good corporate governance on banking profitability. Management Science Letters, 10(9), pp.2045-2052.

Zulfikar, R., Lukviarman, N., Suhardjanto, D., Ismail, T., Dwi Astuti, K. and Meutia, M., 2020. Corporate governance compliance in the banking industry: The role of the board. Journal of Open Innovation: Technology, Market, and Complexity, 6(4), p.137.