Another form of credit system regulation by the central bank is open market operations with government bonds by means of their purchase and sale by credit and financial institutions. By selling government bonds, the central bank reduces the cash resources of banks and other financial institutions and thus contributes to raising interest rates in the capital market. This makes credit institutions legally obliged to buy a certain part of government bonds, thus financing budget deficits and public debt.
A form of regulation is also the direct government influence of the central bank on the credit system through direct prescriptions of supervisory authorities in the form of instructions, directives, and sanctions for violations. In a number of cases, the central bank exercises control over large loans, limits on bank loans, and spot checks on credit institutions. However, direct impact methods mainly apply to commercial and savings banks and, to a lesser extent, to other financial institutions.
One method of regulation is tax policy. It consists of changes in the tax rates of profit earned by various financial institutions. As a rule, the latter are subject to income tax, as are all other legal entities operating under certain economic conditions. At the same time, tax collection differs significantly from country to country and from one institution to another according to their functional specifics. An increase in taxes may contribute to a decrease in lending operations and an increase in interest rates. On the contrary, a reduction in taxes on the income of these institutions leads to an increase in such transactions and may contribute to a decrease in interest rates. Therefore, the tax impact is a fairly effective state regulation of the credit system.
In some countries, unlike industrial and trading companies, financial institutions have some tax breaks. They usually extend to specialized non-bank financial institutions (insurance, investment, financial companies, philanthropic foundations).
Another regulatory method of the credit system is government participation in financial institutions. This is expressed in three main directions: acquisition of a part of credit institutions by the state through nationalization; organization of new institutions as a supplement to the private one; state participation through acquisition of shares of credit and financial institutions and, thus, creation of mixed institutions.
Through this method, the state has a fairly effective impact on the functioning of the entire credit system. The method of regulation through the creation of public property is quite common in continental Europe and in developing countries. For example, France, Germany, Italy, Portugal, Turkey, and Scandinavian countries have maintained a rather large public sector in the credit system, despite the recent expansion of the privatization process. In France, by nationalizing a number of banks and insurance companies in the early 1980s, the government's credit sector was significantly expanded. It should be noted that in most industrialized countries, state ownership of the credit system also extends to the banking sector. This allows the state to solve the problem of public debt more quickly and efficiently by selling government securities to its credit institutions and, at the expense of the latter, to finance large investment projects of national scale. In addition, in the presence of state and parastatal credit institutions, there is an impact on the demand and supply of loan capital, the dynamics of its market and interest rates.
The regulation of the credit system is heavily influenced by legislative measures implemented by the central government, local authorities, as well as legislative authorities. They develop packages of laws and regulations governing various areas of credit and financial institutions. The main regulatory function is performed by the central executive and legislative authorities, which create the main laws governing the activities of credit and financial institutions.
Within the executive branch, the main regulatory bodies are the central bank and the Ministry of Finance. A number of countries have established additional central government regulatory bodies. Typically, they operate in countries with relatively high levels of government in the credit system. For example, in France, apart from the central bank and the Ministry of Finance, the National Credit Council, the Bank Supervision Commission, and the Exchange Operations Commission are involved in the regulation of the credit system.