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Banking

Functions of Central Bank

Functions of  Central Bank will be a lot more clear only after knowing a little about the Central Bank itself. Moreover, the Central Bank is a government-owned superior authority that plays the role of a governing body. In other words, the Central Bank is a monetary institution that is responsible for regulating money supply in the market. Also, the Central Bank manages the currency and interest rates of a state and monitors the commercial banking system.

Introducing Central Bank

The Central Bank is the apex institute that aids in the optimum management of currency and money flow within a market. However, it is also the center for last resort which lends money to the banking sector during a financial crisis. Most Central Banks have a critical and mandatory responsibility of:

  • Discouraging and having a low tolerance towards fraudulent behaviors by other member banks
  • Ensuring that the other banks possess the aspect of solvency
  • Preventing bank runs

The economy’s political and government system, usually, keeps a close watch on the functioning of the Central Bank.  However, the Central Banks at many emerging and developed economies are free from political intervention. In such a case, they are free to take decisions in an autonomous manner without being accountable to a higher authority.

Functions of Central Bank

functions of central bank

An Issue Bank

The Central Bank is the sole authority that has been given the sole right to issue money. Moreover, they are responsible for the rightful printing, minting and circulation of money into the economy. However, with great powers, comes

great responsibility. Therefore, the Central Bank is responsible for controlling elasticity, ensuring uniformity and providing supervision.

Holder of Cash Reserves

One of the most crucial functions of the Central Bank is that they are the custodians of cash. Moreover, banks in every country reserve some percentage of their deposits with the central bank. This makes the central bank, the legal and the most safest holder of cash reserves.

Adviser to the Government

The central bank is said to be the most trustworthy bank to the government. Also, the central bank is vested upon by the government to be their advisor in terms of financial and monetary crisis. In addition, the central bank collects deposits, makes payments and handles the financial matters of a country. Therefore, the central bank is the government’s:

  • Advisor
  • Agent
  • Banker

Last Resort Lender

When everything with a bank’s functioning, seems to be going down and under-performing,the central bank is ready to rescue. In other words, when the commercial banks are unable to lift themselves up from a crisis, they take to the last resort. In this case, the last monetary resort is one of the most important functions of Central Bank.

Holder of Foreign Currency Reserves

By now, it is a known fact that the central bank is a holder of cash reserves. It is only fair, safe, legal and best suited for the central bank to be the house for foreign currency reserves. Moreover, by making the central bank the official foreign currency holder, the government can promise economic disciple.

Credit Controller

The commercial banks create a lot of credit during their course of operations. However, this credit can be one of the most critical and leading reasons for the emergence of inflation in an economy.

In such a case, a governing body is required to monitor the credit rates. Therefore, the central bank works on the control and modification of credit rates and the control of inflation.

Protector of Depositor’s Interests

The central bank has much variety of depositors. Some of the most important depositors are the commercial banks and the government itself. One of the most critical functions of a central bank is to protect its customer interest.

To know more about RBI, click here

Solved Questions

Q. The Central Bank is the prevention of inflation of the controller of credit? Or both?

Answer: One of the functions of the central bank is the controlling of credit, which in turn controls the inflation rate within the economy. It is important to understand that the central bank cannot prevent or eradicate the inflation rate. However, they do monitor and control credit rates.

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