AN ENGLISH COURSE FOR STUDENTS OF FINANCE. Учебно-методический комплекс

BLOCK 3

Additional Practice 3.1

Deregulation and supervision in banking markets

Recently financial markets in different countries have been 'deregulated', that is freed from many restrictions on the kind of activity that can be engaged in by different kinds of financial companies. With this increased freedom, supervision of financial institutions becomes more complicated.

Pre – reading questions:

Have banks and financial markets been deregulated in your country? Do you think deregulation will make banking and investment more risky?

1.The grand circle that regulators have to square is this: how to establish a framework of regulation that accommodates the characteristics of the traditional specialized banking system and mark it off from other businesses, with the sort of diversified financial services that are actually evolving. The era of strictly compartmentalized financial institutions is passing, leaving the regulatory system designed to match it looking increasingly out of date.

2.A single omnipotent, omniscient regulator for all financial services remains a dream. Many say it will stay that way, pointing out how long it took to get agreement just on rudimentary international rules for the capital adequacy of banks. Yet regulators everywhere acknowledge the need to cooperate more closely with their opposite numbers across industrial and geographical boundaries. They also agree that greater harmonization of regulatory standards on everything from reporting requirements to risk assessment will come surely, if slowly.

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Vocabulary

3. Some of the words used in Paragraphs 1 and 2 are very formal. Match the formal words with the more informal expression of the meaning which they have in this text.

Text organization

4. Which of the following sentences do you think is the first sentence of Paragraph 3?

(1)The history of attempted bank regulation extends far back to the early days of the foundation of the Bank of England.

(2)Bankers in America are complaining that proposed deregulation of financial institution there will open the way to increase foreign competition.

(3)Nonetheless, few foresee anything but the most limited merging of exiting regulatory agencies, even within single countries.

(4)Japan's central bank has just announced liberalised arrangements for banks wishing to raise more capital.

Now read Paragraph 3, and Paragraph 4.

3. Much of that is likely to be mere tidying up. A good place to start in America would be scrapping the separate regulation of thrifts. If they have been given power to act like small banks, then there is little reason not to regulate them as banks (and especially given the mess thrift regulatory have made of the job). It is what

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AN ENGLISH COURSE FOR STUDENTS OF FINANCE

Japan has sensibly done by making its equivalent of thrifts, sogo banks, choose to be either credit unions or to become commercial banks .Britain, too, has let those of its building societies with ambitions to be banks, and to be regulated as such.

4.These are moves in another right direction - to switch away from regulation by institution, as mostly happens now, to regulation by mostly happens now, to regulation by function. This means that regulation becomes a matter of supervising what is done rather than who does it.

5.Tick (v) the country to which the statements on the left of the table apply according to Paragraph 3 and 4.

Now read Paragraph 5,

5. Unsystematic deregulation has brought the system to its present ugly pass. This has left an increasing number of competitive anomalies. Much of the pressure for, and resistance to, further change comes from those institutions that wish to alleviate or entrench their market disadvantages. In both America and Japan, the debates about reforming the domestic financial systems, and in particular about updating Glass-Steagall and Article 65 respectively, have been slowed by political horse-trading. This is making

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worse a situation in which competition is keeping the prices of many financial services artificially low and capacity artificially great in a way that cannot be sustained for long. Systematic risk gets greater, not less, the longer the system is skewed.

Comprehension

6. Which of the following are mentioned in Paragraph 5 as being problems in the present system?

(1)Prices are too high and capacity too low.

(2)Change is being stopped by vested interests.

(3)Politics are preventing reform in some countries.

(4)Risk is decreasing by keeping the present system.

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AN ENGLISH COURSE FOR STUDENTS OF FINANCE

BLOCK 4

INFORMATION FOR STUDY

The Central Bank of the Russian Federation

The Central Bank of the Russian Federation (CBR) is one of the few central banks in the former communist countries of Europe that does not claim to have been set up exactly like the German Bundesbank. This is just as well, because it has more formal responsibilities and powers than the Bundesbank under the constitution and under the (revised) central-bank law of April 1995. This may not be a good thing.

Unlike the Bundesbank, the CBR is constitutionally independent. Article 75 of the constitution passed in December 1993 and reproduced in full below states that:

1.*The monetary unit in the Russian Federation shall be the Rouble. Issuance of money shall be carried out exclusively by the Central Bank of the Russian Federation. The introduction and issue of other money in the Russian Federation shall not be alloyed.

2.Protecting and ensuring the stability of the rouble shall be the principal function of the Central Bank of the Russian Federation, which it shall discharge independently from other bodies of state authority.

3.A system of taxes to be collected for the federal budget and the general principles of taxation and levies in the Russian Federation, shall be established by federal law.

4.State loans shall be issued in the manner specified in federal law and shall be accepted on a voluntary basis.

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*The central-bank law was adopted, in 1992, but amended a number of times since, most recently in April 1995. Under the law, the candidate for the post of CBR governor is proposed by the president and confirmed or rejected by the Duma. The governor then proposes the twelve members of the board of directors to the Duma. The governor and members of the board of directors have tenure for four years. This tenure is secured by considerable, but not foolproof, protection from outside interference. The CBR and the government are legally obliged to consult each other about their areas of responsibilities for the purpose of co-ordination only. The relationship is symmetrical in law. The CBR makes a report to the Duma on monetary conditions, but does not receive instructions from the Duma or any other body. The CBR is statutoryly - but not constitutionally - prohibited from monetary financing of the budget deficit. This definition does not prevent the CBR indirectly financing the budget by buying government securities in the secondary market.

The CBR is uniquely responsible for:

•monetary policy,

•banking supervision,

•inter-bank settlement; and is

•banker to the federal government.

It shares responsibilities for:

•holding (the bulk of) FX reserves, with the government;

•the exchange-rate targets and regime, with the government;

•the securities supervision of banks, with the Federal Securities Commission.

The government is formally responsible for exchange-rate policy and the CBR for implementation. The government has tended to share the lead on policy with the CBR, probably because there has been a high degree of convergence in thinking between the two organisations, eg, on the introduction of (and later modifications to) the rouble corridor.

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AN ENGLISH COURSE FOR STUDENTS OF FINANCE

Feb-95 Jun-95 Oct-95 Feb-96 Jul-96 Nov-96 Mar-97 Jul-97 Dec-97 Source: Reuters and Russian European Centre For Economic Policy

In practice, central-bank independence does not derive exclusively from the law; there is also popular and elite support for the nation. Furthermore, a plethora of responsibilities can:

•blur the institution's 'focus';

•lead to potential conflicts

-between instruments and targets,

-with the government over exchange-rate policy and implementation, and

-with the Federal Securities Commission over the super-

vision of the banks' securities operations;

• enhance the scope for policy and administration errors which cross-contaminate and impair the institution's prestige.

The CBR's independence is yet to be fully tested. So far, the picture is open.

*The executive, acting in union with the Duma, passed a law forcing the CBR to hand over RUR5trn (USDIbn) to the budget in June 1996. This was the first time the CBR's independence had been challenged in this way; the CBR appealed to the Constitutional Court in early July to review the law in the light of Article 2

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of the 'central-bank law', under which 'the Bank of Russia is fully empowered to own and control its property and taking away property without its consent is not allowed', according to a Western law firm in Moscow. The CBR and the government eventually came to an arrangement that established the precise legal rules for the transfer of CBR profits to the government. This seems to be broadly in line with the arrangements in western European countries.

*The CBR seems to identify fighting inflation as its prime task and stabilising the RUR as a means of achieving low inflation. If inflation started to rise, rather than fall in line with the IMF and budget targets, it is unclear whether the CBR would raise rates and allow the RUR to appreciate. Such a difficult choice might be delayed for some years - that is, until economic recovery has gathered sufficient momentum to provoke overheating.

*The government has formal responsibility over the ex- change-rate regime and targets and has been working in harmony with the CBR on the design and implementation of policy. However, the government could frustrate the CBR's actions in, for example, fighting inflation if it chose to impose a faster rate of RUR depreciation or a devaluation, or prevent an interest-rate rise by, eg, changing the parameters of the corridor.

Open-market Operations

The CBR conducts open-market operations and has now acquired a large portfolio of federal securities. This constitutes indirect lending to the government; direct lending is prohibited. The IMF puts limits on this indirect lending, but there is nothing in domestic legislation, which regulates this practice. Last year, the CBR kept its stock of lending to the finance ministry unchanged and, therefore, provided no direct financing on the margin to the government. However, the CBR acquired RUR23trn of securities - almost certainly government rouble securities such as T-bills - taking holdings to nearly RUR59trn. Some of this acquisition of securities could reflect the exchange of new finance-ministry securities in cancellation of part of the finance-ministry's historic debt to

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AN ENGLISH COURSE FOR STUDENTS OF FINANCE

the CBR. This suggests the CBR could hold as much as 25% of the stock of RUR237trn of GKOs and OFZs issued at end-1996 and is a major player on the primary and secondary markets in government securities. As the government's banker, it would presumably be obliged to strive to meet the objectives of its client with respect to the quantity and cost of the securities the government issues and to secondary-market conditions.

Central Bank of the Russian Federation

Note: The CPI rose by 20% from December 1995 to November 1996.

Monetary and Exchange-Rate Policy

Central-bank Policy

The primary responsibility of the Central Bank of Russia is the stability of the currency:

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