2015/7/8 Reserve Requirements Open Market Operations Excess reserve The buying and selling of government securities The amount of cash in hand or deposit in the in the open market in order to expand or contract central bank that is in excess to the required he amount of money in the banking system. eserve The central bank reduces money supply by selling Deposit reserve rate bonds ry dealers(security firms and banks)and decreasing the balance The interest rate that the central bank pays on the that banks can lend equired reserve and the excess reserve Purchase of government securities injects money Open Market Operations Open Market Repurchase Agreements Repurchase Agreement( Repo Reverse Repurchase Agreement An agreement with a commitment by the seller The central bank sells securities to dealers and (dealer) of security to buy it back from the agrees to repurchase them at a higher price purchaser at a specified higher price at a designated future date It contracts the short-term liquidity in the banking ector before the central bank buys back the here the security serves the collateral In the repurchase transaction the central bank What is the difference between Repo and provides short-term liquidity to the banking open market operation? The wording in China is different. Discount Rate Discount Rate The US Fed Discount rate Proceeds from discount loans are also the interest rate charged to co reserves and increase the bank's capacity other depository institutions o from their regional Federal Reserve Bank's lending facility-the discount window, i.e An increase in the discount rate discourages capital financed by the central bank banks from borrowing from the Fed, thereby the total amounts of loans provided to firm extension and seasonal credit extension to a decrease in the discount rate encourages banks to borrow from the fed2015/7/8 2 Reserve Requirements • Excess reserve – The amount of cash in hand or deposit in the central bank that is in excess to the required reserve • Deposit reserve rate – The interest rate that the central bank pays on the required reserve and the excess reserve 1-7 Open Market Operations • The buying and selling of government securities in the open market in order to expand or contract the amount of money in the banking system. • The central bank reduces money supply by selling bonds to primary dealers (security firms and commercial banks) and decreasing the balance that banks can lend. • Purchase of government securities injects money into the banking system and stimulates growth. 1-8 Open Market Operations • Repurchase Agreement (Repo) – An agreement with a commitment by the seller (dealer) of security to buy it back from the purchaser at a specified higher price at a designated future date. – It represents a collateralized short-term loan where the security serves the collateral. – In the repurchase transaction, the central bank provides short-term liquidity to the banking sector. 1-9 Open Market Repurchase Agreements • Reverse Repurchase Agreement – The central bank sells securities to dealers and agrees to repurchase them at a higher price – It contracts the short-term liquidity in the banking sector before the central bank buys back the security. • What is the difference between Repo and open market operation? • The wording in China is different. 1-10 Discount Rate • The US Fed Discount rate – the interest rate charged to commercial banks and other depository institutions on loans they receive from their regional Federal Reserve Bank's lending facility--the discount window, i.e., the cost of capital financed by the central bank. – Discount windows provides very short-term (overnight) loan extension, short-term loan extension and seasonal credit extension to commercial banks. 1-11 Discount Rate • Proceeds from discount loans are also reserves and increase the bank’s capacity in making loans. • An increase in the discount rate discourages banks from borrowing from the Fed, thereby the total amounts of loans provided to firms. • A decrease in the discount rate encourages banks to borrow from the Fed. 1-12