CENTRAL BANK: Definition, Functions of Central Bank

Central Bank:

One of the most important financial institutions in any modern economy is the central bank. A central bank is an agency of government that has important public policy functions such as, monitoring the operations of the financial system and controlling the growth of the money supply.

Again, a central bank is an institution charged with the responsibility of regulating the supply, availability, and cost of money in the interests of the general public. To regulate the quantity of money, the central bank is given a special group of powers that other institutions do not possess or which they possess to only a limited degree. These special powers may be allowed to more than one institution, although only one institution is generally known as the central bank.

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Today almost all countries have central banks. It is only in the present century that the importance of central banking gained wide recognition. The establishment of the central bank in the modern sense dates back to the nineteenth century. To be sure, the state bank of Sweden, the oldest central bank, dates back to 1668, and the Bank of England, the most celebrated of all central banks was established in 1694.
According to Sayer's "the central bank is an organization of the government that undertakes the major financial operations of the government."
De Kock defined, a central bank as, " A bank which contributes the open of the monetary and banking structure of the country."

According to the Bank for International settlements, a central bank is defined as " The Bank  in any country to which has been constructed the duty of regulating the volume of currency and credit in that country."
According to the Oxford dictionary of economics, " A bank which controls a country's money supply and monetary policy. It acts as a banker of the other banks and a lender of last resort."
From the above discussion, we can say that the bank which controls all economic activities of all financial institution and works as a monetary representative and adviser, is called Central Bank. So we can say that the central bank is the guardian of the money market.

Functions of Central Bank:

What functions are more characteristically the central banking functions has been a widely discussed question among economists. Howtrey thinks that it should primarily be the "lender of the last resort." Vera Smith stresses the monopoly of note issue and shows regards control of credit as " the one true but at the same time all sufficing function of a central bank. It is, however, difficult to single out any particular function as characteristic of a central bank.

Broadly put, a central bank acts in the following capacities:

1. Issue of Notes: 

The first and main function of a central bank is the issuing of notes. Since the central bank issues notes, it controls the supply of money in the country. When the supply of money increases, then to reduce the supply of money, the central bank collects money by using the open market operation rule. As a result, the excess supply of money will decrease from the market. Similarly, if the supply of money is less in the market then govt. will return these (such as a bond). As a result, the supply of money will increase.

2. As the Banker to the State:

The second important function of a central bank is to act as a banker to the government. All the balances of the government of the country are kept with the central bank. On these balances, usually, the central bank pays no interest. On the other hand, the bank performs some services to the government. Generally speaking, it is the fiscal agent of the government and advises the latter in matters relating to currency and exchanges as well as finance. It carries out their exchange, remittance, and other bank operations including the management of public debt.

3. Banker's Bank:

Broadly speaking, the central bank acts as a banker's bank in their capacities: 1. As the custodian of the cash reserves of the commercial banks. 2. As the lender of the other bank. 3. As a bank of central clearance, settlement, and transfers. For example, if other banks of the country 5% cash reserves of their deposit in the central bank, so, at any time, they can borrow the money as a loan from the central bank.

4. As the Guardian of the Money Market:

Central Bank acts as the guardian of the country's money market as the director and controller of the money market. It also controls the money currency, controls credit, stability in money supply, and an exchange rate of foreign currency, etc. It establishes a country's well-organized and develops money market.

5. Lender of Last Resort:

The central bank is the lender of last resort to the commercial banks. When the commercial banks have exhausted their own resources and have failed to supplement their funds from the usual outside resources, the central bank is called upon to function as the lender of last resort.

6. Foreign Exchange Control:

The country's export and import as well as international trade success rate largely depend on the good conduct and control of the foreign exchange. So, the foreign exchange system is controlled by the central bank.

7. Maintaining Foreign Exchange Reserve:

A high level of crisis and an abundance of foreign exchange are harmful to the economy. The central bank maintains sufficient foreign exchange so that there is no problem in case of export and import trade.

8. Keeping the Government account:

Receiving and transferring government funds, the central bank maintains the account of various government divisions, ministry and organizations i.e. central bank keeps the account of all monetary and economical transactions.

9. Revenue Collection:

As the bank of government central bank helps to collect revenue by collecting different types of tax, duty.

10. Maintenance of Information: 

The central bank does the task of collecting and preserving all sorts of information which is much helpful in the case of various government planning.

11. Co-coordinator:

The central bank plays the role of co-coordinator by maintaining a relationship with other foreign banks and international economic organizations.

12. Clearing House:

The last settlement of the mutual assets and liabilities of other banks is operated by the central bank. So central-bank works as a clearinghouse.

13. Act as an Advisor:

The central bank delivers suggestions or instructions to commercial banks by providing various kinds of financial information. Central bank helps the commercial banks as well.

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