Central Bank: Definition, Function and Role
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Added on 2019-12-17
Central Bank: Definition, Function and Role
Added on 2019-12-17
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What are the main functionsof central bank and why is itsindependence important?
Table of ContentsINTRODUCTION...........................................................................................................................1TASK...............................................................................................................................................1CONCLUSION................................................................................................................................6REFERENCES................................................................................................................................8
INTRODUCTIONCentral bank manages the state currency, money supply and interest rates. Central bankpossess a monopoly by which they can create or increase the monetary base so that they can printthe national currency. The primary function of central bank is that they have to control themoney supply of the nation along with the duties such as managing interest rates (Martin, 2015).Further they have to set reserve requirement and have to act as a last resort during bankinsolvency at the time of financial crisis. This task includes the different functions of the centralbank and central bank is important has to be discussed.TASKA central bank is the bank by which they are having the different degree so that they cancharged with that they have to controlling the money supply. Central bank can issue bank notesand coins by which they can do smooth functioning. They are doing proper trade by the financialinstruments and manage the foreign reserve and play a important role in informing the publicabout the economy. Further they have to regulate the commercial banks and stabilize the macroeconomy. Central bank is having the different functions so that they can consist the public dutywhich influence by regulation, persuasion and also in the market operation so that are having thefinancial intermediaries (Bodea and Hicks, 2015). Central bank have a proper control on moneywhich helps in the development and by that they can not face any problem in money supply.Central bank acts as a government banker have to hold the deposits and also make the paymentson the behalf of the consumer. Central bank return the notes of the commercial banks so that theycan redeem into gold and silver which helps in proper regulation of the commercial bank whichare having the reserve ratios and then they do the proper money supply. Central banks governedby the board consisting of its member banks. Central bank is using monetary policy so that theycan affect the economic growth by which they can control the liquidity in the financial system. Ithelps in achieving the aim by the tool or the instrument which is monetary policy. Central bankhave to maintain the reserve as they require by the consumers and have to use the open marketoperations so that they can not face any problem at the time of financial crisis (Neuenkirch andNeumeier, 2015). Different functions of Central bank are :-Issue of currency –It is the important function of the central bank that they are issuing thecurrency by which staff members of central bank can secure the money and have to do proper1
control on the money supply. Central bank can keep the reserve in the form of gold and foreignsecurities and it is based on the different rules which is against the currency which is issued bycentral bank. Central bank of UK issue the currency to the person who are living in the economyand by issuing the currency to the person they are not facing any problems and by that centralbank can maintain the the reserves which will helps the economy at the time of financial crisis(Bordo and Siklos, 2015). Along with this commercial banks take the borrowings in the form ofmoney from the central bank. Commercial banks have to sell the securities to central bank so thatthey can create the new notes which help in improving the currency this called monetisation ofbudget deficit or deficit financing. The regulatory bodies spend the new currency so that they cancirculate in the economy or nation so that they can meet the expenditure. Banker to government – Central bank having the different function one of them is both bankerto the government which is important for both central and state government. Along with this ithelps in carrying out the banking business of the regulatory bodies. Ministry have to keep theircash so that they can maintain the balance in the accounts of the central bank. Further, theyaccept the receipts and make payments on the behalf of the government. Central bank have togive the loans and advances to the government for the periods which is temporary as they have tomanage the public debt of the country (Engel, 2015). The central government have to borrow theamount of money so that they can sell the money by which they can maintain the reserves andsecurities. Banker's bank and supervisor – There are so many commercial banks by which they can dothe proper regulation and have to supervise the proper functioning and members of central bankhaving the duty so that they can discharged by the central bank. Central bank act like banker'sbank in three capacities as it is the custodian of the cash reserve and banks of the country arerequired to keep the certain percentage of the deposits with the central bank and have their ownway so that they can be the ultimate holder of the cash reserve of the commercial banks (Micossi,2015). Another is that the central bank is the lender of the last resort that commercial bankshaving short of funds as they have to take the loans from the central bank and have to get thetrade bills so that they can de discounted as it is the great strength of the banking system. Controller of credit and money supply –It is one of the major function of monetary policy ofthe economy which is done by central bank of the UK. They control the credit and money supplyin the economy which can help to maintian the growth rate of the country. The key objective of2
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