Effect of Monetary Policy on Banking Sector
The effect of monetary policy on banking sector can be seen in different ways. A monetary policy is a set of strategies that the central bank of any country employs to regulate the amount of money that is in circulation at any given time. These strategies also determine the worth of that money.
The ultimate goal of a monetary policy in any country is to enhance long-term economic growth, promote a balance in employment, stability in prices and moderate interest rates. Banks are part of the central bank of any country. As such, they are affected by the monetary policy set and implemented by the central bank.
In the U.S the Federal Reserve formulates the monetary policy. In the U.K, Bank of Britain formulates the monetary policy. This implies that all banks in the U.S and in the U.K are affected by the monetary policy formulated and implemented by the Federal Reserve and the Bank of Britain respectively.
Monetary policy of any country affects the discount rate of banks in that country. Discount rate refers to the interest rate that banks charge when lending or borrowing money from each other. For instance, if a country embraces a restrictive monetary policy, the discount rate is increased. This decreases lending among banks in that country.
The central bank can also increase reserve requirement. Reserve requirement refers to the amount of money that any bank in a country is required to have by the central bank. If the central bank increases the reserve requirement, banks will have to save more money. Thus, they will not have more money to lend.
When the central bank issues debt to get cash, the economy will have less cash in circulation. Since banks are among the institutions that buy the debt issued by the central bank, they will be left with less cash. This makes it difficult for them to lend loans to customers. As such, they are forced to increase the interest rates that they charge for loans.
Any monetary policy should be formulated with the consideration of the banking sector. This is because if the monetary policy is inconsistent with the activities of the banking sector it will cause inconsistencies in the operations of the banks. Additionally, if some banks find the policy as being too inconsistent they will ignore some of its guidelines and this will affect its implementation. This will eventually affect the entire banking sector and the economy of a country.
A bad monetary policy can also cause problems among banks due to irregularities in information assimilation among borrowers and depositors with accounts in the banks. All these factors of a monetary policy that can affect the banking sector negatively if the policy is not formulated and implemented properly and timely.
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A monetary policy of a country plays a very important role in determining the growth of its banking sector and the economy. To write a comprehensive essay on the effect of monetary policy on banking sector, you must conduct extensive research first. Alternatively, you can order your essay with veteran essay writers at www.assignmentwritinghelp.net now.