In the field of monetary policy, this refers to an informal – i.e. not contractually sealed – agreement between the central bank and the banks (an arrangement between banks and the central bank based on honor, on commitment to moral principles and not officially binding). The arrangement can refer to an action – such as: Reporting on foreign subsidiaries – or not doing – for example: For example, the banks may refrain from issuing floating-rate bonds. – Experience shows that banks regularly comply with such agreements. This is because banks trade in a commodity (central bank money) that is issued and regulated by a monopolist (the central bank). It is always disadvantageous for longer-term business policy to override a supply monopolist; especially since – central banks and supervisory authorities cooperate closely, – on-site inspections by the supervisory authority initiated by the central bank always entail high costs, and – if they are repeated conspicuously, they damage the reputation of the institution, i.e. they diminish goodwill. – See Memorandum of Understanding, Reputational Risk.
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