Tutorial:Business Academy Topic: Financial Market and Banks Prepared by: Ing. Ingrid Ilčíková Projekt Anglicky v odborných předmětech, CZ.1.07/1.3.09/ je spolufinancován Evropským sociálním fondem a státním rozpočtem České republiky.

THE CZECH NATIONAL BANK

 the CNB – the central bank of the CR  supervises the financial market  established by the Constitution of the CR  Chapter Six – The Czech National Bank, Article 98 The Czech National Bank is the central bank of the state. The main objective of its activities is to maintain the price stability; its activities can be regulated only by law  formation in 1993, after separating the republic it was necessary to establish a central bank for both the CR and the SR; the successor to the Czechoslovak State Bank

THE CHARACTERISTICS  independent of the government, attends its meetings  it monitors monetary stability, inflation, price levels, the unemployment rate, economic growth, and it adapts its activities – it sets a limit on its instruments  it supports economic policy of the government unless inconsistent with its main objective  in accordance with its objective it sets the monetary policy, issues banknotes and coins, controls the money circulation, payments and bank clearing, it supervises the banking sector, capital market, insurance, pension funds, credit unions, electronic money institutions and foreign exchange control  it operates according to the CNB Act and other legislation

 it is not incorporated in the trade register  it does not have determined the amount of the ordinary capital  it is not a business entity  it has no direct relationship with the clients  it provides bank services for the state and public sector  it keeps the accounts of the organizations connected to the SR - finance and customs offices, the Czech Social Security, job centres, contributory organizations, state funds, accounts linked to the budget of the European Communities

MANAGEMENT  headed by the bank board – chaired by the governor - 6-year-long term  the bank board and the governor are appointed and recalled by the President of the Republic  the bank board consists of seven members  its members are: the governor, 2 vice-governors and 4 senior directors of the CNB

THE TASKS OF THE CNB  it sets an obligatory reserve rate  it sets the key interest rates – deposits, loans  it sets the rules in the financial sector – the conditions for granting banking licences  it is in charge of banking supervision  it determines the exchange rate policy  relationships with foreign financial institutions - IMF, World Bank  money emission  State Bank  Bank of Banks  supervision of the introduction of the euro  management of foreign exchange reserves  inflation targeting – it pursues price stability, creates inflationary expectations  it took over the activities after the cancelled Securities and Exchange Commission

THE INSTRUMENTS OF THE CENTRAL BANK  Discount rate – the basic interest rate in the economy; commercial banks overnight deposit with the CNB their temporarily free funds  if there is a high inflation in the economy, the CNB increases the discount rate  Lombard rate – commercial bank can overnight borrow money from the CNB, the CNB provides money against a pledge of securities at a higher interest rate  if the bank raises its rates, the loans are expensive, and thus less money flows into the economy

 2W repo rate – according to the European Central Bank, a two-week repo rate started to be used as a key rate; the main monetary policy instrument, the CNB accepts surplus liquidity from banks and offers securities instead; both sides committed to exchange securities back for money (plus interest) after certain time (14 days)  Required reserves – RR - the banks must deposit a certain percentage of the funds with the CNB, then the money cannot be lent, it earns an interest; the tool has an anti-inflationary effect (increasing RR means that banks have less money for lending, and thus less money gets into circulation); according to EU requirements the RR were in1999 reduced to 2 % and the rate remains the same

 Free market operations – the CNB sells and buys securities  If it sells =) it withdraws money from the circulation  The terms of liquidity – the banks have a determined relationship in the structure of assets and liabilities, short-term loans backed by short-term sources, long- term loans backed by long-term sources

ACTIVITIES:  On the CNB website, find the current value of the rates of the basic tools of the CNB; look at the history of the developement of the rates, comment changes connected with the development of the economy.  How many members are there in the Bank Board and why?

RESOURCES:  Juřík, P. Historie bank a spořitelen v Čechách a na Moravě. Praha: Libri, ISBN  Vencovský, F. Lidé a Peníze. Praha: Createam, ISBN  Available on  Available on #pmr