Functions of Central Bank

Central bank is an important organization for any country. It performs traditional and developmental role to accomplish macro-economic objectives. This includes currency issuance, regulation of liquidity, supervision of banks and secondary markets, exchange rate management, balance of payment, establishment and development of financial institutions.

Central bank is the center of banking system of any country and has sole authority to control and regulate the supply of money. Central bank controls the supply of money by keeping the welfare of people in mind as primary object.  Functions of central bank are discussed in detail below.

Monopoly over Issuing Currency

[linkunit]The primary function of central banks is to issue money in the country. Central bank issue currency notes by following certain regulations enforced by the state. There are different requirements which central bank need to fulfill for this purpose, one important prerequisite is keeping reserve against issued money.  Some important advantages for this sole authority are:

– Credit creation by commercial banks can be checked and controlled by central bank.
– Central Bank has the confidence of people as it has the government backing and recognition.
– As the sole authority of issuing currency there is uniformity in the country’s currency.
– Government can use this sole authority for the best interest of people.

Government Agent and Advisor

It acts as the government bank and agent, to collect and pay transactions on behalf of the government.  Central bank has a detail record of all monetary issues and present in good position to advise government for monetary, banking and financial issues.

Bankers Bank

It is the bank for all commercial banks and monitor and control all commercial banks by its regulations. Commercial banks keep reserves with central bank as a requirement. Central bank also helps commercial banks in their daily business life by providing loans, security to cash reserves and gives them advice on financial and economic issues.

Clearing House

Another important function central bank does for commercial banks is acting as a clearing house for settle all the bill and checks drawn one another.

Lender of the Last Resort

Central bank helps commercial banks when they face any crisis, central bank come to rescue by advancing loans and bailout packages.

Credit Control

Credit Control becomes an emerging vital function of Central Banks. Although monitoring and controlling credit been always a function of central banks but as the technology grew and use of plastic and e-transaction is becoming more common there are many sensitive monetary issues arises. Central Banks take quantitative and qualitative methods for credit control such as bank rate, open market operation and moral situations etc.

Financial Agent

Central bank works as government agent for foreign exchange and gold transactions.