Regulation and Supervision of the Financial System Essay

Regulation and Supervision of the Financial System
Another important function of the state bank is to assure the soundness of the financial system, as it has been given vast powers under the State Bank of Pakistan Act, 1956. The state bank monitors the banking activities through a combination of on-site inspection and off-site monitoring. Off-site monitoring is done through various periodicals received from the banks, whereas, on-site inspection is done on the premises of the concerned bank. The aim of all this inspection is to check the assets and liabilities as they are on the records, for quality assurance of assets, etc.
Banker's Bank
Banks are classified as scheduled or non-scheduled, and these lists are updated at various offices. The state bank provides three important services to the scheduled banks, which are Statutory reserves of the scheduled banks, remittances facilities, and it manage the operations of clearing houses.
Lender of the Last Resort
The State Bank provides loans and rediscount facilities to scheduled banks, when they have no alternative sources. These loans are generally short term loans, to help the scheduled banks raise funds temporarily.
Banker to Government
The State Bank also acts as a bank to the government by accepting the deposits of cash, cheques and drafts of the government, by purchasing gold, silver, securities or shares on behalf of government, etc.
II. The Secondary Functions
The secondary functions of the state bank include the agency functions. The agency functions include functions like management of public debt, management of foreign exchange, and other functions like the maintaining close relationships with international financial institutions, and advising the government on policy matters.
Public Debt Management
The actions involved in the public debt management are subscribing securities to Federal and Provincial government, sale or purchase of securities in the money market, payment of interest to holders of public debt instruments.
Management of Foreign Exchange
The State Bank is responsible for maintain the external value of Pakistan's currency. As the State Bank is an agent to the government, it is authorized to purchase and sell gold, solver or foreign exchange. The bank is also responsible to keep the exchange rate of Pakistani rupee at a desirable level and prevent too much fluctuations in it.
Advisor to Government
The bank also acts as an advisor to the Government on financial and economic matters, especially with respect to the monetary aspects of the country. The bank also participates in the economic policy making of the country as a member of various government agencies and committees.
Developmental Functions
The developmental functions, also known as the nontraditional functions or promotional functions, include functions of state bank like the development of the financial framework, provision of training facilities to bankers, institutionalization of savings and investment, and provision of credit to priority sectors. The state bank of Pakistan has also played an important role in the islamization of the banking system.
Development of the Banking System
The main contribution of the State Bank was the rehabilitation of the banking system in Pakistan.