Concerned about the Security of their Investments and Bank Deposits

Content
TOC \h \u \z Background of Central Bank of Brazil PAGEREF _Toc69634338 \h 4Issue Currency PAGEREF _Toc69634339 \h 5Acts As Banker to Banks PAGEREF _Toc69634340 \h 7Acts As Banker to the Government PAGEREF _Toc69634341 \h 7Acts As the Lender of Last Resort PAGEREF _Toc69634342 \h 8Implements Monetary Policy PAGEREF _Toc69634343 \h 8Regulates the Financial System PAGEREF _Toc69634344 \h 12Conclusion PAGEREF _Toc69634345 \h 14References PAGEREF _Toc69634346 \h 16
Appraise the Effectiveness of the Central Bank of Brazil, as Compared to the Federal Reserve in the US, in Performing the Functions of Central Bank in Brazil.
Introduction
A central bank, also known as a monetary authority or a reserve bank, is a national institution that is charged with the responsibility of managing a country's currency and its monetary policy in addition to overseeing the commercial banking system in the country or a formal monetary union that brings together different states. Unlike commercial banks, the central bank has a monopoly of authority when increasing a country's monetary base. In many other countries, the central bank also plays supervisory and regulatory roles to maintain stability within the economy (Brezina, 2012). As such, the central banks can prevent bank runs and discourage fraudulent financial behavior and recklessness among other member banks (Herendeen, 2008). In many developed nations, the central banks are independent institutions that operate free of political interference. However, even with such arrangements, the central banks are still subject to control, albeit limited, by the executive and the legislature.
Since each country has its unique economic systems, needs, and legal frameworks that define their central banks' authority and roles, certain functions seem to cut across all the central banks globally. For example, a central bank's primary roles include monetary policy, reserve management, issuing coins and notes, maintaining financial stability, managing payment systems, and banking supervision, amongst other functions (Brezina, 2012). In terms of managing the monetary policy, the central bank's role is to set the official interest rates within an economy. In addition, the central bank also controls the money supply within an economy. The other role of a central bank is to maintain financial stability. In this regard, the central bank serves as the government's bank and the banker's bank or the lender of last resort (Herendeen, 2008). The central bank also acts as the national reserve manager. It is the institution charged with managing the foreign exchange of a country, its gold reserves, and government bonds (Brezina, 2012). The central bank also supervises and regulates the entire banking industry.
Furthermore, the institution also manages and supervises inter-bank clearance systems and payment systems in a country. The other important role of the central bank is to issue notes and coins used for financial transactions in an economy. Other central bank functions include conducting economic research, collecting statistics, advising the government on financial matters, and supervising deposit guarantee schemes. The primary objective of central banks is to ensure the stability of prices within an economy. The level of inflation usually indicates this at any particular time (Herendeen, 2008). Inflation can be defined as the rise of prices of commodities in relation to a particular currency. Central banks manage prices by keeping the inflation rates at or around the 2% mark.
The central bank also plays an important role in encouraging economic growth in a country. This is achieved through setting and supervising the interest rates; when the interest rates are lower, people can borrow money from financial institutions and interest the money back to the economy (Brezina, 2012). In some countries, the central banks have emerged as key pillars supporting the fight against climate change. After the signing of the Paris agreement on climate change, when most central banks believe they can also pursue environmental help, their countries alleviate the impact of climate change. For example, the Network for Greening the Financial System (NGFS) brings together several central banks with the goal of determining the various ways in which central banks could use their regulatory and monetary policy tools to support climate change mitigation (Herendeen, 2008).
Background of Central Bank of Brazil
The Central Bank of Brazil (CBB) was created in 1964 as a federal agency that was part of the National Financial System of the country. The bank derives its authority from the legal framework stipulated in Law 4, 595 of 1964. However, the bank only began its operations in March 1965 as the law indicated that it would only become operational within 90 days after the passage of the legislation. The bank was initially set up as the Bank of Banks. However, a reorganization of the country’s financial system between 1985 and 1986 saw a redefinition of the accounts and responsibilities of the CBB. For example, the roles of the CBB were clearly distinguished from those of the National Treasury and the Bank of Brazil. The Special Account was abolished in 1986 allowing money supply from the CBB began being vividly identified within the budgets for both the Bank of Brazil and the Central Bank of Brazil.
In1988, more responsibilities we added to the CBB from the Bank of Brazil. These new roles included regulation of the banking system in the country, managing a country's currency and its monetary policy, and other supervisory and regulatory roles to maintain stability within the economy. Similarly, some functions of the CBB that were atypical of central banks were transferred to the National Treasury. Such roles include those related to fostering initiatives and the management of the federal public debt. The 1988 constitution also helped strengthen the Central Bank by providing important rules concerning eh activities of the Central Bank, including the exclusive delegation to issue money on behalf of the Union. Furthermore, the constitution also prohibited the Central Bank to grant loans to the National Treasury either direct or indirectly.
Background of the Federal Reserve
The Federal Reserve was established in 1913 through the Federal Reserve Act (Brezina, 2012). The Act's main objective was to ensure economic stability within the country by establishing a central bank. The main role of the central bank was to implement monetary policies in the country. Prior to creating the Federal Reserve Act, many investors were concerned about the security of their investments and bank deposits. The financial market was dominated by private lending institutions such as J.P. Morgan, who bailed out the government in times of need, such as in 1895 when the government was cash strapped. However, minimal regulations were governing the financial sector in the country.
When the Federal Reserve Act came into force after being accented to by President Woodrow Wilson, it was viewed as the most influential and significant legislation in the financial sector. The Act mandated the 12 Federal Reserve banks the ability to print and circulate money to ensure economic stability in the country (Brezina, 2012). The Federal Reserve was also given the mandate of regulating interest rates in the country. The Federal Reserve is the body charged with its responsibility of implementing monetary policies.
Comparison of the Roles of the Central Bank of Brazil and the Federal Reserve
Issue Currency
Brazil
One of the primary roles of the Central Bank of Brazil is to issue currency. It is the only entity in the country that is mandated to issue and supply money for use within the economy. As such, the bank’s monetary policy on the issuance of currency in the economy has a significant impact on the stability of the economy as a whole. The amount of money the bank supplies in the economy affects inflation and the GDP of the country. The supply of money is influenced by three main factors: the reserve requirement imposed on commercial banks, open market operations, and the prevailing interest rates as set by the central bank. The Central Bank of Brazil issues the Brazilian Real, the country’s currency.
In 2008, the world experienced a significant financial crisis that required central banks from around the world to implement a wide range of measures to secure their most affected industries while also maintaining a stable economy. In response to the crisis, the Central Bank of Brazil took several measures that influenced its supply of money. In the midst of the crisis, the Brazilian government implemented several countercyclical measures that revolved around three federal banks: the Bank of Brazil, Federal Savings Bank, and the National Bank for Economic and Social Development. However, the Bank of Brazil only played a secondary role in safeguarding the country as most of the strategies were implemented by the National Treasury. The bank was also quite incoherent in its policy for fostering liquidity in t economy during the crisis. Nevertheless, at the height of the financial crisis, the bank stimulated liquidity through open market operations and reserve requirements.
Federal Reserve System
Monetarists oppose the existence of a Federal Reserve but advocate for a central bank policy that aims at maintaining the supply and demand for money at equilibrium. According to the monetary policy, a lot of money supplied to the economy increases inflation. Monetary authorities and institutions in the economy, such as the central bank, should aim at maintaining the stability of prices in the economy.
The 2008 financial crisis was in part occasioned by the interest rate policy that was implemented by the Federal Reserve as a response to low inflation in the economy at the time. It is the continual rise in the federal discount rate for US Bonds to 3.5% from 1.5% and later rising to 5.03% by September 2007 that led to the subprime mortgage crisis and the eventual financial crisis. During the crisis, the Federal Reserve undertook several measures through its role of issuing currency. For example, the bank opened new emergency liquidity facilities in addition to reducing policy interest rates.
In terms of the issuing style, there have been several forms of paper money that have been in use since then, with the latest one being the Federal Reserve Note which has been in use since the enactment of the Federal Reserve Act of 1913. The USD is also the primary reserve currency of the world and is the most used currency in international transactions.
With the rise in digital currencies, the Federal Reserve is yet to start issuing its own digital currency. As such, it does not regulate the usage of digital currencies like the Bitcoin, Libra and others. However, the bank is closely studying digital currencies with an objective of launching its digital currency and h to regulate the industry.
Comparison
Although there are certain similarities between the two banks in terms of their role in issuing currency in their respective jurisdictions, there are a few contrasts. Central Bank of Brazil had incoherence in its policy for fostering liquidity in t economy during the crisis. On the contrary, the Federal Reserve undertook several measures through its role of issuing currency including opening new emergency liquidity facilities in addition to reducing policy interest rates.