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What is a Central Bank?

2016-12-08T13:14:47+00:00

The term 'Central Bank' is included in the Banking edition of the Financial Dictionary. Get yours now on amazon in ebook or paperback format. Read more here...

Central banks are national monetary authorities or reserve banks that are given the unique privilege and responsibility of loaning a government its currency. Central banks have many of the same characteristics that traditional banks do, such as charging set rates of interest on loans that they make to borrowers like the government of the country that they represent, or alternatively to commercial banks in dire need and as a last resort.

Central banks are different from regular banks in a variety of interest ways. Chief among these is their monopoly of creating the nation’s currency. They also have the power to loan such currency out to their government as fully legal tender. These banks are the only ones that will lend to commercial banks in difficult times of need, too.

The main role of a central bank is to issue and oversee a country’s supply of money. Besides this, they also engage in a number of more vigorous activities including setting and monitoring the interest rates of subsidized loans and helping out the banking sector in periods of financial difficulties or even crisis. Some central banks additionally supervise the commercial banking sector and individual banks in order to make certain that they do not engage in corrupt behavior or rash decision making and practices.

Not all countries possess central banks that are independent of the other branches of government’s meddling and interference. Most of the wealthy countries of the world do have this type of central bank in a system that stops politicians from intervening in monetary policy. The European Central Bank, Bank of England, and Federal Reserve System of the United States are all good examples of independent central banks. Central banks can be privately held or publicly owned. In the U.S., the Federal Reserve proves to be a unique combination of private and public components.

Central banks are involved in many important functions. These include carrying out monetary policy and fixing the nation’s interest rates. They also control their country’s whole money supply. They act as both banker for the government and for all of a country’s banks in difficult times. Central banks similarly handle the nation’s gold reserves and foreign exchange reserves.

They may adjust these by buying or selling more gold, or by balancing the amount and kinds of currencies that they hold at any time. Many central banks supervise their banking industries as well, though not all perform this function. Central banks also help to deal with and combat inflation and manage a country’s currency exchange rate by modifying the nation’s official interest rates and utilizing similar policies to ensure that the desired outcomes of low inflation and stable currency exchange rates are in fact achieved.

The term 'Central Bank' is included in the Banking edition of the Financial Dictionary. You can get your copy on amazon in Kindle or Paperback version. See more details here.