What Is A Central Bank?
A central bank is a financial institution given privileged control over the production and distribution of money and credit for a nation or a group of nations. The central bank stores deposits from banks, just as commercial banks store your deposits. The central bank also lends to banks, just as commercial banks lend to you. Unlike local banks, the central bank basically prints and manages the notes and coins in circulation in a country.
Central banks act as a banker to the rest of the banks. The central bank is storage of cash for commercial banks. When a bank has accumulated “excess cash on hand, they ship it to the central bank, which credits the bank, then burns the cash. When the bank needs to draw upon those reserves, the central bank sends them new serialized bills and debits their account.
Before the central bank came into play, cash accumulated in bank vaults where it could be stolen or embezzled. Consequently, when a bank gets robbed, not only does the bank lose money, but eventually, depositors who have accounts with the bank will lose their money.
It is pertinent to note that although central banks’ responsibilities range widely, depending on their country, central banks’ duties fall into three categories:
- First, central banks control and manipulate the national money supply by issuing currency and setting interest rates on loans and bonds. Typically, central banks raise interest rates to slow growth and avoid inflation; they lower them to spur growth, industrial activity, and consumer spending.
- Second, they control member banks through capital requirements, reserve requirements, and deposit guarantees, among other tools.
- Third, a central bank also acts as an emergency lender to distressed commercial banks and other institutions, and sometimes even a government.
Central Bank Example
Every nation has a central body that oversees its economic and monetary policies to ensure a stable financial system. That body is called the central bank. For instance, The Federal Reserve is the central bank of the United States, the Bank of England is the central bank of the United Kingdom, and the Bank of Japan is the central bank of Japan.« Back to Glossary Index