Central Bank

Definition of central Bank

Central bank is the guardian, director and controller of all the banks of the country.
Central bank is the life and soul of the entire banking system. The central bank is formed
with a view to running the money market in a well organized way. Generally central bank
is engaged with special power and duty to introduce currency within the country, supply
money and control credit.
The central bank is defined by its responsibilities, power and functions. Yet
different economic scholars and banking researchers have defined central bank
differently at various times. Some noteworthy definitions are given below.
A bank which deals chiefly with other banks in holding the banking reserve of its
country or district and normally Government agencies or Govt. related agencies
and operated in the broad public interest.Dictionary of Banking and Finance.
The central Banking is a banking system in which a single bank has either a
completed or a residuary monopoly of note issue. De Dock
A central bank is a bank to which it has entrusted the duty of regulating the
volume of currency and credit in the country. R.P. Kent
A central bank is the organ of govt. that undertakes the major financial
operations of the govt. and by its conduct of these operations and by other means
influences the behavior of financial institutions so as to support the economic
policy of the government-Prof. Sayers
A central bank is the principal bank of the country and which is assigned practically the
following functions:
implementing monetary policy
controlling the nation's entire money supply
the Government's banker and the bankers' bank ("lender of last resort")
managing the country's foreign exchange and gold reserves and the Government's
stock register
regulating and supervising the banking industry
setting the official interest rate used to manage both inflation and the country's
exchange rate and ensuring that this rate takes effect via a variety of policy
mechanisms
To as a depository of the government cash balances and its financial agent and
treasurer in general.
To manage, supervise and direct the currency of the country and to maintain the
currency reserve.

 As the treasurer or cashier of the state to manage different remittances of the govt.
and to act generally as a banker of the govt.
To manage the public debt of the country.
Name of some Central Bank
SL#

Year of
Name of
establishment the bank

1656

Country

Continent

Ownership

The Ricks Bank of Sweden

Sweden

Europe

Govt.

1694

The Bank of
England

Europe

Govt.

1800

The Bank of FranceFrance

Europe

Govt.

1882

The Bank of Japan Japan

Asia

Govt +
Private

1935

The Reserve Bank India

of India

Asia

Govt.

1941

Bank de Brazil

America

Govt +
Private

1960

The Reserve Bank Australia

of Australia

Australia

Govt.

1971

Bangladesh Bank Bangladesh

Asia

Govt.

UK

Brazil

Objectives of the Central bank

The central bank is a non profitable welfare financial institution. The main objectives of
the central bank are to make the economy of the country stable by establishment full
control over the capital market and money market and thereby ensuring welfare of the
common mass of the country.
On the basis of thorough analysis the objectives of the central bank are given below:
Economic Development: The central bank is a development bank. The central
bank is established with the objectives of making economic development of the
country through adopting and implementing economic plans. The central bank
earmarks backwards sectors with a view to making balanced economic
development. The objectives of the central bank are to adopt and implement plans
accordingly.

 Public Welfare: As has been told earlier the central bank is not an organization of
profit. The main objectives of the central bank are to control steering in the
economy and engage its motion to the public welfare.
Organizing and Controlling the Money Market: The objectives of the central
bank are to maintain discipline in the money market and well organize it because
discipline of the money market and its stability are preconditions for economic
development.
Equitable Distribution of Wealth: In a country with limited resources equitable
distribution of wealth can ensure grater public welfare and real economic
development. So one objective of central bank is to adopt and implement plans on
priority basis and thereby ensure equitable distribution of wealth.
Guide of the Banking System: Another objective of central bank is to act as a
guardian of the listed bank that means commercial banks of the country. It gives
council, advice to listed banks in matters relating to banking business.
Maintaining the Price Stability: If the price level becomes unstable, trade,
commerce and industries and for that matter all economic activities become
unstable and depression in the economy appears. So the central bank maintains
price stability by controlling supply of money.
Note Issue: The central bank keeps notes and currencies of the country in
circulation. So, in order to save the economy and for those matter economic
activities from being barren it issues notes according to market demand and
controls it.
Maintain the Standard of Local Currency: It is very essential to maintain the
standard of local currency in foreign market in order to keep the influence of the
transactions in international business in favor of the country.
Foreign Exchange Control: Control over foreign exchange is indispensable if the
import and export are to be kept in favor of the countrys economy. The central
bank controls the incoming and outgoing of the foreign exchange.
Clearing House: One special duty of the central bank as guardian of the
commercial banks is to settle transactions among them. Central bank does this job
with the objective of making co ordination in the entire banking system.
Credit Control: The commercial banks are interested in getting benefits through
extending more credits. But that makes the money market unstable. To prevent
this situation central bank controls credit supply of commercial banks.
Advisor of the Govt.: Another objective of the central bank is to advice to the
government.

 Bankers of the Banks: one of the objectives of the central bank is to act as the
banker of the banks.
Features of Central Bank
The supreme central bank is bright with its features as the guardian of all the banks of the
country and controller of the total economy. These features of its own have given it a
separate dignity. Some features of central bank are given below.
Banking Organization: As a separate banking institutions only one central bank
is established in each country of the world. Its objective, functions and influence
are different from that of any other kind of bank.
Symbol and Sovereignty: Because there is only one central bank in a country this
bank is earmarked as the symbol of economic sovereignty in all countries of the
world.
Non Profit Oriented Bank: The main objective of the central is not to make
profit. But its basic objective is to establish control over the countrys economy
and by leading the economy to the right direction ensure grater public welfare.
Legal entity: The central bank is established quite separately under a special act
of the country. It possesses a separate legal entity being created under a special act
or ordinance.
Monopolist in note Issue: The central bank only has the authority to issue notes.
For this it is called the sole trader in issuing notes and currencies and their control.
Nature of Ownership: Generally the central bank is established under the sole
ownership of the Government. But there are instances in some parts of the world
of establishment of central bank under sole govt. ownership and government and
private joint ownership.
Control: Whatever be the nature of the ownership of the central bank its control
rests with the govt. almost fully. This control is preserved with a view to
conducting money market property.
Banker of all banks: the central bank works as a banker of all the banks of the
country. All the banks of the country are listed with the central bank. The central
bank settles transactions among other banks. Central bank gives financial
assistance to commercial banks if necessary.
Bank of the Government: The central bank is the bank of the govt. Government
money is deposited with the central bank. The central bank maintains all financial

accounts of the government and makes financial transactions. Moreover, at the

time of crisis it gives credit to the govt.
Organizer and Controller of Money Market: It plays the role of organizer in
money market by issuing notes. On the other hand it plays the role of controller in
money market by establishing control over the entire banking system.
Stability: The central bank is engaged with the task of maintaining stability of the
total economy by keeping value of the money and price of goods stable through
supply of currencies and control of credit.
Lender of the Last Resort: The central bank possesses the unique feature of being
the lender of the last resort. When the commercial banks cannot collect money
from any other sources at the time of crisis, then the central bank supplies money
as credit to commercial banks. For this it is earmarked as the lender of the last
resort.
Controller of the Exchange Rate: Central bank performs the tasks of maintaining
a prestigious exchange rate of local currency with foreign currency.
Clearing House: One special duty of the central bank as guardian of the
commercial banks is to settle transactions among them. Central bank does this job
with the objective of making co ordination in the entire banking system.
Consultant of the Government: Central bank plays the role of consultant of the
government in adopting various economic plans and their implementation.
Monetary policy of Central Bank
Monetary policy is the process by which the government, central bank, or monetary
authority of a country controls (i) the supply of money, (ii) availability of money, and (iii)
cost of money or rate of interest, in order to attain a set of objectives oriented towards the
growth and stability of the economy. Monetary theory provides insight into how to craft
optimal monetary policy.
Monetary policy is referred to as either being an expansionary policy, or a contractionary
policy, where an expansionary policy increases the total supply of money in the economy,
and a contractionary policy decreases the total money supply. Expansionary policy is
traditionally used to combat unemployment in a recession by lowering interest rates,
while contractionary policy involves raising interest rates in order to combat inflation.
Monetary policy should be contrasted with fiscal policy, which refers to government
borrowing, spending and taxation.
Bank rate

Bank rate, also referred to as the discount rate, is the rate of interest which a central bank
charges on the loans and advances that it extends to commercial banks and other financial
intermediaries. Changes in the bank rate are often used by central banks to control the
money supply.
Open market operations
Open market operations are the means of implementing monetary policy by which a
central bank controls its national money supply by buying and selling government
securities, or other financial instruments. Monetary targets, such as interest rates or
exchange rates, are used to guide this implementation.
Since most money is now in the form of electronic records, rather than paper records such
as banknotes, open market operations are conducted simply by electronically increasing
or decreasing ('crediting' or 'debiting') the amount of money that a bank has, e.g., in its
reserve account at the central bank, in exchange for a bank selling or buying a financial
instrument. Newly created money is used by the central bank to buy in the open market a
financial asset, such as government bonds, foreign currency, or gold. If the central bank
sells these assets in the open market, the amount of money that the purchasing bank holds
decreases, effectively destroying money.
Reserve requirement
The reserve requirement (or required reserve ratio) is a bank regulation that sets the
minimum reserves each bank must hold to customer deposits and notes. These reserves
are designed to satisfy withdrawal demands, and would normally be in the form of fiat
currency stored in a bank vault (vault cash), or with a central bank.
The reserve ratio is sometimes used as a tool in monetary policy, influencing the
country's economy, borrowing, and interest rates.