Central Bank | Meaning Of Central Bank | Functions Of Central Bank

Summary

The central bank plays a crucial role in regulating money markets, managing short-term loans to commercial banks, and supervising financial institutions. It sets key interest rates, ensures proper credit creation, and intervenes when needed to stabilize the economy, such as in times of liquidity crises. The central bank also manages foreign exchange transactions to maintain exchange rate stability and clears checks between banks. By regulating money supply and overseeing commercial banking operations, the central bank ensures financial stability.

Takeaways

• 😀 The central bank manages government accounts and advises on policies to regulate the money market.
• 😀 The central bank primarily deals with short-term money markets and provides loans to commercial banks.
• 😀 The interest rates at which central banks offer loans to commercial banks are crucial for financial stability.
• 😀 The central bank supervises commercial banks, ensuring they follow monetary policy guidelines.
• 😀 In times of liquidity crisis, the central bank provides loans to commercial banks to help stabilize the system.
• 😀 The central bank stabilizes the exchange rate by purchasing foreign exchange when necessary.
• 😀 Commercial bank checks are cleared through their accounts with the central bank.
• 😀 The central bank plays a vital role in regulating the supply of money in the economy.
• 😀 The central bank manages credit creation by commercial banks, influencing the overall economy.
• 😀 In times of economic pressure, the central bank ensures that the monetary system remains balanced and functional.

Q & A

What are the primary functions of a central bank as mentioned in the script?

The central bank acts as a manager of government accounts, an advisor that frames monetary policies, and a supervisor ensuring that commercial banks follow monetary regulations.

How does the central bank manage the accounts of the government?

The central bank handles all the financial transactions and accounts of the government, including receipts and payments, acting as the government's banker.

What is the role of the central bank as an advisor?

As an advisor, the central bank frames policies to regulate the money market and ensure stability in the financial system.

What is the money market according to the script?

The money market refers to a short-term financial market where financial instruments with high liquidity and short maturities are traded.

How does the central bank assist commercial banks in times of crisis?

When commercial banks face liquidity shortages or excessive withdrawals by depositors, the central bank provides short-term loans to help them cope with the crisis.

What is the significance of the rate at which the central bank lends to commercial banks?

This rate, often called the bank rate or repo rate, influences the borrowing costs for commercial banks and ultimately affects interest rates in the broader economy.

How does the central bank act as a supervisor?

As a supervisor, the central bank ensures that commercial banks adhere to monetary policies, maintain reserves, and operate within the established financial guidelines.

What is the role of the central bank in maintaining exchange rate stability?

The central bank buys or sells foreign currency in the foreign exchange market to maintain stability in the exchange rate and prevent excessive fluctuations.

How does the central bank facilitate cheque clearance between banks?

When one bank receives a cheque drawn on another bank, the central bank clears the transaction through the accounts that both banks maintain with it, ensuring smooth interbank settlements.

How does the central bank regulate the money supply in the economy?

The central bank increases or decreases the supply of money by regulating credit creation by commercial banks and through various monetary policy instruments.

Why is regulating the credit creation process important?

Regulating credit creation helps the central bank control inflation, stabilize the economy, and ensure sustainable economic growth by preventing excessive lending or shortage of funds.