Central Bank

In times of financial trouble, one of the most practical and safest places people go to is the bank, where they could borrow money in exchange of minimal interest rate that allows bank to earn some profit and do more business to more clients. Actually, banks get money for lending from savings accounts of their depositors as well as on the loan repayments from their borrowers. On how to balance everything that by the time a depositor would make a withdrawal he or she still have the money is very crucial for the bank. And in inevitable cases that banks get into financial trouble there is also a “mother” bank that would help resolve their financial need. The mother bank is called the Central Bank.

The Central Bank is often referred to as the lender of last resort by bankers. But in national scope, it plays a very vital role in stabilizing the economy of the country on where it serves. In fact, it is also being referred to as the reserve bank and monetary authority of in a certain economy. In the United States, the Federal Reserve serves as the central bank, which by definition is the responsible entity for making the monetary policy of the country where it is located.

Maintaining the stability of national currency and money supply is the main goal of central banks, which include Central Bank of Iraq, Central Bank of Nigeria, Central Bank of Egypt, Central Bank of Malaysia, and the Central Bank of the Philippines, among many others. In order to stabilize the economy, the central bank is the one tasked to determine bank rates, which affects the interest rates on loans and savings given to you by your local banks. And of course, it also serves as the refuge of the banking sector in times of financial crisis.

History

Some historical accounts say that central banking system originated during the medieval era in Europe, where Templar Knights popularized promises to pay, which became valuable and as almost as valuable as commodity money like silver and gold. And these promises to pay evolved to becoming the bank notes being issued by the central bank today.

The Riksbank in Sweden is regarded as the oldest central bank in the world. The bank opened in 1668 with the help of some Dutch businessmen. The Bank of England followed opening in 1694 with the initiative of Scottish businessman William Paterson, who heeded to the request of the English government to have a financial institution that would help pay for a war. The US Federal Reserve was established in December 23, 1913.

Central Bank independency and monetary policy is a crucial issue in central banking system as most countries have central banks owned by the state therefore enjoy only a minimal degree of autonomy and get more prone to government intervention in implementing monetary policy. If a government can influence the central bank on its monetary policy, chances are it could be used for political gains such as it would be used to please parties that could be helpful in realizing their political interests.

Many countries, however, prefer to maintain an independent central bank to really promote a healthy economic environment. Among these countries include the US, England, India, Mexico, Japan, Canada, and Australia.

Moreover, central banks may also have regulatory powers over banks and other financial institutions with regards to determining what are reckless, illegal, and fraudulent acts. The central bank, however, is not the one that litigates or punishes delinquent banks. A separate body is tasked to do that.

Although central banks do not render inidividual citizens its banking services needs, it macroscopically functions to better give each and every one of us a progressive economy.