What is a Central Bank?

A central bank is an ‘apex institution’ in the banking structure of a country. It supervises, controls and regulates the activities of commercial banks and acts as a banker to them. It also acts as a banker, agent and adviser to the government in all financial and monetary matters.

A central bank is also the custodian of the foreign balances of the country and is responsible to maintain the rate of exchange fixed by the government and manages exchange control. The most important function of a central bank is to regulate the volume of currency and credit in a country.

It will be no exaggeration to say that a modern central bank is the central arch to the monetary and fiscal framework in almost all the countries developed or developing in the world.

In developing economies, the central bank has also to perform certain promotional and developmental functions to accelerate the pace of economic growth.

Meaning of Central Bank

In every country there is one bank which acts as the leader of the money market, supervising, controlling and regulating the activities of commercial banks and other financial institutions. It acts as a bank of issue and is in close touch with the government, as banker, agent and adviser to the latter. Such a bank is known as the central bank of the country.

 

A banking institution can more easily be identified by the functions that it performs. According to Vera Smith, “the primary definition of central banking is a banking system in which a single bank has either a complete or residuary monopoly in the note issue.”

Kisch and Elkin believe that “the essential function of a central bank is the maintenance of the stability of the monetary standard.” In the statutes of the Bank for International Settlements a central bank is defined as “the bank of the country to which has been entrusted the duty of regulating the volume of currency and credit in that country.”

De Kock gives a very comprehensive definition of central bank. According to De Kock, a central bank is a bank which constitutes the apex of the monetary and banking structure of its country and which performs, best it can in the national economic interest, the following functions:

  • The regulation of currency in accordance with the requirements of business and the general public, for which purpose it is granted either the sole right of note issue or at least a partial monopoly thereof.
  • The performance of general banking and agency services for the state.
  • The custody of cash reserves of the commercial banks.
  • The custody and management of the nation’s reserves of international currency.
  • The granting of accommodation, in the form of rediscounts, or collateral advances, to commercial banks, bill brokers and dealers, or other financial institutions, and the general acceptance of the responsibility of lender of last resort.
  • The settlement of clearances between the banks.
  • The control of credit in accordance with the needs of business and with a view to carrying out the broad monetary policy adopted by the state.

The nature of function of a central bank differs in a developed economy as compared to those in a developing economy.

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