Central Bank

Central Bank

Class : X - Accounting & Economics Notes

Central Bank is established as the supreme monetary authority in every country. It helps the government as well as other commercial banks to maintain economic stability in the country. Therefore, central bank is the supreme authority of conducting and controlling the monetary system of the country. Central bank is will have the supreme authority which the other banks won't have. As it has main role in the monetary market, it is called the central bank. Only an institution to look after the monetary matters and maintain stability in the country is called central bank. It holds highest power in the country to regulate economic circulation. It helps government to plan monetary policy and implement it in the country and authorized financial institutions. In other words, central bank works as the guardian to all other financial institutions and adviser to the government in matter of economic development. As it plays the role of guardians in matter of financial activities in the country among the government and other financial institutions it has got several functions which are discussed below.

1.       Bank of Note Issue :-

Central bank uses power of monopoly in all most all the countries to issue notes. The monopoly power to issue notes enables the central bank to control money supply in the country effectively. In some country central don't supply all types of notes like in India. In India, one rupee notes are issued by the Ministry of finance.

2.       Banker, Agent and Adviser to the government :-

Central bank works as the adviser to the government to maintain monetary stability and regular circulation of money in the country. Central bank provides all banking facilities to government just like commercial bank provides to the people. Beside this it  advise to the to the government and works as the representative of government on monetary activities.

3.       Bank's Bank :-

Central bank is a financial institution of the country. So, it is responsible to run the financial system of the country. Without its permission none of the financial institution can run in the country. All other bank has their account in the central bank. The relationship between central bank and banks is just like the relation of people and commercial banks. Central bank provides all facilities to its member banks and controls monetary activities.

4.       Custodian of foreign exchange reserve :-

Central bank works as the guardian of the foreign exchange reserve of the country. It is responsible to maintain stability of exchange rate and remove disequilibrium in the balance of payments. Foreign exchange is main key to maintain stability and reduce disequilibrium. So, central bank works as guardian of foreign exchange reserve of the country.

5.       Lender of the last resort :-

Central bank functions as the lender of last resort for commercial bank may have financial dealing with other banks claiming for their ownership. In this condition, central bank settles the claim.

6.       Bank of Settlement :-

During the course of business commercial bank may have financial dealing with other banks claiming for their ownership. In this condition, central bank settles the claim.

7.       Control the credit :-

The most important function of the cental bank is to control the commercial banks capacity of credit creation because commercial bank create credit in the country depending upon the economic situation of the country. The credit can be desirable or undesirable. Central bank encourages for desirable credit and discourages for undesirable credit by reducing capacity of credit creation.

As per the functions of central bank and the role played by central bank to maintain monetary stability in the country, we can say that central bank is bank of government or banks' bank.