Meaning, origin and functions of central bank. - SS2 Commerce Lesson Note

A central bank is a crucial institution in a country's financial system, responsible for managing its currency and ensuring the stability of the overall economy. A central bank is the "bank of banks" or the government's bank. It acts as a key authority in the financial system and has the power to control and regulate the country's money supply.

Origin:

Central banks have existed for centuries, but their roles and functions have evolved over time. The Bank of Sweden, established in 1668, is recognized as the oldest central bank. The modern central banking system emerged in the 19th and 20th centuries, with notable examples being the Bank of England, the Federal Reserve in the United States, and the European Central Bank.

Functions:

·         Monetary Policy: One of the primary functions of a central bank is to manage the country's monetary policy. It aims to control inflation, stabilize prices, and promote economic growth. Central banks use various tools, such as adjusting interest rates or buying/selling government bonds, to influence the supply of money in the economy.

·         Currency Issuance: Central banks have the authority to issue and regulate the country's currency. They ensure that there is enough money in circulation to meet the needs of the economy and maintain confidence in the currency.

·         Banker to the Government: Central banks act as the government's bank, handling its financial transactions, managing public debt, and providing loans when necessary. They also play a role in maintaining the stability of the banking system by acting as a lender of last resort, offering funds to banks facing liquidity problems.

·         Supervision and Regulation: Central banks supervise and regulate commercial banks and other financial institutions within their jurisdiction. They establish rules and regulations to maintain the stability and soundness of the banking system, protect depositors' interests, and prevent financial crises.

·         Foreign Exchange Management: Central banks manage a country's foreign exchange reserves and often intervene in the foreign exchange market to stabilize the value of the national currency. They may buy or sell foreign currencies to influence exchange rates and support international trade.