Role of central banks in banking system

Role of central banks in banking system

Central banks can be referred to as new inventions. It was earlier seen that an American president Mr. Andrew Jackson had even cancelled the concept of central bank in the United States of American as he did not feel that it was very important at that particular point of time. However, a lot have changed since then. In today’s era, central banks are considered as one of the most integral part of financial systems of the most countries in the world. Central banks can also be referred to as hybrids. It can be said to be a mix of unique functions and identical functions relating to commercial banks. It enjoys absolute legal monopoly in few of the functions.

Other banks deposit their money into central banks especially banks under the supervision of foreign governments. These banks are said to deposit their gold reserves and foreign exchange for the purpose of safe keep. Central bank also invests the various forex reserves and thereby, maintaining an investment portfolio which is at par with the trade ratio of its client. It also has hold over the gold reserves of the country. Off late, the central banks have tried to get rid of their gold reserves as the prices of the gold are falling quite a lot. However, it is still being shown to have handsome profits as the gold is registered in the historical prices i.e. the prices before the decline.

In the modern era, the central bank is performing the function of regulating and monitoring the interest rates in the economy. The interest rate is quite proportional to the inflation as well as plays an important and active role in influencing the economic activity in the economy. Higher interest rates would cause and lower economic activity in the economy and lower inflation and vice versa. There are two types of central bank one is the autonomous and the other is semi-autonomous. The autonomous is financially and politically independent however the latter one is dependent on the Ministry of Finance. Central banks play an integral part in the financial system of the country.

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