How does the federal reserve bank monitor and regulate the operation of other banks and financial institutions

Through the use of monetary policy instruments

Explanation:

The federal reserve bank otherwise known as the central bank in other countries of the world is the highest bank in the country that has the responsibility of using the monetary policy instruments such as open market operation, Bank Rate, special deposit, cash reserve ratio, special directives, and moral suasion to regulate the activities of other banks financial institutions in the country, it is done through the following processes.

Open market operation : This is the process whereby the central bank buy and sell treasury bill in order to regulate the economy. If there is too much money in circulation, the central bank will sell treasury bill to the commercial bank.on the other hand ,if the money in circulation is too small the central bank will buy treasury bill from the commercial bank.

Bank Rate : This is the rate which influence the rate charged by the commercial bank on their loan . The central bank can raise or lower bank rate if the need arise to do so in the economy. This is the rate at which the central bank is willing to lend to the commercial bank and other financial institutions in the country.

Special deposits : This is an instruction from the central bank requiring the commercial bank and other financial institutions to keep with it special deposit over and above their statutory requirements. This is used by the central bank to reduce the lending abilities of commercial bank and other financial institutions.

Special Directives : This is an instruction given by the central bank to commercial bank and other financial institutions as regard what the directions of their lending policy should be.for instance, central bank may direct them to focuse their lending policy on the real sectors of the economy such as the agricultural and the manufacturing sectors of the economy.

Moral suasion : This is the gentle appeal from the central bank to the commercial bank and other financial institutions as to the kind of lending policy they should adopt.

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