Central Banking

Central Banking

Role of Central Banking

The foremost monetary institution in a market economy is the central bank. These are usually government-owned institutions, but even in countries where they are owned by the nation’s banks (such as the United States and Italy), the responsibility of the central bank is to the national interest.

Most central banks perform the following functions: They serve as the government’s banker, act as the banker of the banking system, regulate the monetary system for both domestic and international policy goals, and issue the nation’s currency. As banker to the government, the central bank collects and disburses government income and receipts, manages the issue and redemption of government debt, advises the government on all matters pertaining to financial activities, and makes loans to the government. As banker to the nation’s banks, the central bank holds and transfers banks’ deposits, supervises their operations, acts as a lender of last resort, and provides technical and advisory services. Monetary policy for both domestic and foreign purposes is implemented and, in many countries, decided by the national banking authorities, using a variety of direct and indirect controls over the financial institutions. Coins and notes that circulate as the national currency are usually the liability of the central bank.

The ability of the central bank to control the money supply and thus the pace of economic growth is responsible for a major economic-policy debate. Some economists believe that monetary control is extremely effective in the short run and can be used to influence economic activity. Nevertheless, some hold that discretionary monetary policy should not be used because, in the long run, central banks have been unable to control the economy effectively. Another group of economists believes that the short-run impact of monetary control is less powerful, but that the central banking authorities can play a useful role in mitigating the excesses of inflation and depression. A school of economists claims that monetary policy cannot affect systematically the pace of national economic activity. All agree that problems related to the supply side of the economy, such as fuel shortages, cannot be resolved by central-bank action.

More about Banking

Commercial Banking in the United States

Commercial banks are the most significant of the financial intermediaries. Read more about Commercial Banking in the U.S. here.

Thrift Institutions

Savings and loan associations (SLAs) and savings banks are similar but separate financial institutions. Both were patterned after cooperative movements in Scotland and England. See more about Thrift Institutions here.

European Banking

European banks engage in some activities prohibited to banks in the United States. Commercial banks in Europe tend to be more business oriented. Read more about Banking in Europe here.

Banking in the United Kingdom

Since the 17th century Great Britain has been known for its prominence in banking. London still remains a major financial center, and virtually all the world’s leading commercial banks are represented there. Read more about banking in Great Britain here.

International Banking

In 1978 the U.S. Congress passed the International Banking Act, which imposed constraints on the activities of foreign banks in the United States. Read more about international banking here.

Source: “Banking”Microsoft® Encarta® Online Encyclopedia

See Also

Investment Banking
Savings Institutions
Credit Union
Outline of International banking regulations
List of Banking legal online resources
List of Banking Law e-Journals
List of Investment Law e-Journals
Venture Capital



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