The Functions of the Deutsche Bundesbank

Topics: Money, Bank, Central bank Pages: 3 (786 words) Published: September 22, 2010

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 “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 Bundesbank's special status as the “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 interbank payments. As the...
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