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Central Banking

Now every country has a central bank. It is a symbol of financial sovereignty and stability of
the country. A central bank is a institution which is repn for safeguarding the financial stability of
the country. It holds the ultimate reserves of the nation, controls the flow of purchasing power-
whether currency or credit and acts as a banker to the state.
Central Banking Principles:
The principles on which a central bank is run are quite different from the ordinary banking
principles:
i) An ordinary bank is run for profit. hereas, a central bank is primarily bears the
responsibility of safeguarding the financial ! economic stability of the country.
ii) "ince the central bank is not a profit or dividend-hunting institution, it does not act as a
rival of other banking institutions and not usually performing ordinary banking
functions. It is primarily concerned with maintaining the solvency of the entire banking
system of the country. It must, therefore, keep its own assets as li#uid as possible.
iii) $he central bank must follow an active policy when something goes wrong with credit
mechanism in the country. $o remedy the situation , it may apply two weapons% &a) the
manipulation of bank rate. &b) the open market operations.
iv) 'or the efficient functioning, the central bank is provided with special e#uipment% &a) it
is given the monopoly of note issue. &b) it is made a banker to the (ovt. &c) it is a
banker)s bank.
v) A central bank should not be subservient to any political party. It must be independent of
all political influence, so that it can act freely, without fear or fever, in the best interest of
the nation.
Some Central Banks of the World:
Albania% *ank of Albania
Algeria: *ank of Algeria
Argentina% *anco +entral de la ,epublica
Argentina
Australia% ,eserve *ank of Australia
Bahrain: *ahrain -onetary Agency
Bangladesh% *angladesh *ank
Belgium% Nationale *ank van *elgie - *an#ue
Nationale de *elgi#ue
Bhutan% ,oyal -onetary Authority of *hutan
Canada: *ank of +anada - *an#ue du +anada
China: $he .eople/s *ank of +hina
Denmark: 0anmarks Nationalbank
Egypt% +entral *ank of 1gypt
European Union: 1uropean +entral *ank
ermany% 0eutsche *undesbank
!ong "ong% 2ong 3ong -onetary Authority
#ndia: ,eserve *ank of India
#ran: $he +entral *ank of the Islamic ,epublic
of Iran
$apan: *ank of 4apan
%alaysia% *ank Negara -alaysia
&epal% Nepal ,astra *ank
&e' (ealand% ,eserve *ank of New 5ealand
Pakistan% "tate *ank of .akistan
)ussia% +entral *ank of ,ussia
*unctions of Central Bank:
Central bank in a country performs a wide array of functions. *roadly speaking, a central bank acts in
the following capacities%
6. $he note issuing agency
7. $he banker to the state.
8. $he bankers) bank
9. $he guardian of money market through credit control
:. $he lender of last resort
;. It undertakes to maintain the e<ternal value of the domestic currency.
=. It undertakes e<change control operations.
>. $he +ustodian of National ,eserve.
?. It fights economic crisis and fluctuations and ensures economic stability of the country.
In the western countries the functions of central banks are regulatory in nature. *ut in the under
developed countries, the central banks has a special role to play , which is not merely regulatory to
maintain stability , but development ! promotional.
** Bankers Bank:
$he central bank acts as a banker)s bank in three capacities%
a) As a custodian of cash reserves of commercial banks.
b) @ender of last resort. &i.e. rediscounting 6
st
class trade bills )
c) +learing and settlement. &i.e. +learing house in **)
++ ,he Custodian of &ational )eser-e
$he central bank is generally entrusted with the custody of the nation)s reserves. $he reserves in the past
were mainly kept in the form of gold, but after the breakdown of gold standard currently convertible
foreign currencies form the reserve. $he central bank, not infre#uently, also work as custodian of foreign
e<change reserve.
** Credit Control:
A modern central bank try to control flow of credits in the market place to supplement its
broad obAectives of monetary control.
%ethods of Credit Control:
6. Bank )ate Policy: involving the variation of discount rates to influence the market rate of
interest, which plays a crucial role in the creation of credit.
7. /pen %arket /perations: involving the purchase and sale of securities, (ovt. or central
bank)s own in the open market to influence the #uantum of money circulation.
8. 0arying )eser-e System1)e2uirement: involving the variation of the minimum reserves,
which the commercial banks are re#uired to keep with the central bank, to curtail or enlarge
the power of the commercial banks to create credit.
9. Selecti-e Credit Controls: involving directional control to influence the flow of credit in
particular channels.
:. Credit )ationing. means restrictions placed by central bank on demands for accommodation
made upon it during times of monetary crisis and declining gold reserves. $he credit is
rationed by limiting the amount available to each applicant. 'urther central bank restricts its
discounts to bills maturing after short period.
;. %argin )estriction. involves setting the level up to which the bank would provide finance
for the underlying goods, services or the proAect. -argin restriction on @etter of +redit set
by central bank &@B+) is an e<ample.
=. %oral Suasion. Involves friendly persuasion and advice to influence the lending policy of
commercial banks.
>. Direct Action: involves taking coercive measures against individual banks to penaliCe
recalcitrant units of the banking system.

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