Central bank is also termed as the monetary authority or apex bank of a country. A central bank regulates the monetary policy of a particular country. The principal responsibility of a central bank is to preserve the steadiness of the money supply and currency of the country. However, a central bank also performs the regulation of the rates of interest of subsidized loans and it functions as an LOLR or lender of last resort because it provides loans to a number of commercial banks in case they are unable to find any other source. The private banks or commercial banks are frequently considered as an important segment of the financial infrastructure of a country. A central bank also bears authoritative power to assure that the financial services providers and commercial banks carry out their operations in an honest and customer-friendly manner.
In the majority of nations, the central bank is owned by the state and enjoys a minimum level of autonomy. This permits the scope of government intervention in the fiscal policies and monetary policies. The independent central bank is that type of a financial authority, which functions according to the rules and regulations that have been planned to preclude political intervention.
The functions and responsibilities of a central bank are the following:
- Implementation of financial policies
- Regulating the total money supply of a country
- It functions as the banker's bank, as well as the banker of the government
- It handles the gold reserve and the foreign exchange reserve of a country, as well as the stock register of the government
- Controlling and monitoring of the banking sector
- Determination of the official rate of interest - this is implemented for handling both the exchange rate and inflation rate of the
- country and assuring that the rate is applied through different types of policy procedures
The monetary policy adopted by a central bank deals with gold-backed currency, fiat currency, currency union or currency board and promissory notes.
Central banks perform a lot of interest rate interventions. They try to regulate the short-term rates of interest and this usually affects bond market interest rates, stock market rates, mortgage rates and other rates of interest.
The principal policy instruments of a central bank are the following:
- Interest rate policy: Principal refinancing rate, marginal lending rate, and deposit rate
- Open market operation
- Reserve requirement for the banks
- Credit policy
- Re-lending and re-discounting
Some of the central banks of different countries of the world are the following:
- The European Central Bank
- Reserve Bank of Australia
- The Banco de la República de Colombia
- The Bank of Canada
- The Federal Reserve Bank (United States)
- Central Bank of Norway
- Bank of England
- Bank of Russia
- National Bank of Ukraine
- Central Bank of Ireland
- Bank of Japan
- People's Bank of China
- Reserve Bank of India