Differences between central bank and commercial bank. - SS2 Commerce Lesson Note

Purpose and Function:

·         Central Bank: The primary purpose of a central bank is to control and regulate the overall economy and financial system of a country. It manages monetary policy, issues currency, acts as the banker to the government, and supervises commercial banks. It focuses on maintaining economic stability and promoting the general welfare of the country.

·         Commercial Bank: Commercial banks, on the other hand, are profit-oriented institutions that provide financial services to individuals, businesses, and other organizations. They accept deposits, offer loans, facilitate transactions, and provide various banking services such as savings accounts, checking accounts, and credit facilities.

Authority and Regulation:

·         Central Bank: The central bank is typically a government institution with significant regulatory authority over the financial system. It sets and enforces rules, regulations, and policies for commercial banks and other financial institutions. It acts as a lender of last resort and has the power to supervise, monitor, and intervene in the banking sector to ensure stability and compliance with regulations.

·         Commercial Bank: Commercial banks operate within the framework set by the central bank and are subject to its regulations and oversight. They must adhere to guidelines regarding capital requirements, risk management, lending practices, customer protection, and reporting standards.

Monetary Policy:

·         Central Bank: Central banks have the responsibility of formulating and implementing monetary policy to influence the money supply, interest rates, and overall economic conditions. They adjust monetary policy tools like interest rates and open market operations to manage inflation, stabilize prices, and promote economic growth.

·         Commercial Bank: Commercial banks do not have the authority to set or implement monetary policy. However, they play a role in the transmission of monetary policy as they adjust their own interest rates and lending practices based on the central bank's policies. They also lend and borrow funds within the framework provided by the central bank.

Currency Issuance:

·         Central Bank: The central bank has the sole authority to issue and regulate the country's currency. It ensures the integrity, stability, and availability of the currency in the economy.

·         Commercial Bank: Commercial banks do not have the authority to issue currency. They can only provide services related to currency such as handling cash transactions and facilitating currency exchanges.

Focus and Objectives:

·         Central Bank: The central bank's primary focus is on macroeconomic stability, monetary policy, and the overall health of the financial system. It aims to promote economic growth, control inflation, and ensure the stability of the banking sector.

·         Commercial Bank: Commercial banks primarily focus on generating profits by providing financial services to customers. Their objectives include attracting deposits, lending funds to borrowers, and earning interest income on loans and investments.