The Functions of the Deutsche Bundesbank - Free Essay Example

THE FUNCTIONS OF THE DEUTSCHE BUNDESBANK 1. The bank of issue Only the Bundesbank is entitled to issue banknotes denominated in Deutsche Mark (monopoly of the issue of banknotes). These banknotes are the only legal tender for any amount in Germany. Any person to whom money is owed must accept them in unlimited amounts in settlement of his claim. Coins, by contrast, are legal tender to only a limited extent. The banknotes issued by the Bundesbank therefore constitute the foundation of the German monetary system. They are used by all economic agents for the smooth and often cost-effective settlement of payments. Commercial banks, which offer their customers â€Å"cash substitutes† in the form of giro balances that the customers can draw upon by, say, cheque or credit transfer, are likewise ultimately dependent on the notes provided by the central bank since their customers may withdraw cash from their accounts at any time. At present the Bundesbank is issuing eight different denominations of banknotes: DM 5, DM 10, DM 20, DM 50, DM 100, DM 200, DM 500 and DM 1,000. In addition to the banknotes, the Bundesbank puts coins denominated in Deutsche Mark or pfennig into circulation. 2. The bankers bank The Bundesbanks special status as the â€Å"bankers bank† derives from the fact that credit institutions are to a certain extent dependent on a supply of central bank balances (in other words, sight deposits with the central bank which can be exchanged for currency at any time). Only by means of recourse to central bank money can the solvency of the entire banking system be ensured. This is partly because – as mentioned earlier – bank customers generally ask for some of the credits granted to them or some of their sight deposits with banks to be paid out in Bundesbank notes, which commercial banks, in turn, can obtain only from the central bank. Credit institutions also keep balances at the Bundesbank for the settlement of cashless in terbank payments. As the â€Å"bankers bank†, the Bundesbank in normal circumstances smooths out fluctuations in the banking systems demand for entral bank money that result from ongoing inpayments to and outpayments from credit institutions giro accounts with the Bundesbank. In addition, the banks themselves can even out very short-term fluctuations to a certain extent since the minimum reserve requirements do not have to be complied with on a day-to-day basis, but only as an average of the month. 3. The states bank As a banking institution, the Bundesbank acts in some measure as the â€Å"principal banker† of the Federal Government and – to a lesser extent – of the Lander Governments. However, the legislature, in the light of past experience, has closely circumscribed this field of operations, so as to rule out any erosion of the Bundesbanks monetary policy autonomy right from the start. A focal point of the Bundesbanks activities as the states †Å"principal banker† remains its participation in borrowing in the market by the Federal Government (including its special funds) and the Lander Governments. Debt securities and Treasury bills should be issued primarily through the Bundesbank; failing this, the Bundesbank must be consulted (Bundesbank Act, section 20). In this context, the Bundesbank mainly performs an advisory, intermediary and coordinating function, for which its knowledge of market conditions makes it especially fitted. The Bundesbank acts as the fiscal agent for most of the debt instruments issued by the Federal Government (see page 59 f. ). For instance, it sells Treasury financing paper, Federal savings bonds and five-year special Federal bonds in the form of tap issues for the account of the Federal Government 4. The guardian of the monetary reserves The Bundesbank is the only body in Germany which holds official monetary reserves; it therefore manages the â€Å"national monetary reserves†. The gold holding, which amounted to DM 13. 7 billion at the end of 1994 purchase price, constitutes a considerable part of these reserves. The most important single item, however, is the dollar holding, which came to around DM 80 billion at the end of 1994. The great significance of this item is justified by the predominant position the US dollar holds as an international intervention and reserve currency. Germany is a member of the European Monetary System (EMS), and this accounts for the Bundesbanks claims on the European Monetary Institute (up to the end of 1993: on the European Monetary Cooperation Fund – EMCF), to which 20 % of the gold and dollar reserves were transferred on a revolving basis. Finally, the reserve position in the International Monetary Fund is likewise a major constituent. This item includes the special drawing rights resulting from Germanys membership of the International Monetary Fund.