Functions/roles of central banks

1. Currency regulator or bank of issue
2. Bank to the government
3. Custodian of Cash reserves
4. Custodian of International currency
5. Lender of last resort
6. Clearing house for transfer and settlement
7. Controller of credit
8. Protecting depositors interests

Discussion

• Currency regulator or bank of issue: Central banks possess the exclusive right to manufacture notes in an economy. All the central banks across the world are involved in issuing notes to the economy.
• Bank to the government: The central bank accepts deposits and issues funds to the government. It is also involved in making and receiving payments for the government. Central banks also offer short term loans to the government in order to recover from bad phases in the economy.
• Government advisor on banking; it acts as an advisor and agent of the government by providing advice to the government in areas of economic policy, capital market, money market and loans from the government.

In addition to that, the central bank is instrumental in formulation of monetary and fiscal            policies that help in regulation of money in the market and controlling inflation.

• Custodian of Cash reserves: It is a practice of the commercial banks of a country to keep a part of their cash balances in the form of deposits with the central bank. The commercial banks can draw that balance when the requirement for cash is high and pay back the same when there is less requirement of cash.
• Custodian of International currency:An important function of the central bank is to maintain a minimum balance of foreign currency. The purpose of maintaining such a balance is to manage sudden or emergency requirements of foreign reserves and also to overcome any adverse deficits of balance of payments.
• Lender of last resort:The central bank acts as a lender of last resort by providing money to its member banks in times of cash crunch. It performs this function by providing loans against securities, treasury bills and also by rediscounting bills.

This is regarded as one of the most crucial functions of the central bank wherein it helps in            protecting the financial structure of the economy from collapsing.

• Clearing house for transfer and settlement: Central bank acts as a clearing house of the commercial banks and helps in settling of mutual indebtedness of the commercial banks. In a clearing house, the representatives of different banks meet and settle the interbank payments.
• Controller of credit:Central banks also function as the controller of credit in the economy. It happens that commercial banks create a lot of credit in the economy that increases the inflation.

The central bank controls the way credit creation by commercial banks is done by                            engaging  in open market operations or bringing about a change in the CRR to control the            process of credit creation by commercial banks.

• Protecting depositors interests: Central bank also needs to keep an eye on the functioning of the commercial banks in order to protect the interests of depositors.