How Does Central Banks Work
Central Banks all around the world are known by various names like reserve banks, state banks, monetary authority etc. Its the Central bank alone, which is not merely a regulatory authority but also retain the right to provide the government with the currency in form of loans.
The Central Banks of the countries work just as the other commercial banks in theory such as they charge interest on the advances they make to other banks or government or any other borrowing party on different rates. But, there are some additional features which make Central Banks different from normal commercial banks; like Central Banks do not transact with individuals, they have monopoly for creating the currency of the country for the government and they give the currency to government as a loan. Several other commercial banks also get currency from Central banks in form of bonds and securities.
Usually the commercial banks knock on the doors of a central bank in case of severe monetary troubles or crisis. To regulate money matters in the country is the predominant business of Central banks, all the monetary policies, helping the financial sector of the country to move smoothly, are designed by the Central banks. Other main duties comprise of calculating and steadying the rate of interest on sponsored loans and making sure all the commercial banks follow its rules and regulations. Furthermore, a central bank also keeps a surveillance over all the other banks and financial institutions to ensure ruling out all the possibilities of spurious activities. Majority of the countries and states, have independent system of central banks. By autonomous bodies it is meant, that they ensure they do not take political dictation or get influenced from any other powerful authority in any case.
Most common examples of the independent Central Banks in the world are two famous banks: Central Bank of Europe and the Federal Reserve System in US. It is widely believed that the Central banks apart from keeping surveillance over the banking business running in the country also are involved in managing the country’s foreign exchange and gold treasury. Central Banks are also obliged to control and monitor the inflation rates of their economies; many of central bank’s policies can increase or decrease the prevailing inflation rates in the country.
There are many Central Banks of the world which are publicly owned and rests of the Central Banks are privately owned except the central bank in United States of America. The central bank of United States of America known as Federal Reserve is owned by combination of both the private and public factions.
