Theory question 105
BankingCommerce 2 (essay, answer five questions only)
List and explain five methods used by the Central Bank to control the activities of the commercial banks.
Show the model answer
Model answer
Any five, explained: open market operations – selling/buying government securities to reduce/increase bank cash; bank rate – raising or lowering the rate at which it lends to banks; cash/liquidity ratio – fixing the share of deposits banks must keep in liquid form; special deposits; selective credit control/directives; credit ceilings; moral suasion.
Explanation
Say how each method changes banks' lending.