Different countries operate their own central bank that controls and monitors operations of commercial banks within their economy; central banks are the custodians of commercial bank. Other than being the sole printer of notes and coins currency of a nation, central banks provide their countries’ currencies with price stability by controlling inflation.
The central bank is pivotal in the role of economy management. Its role is not only to regulate and monitor the financial system, but also to ensure its development, prevent financial distress which could undermine confidence in the system as well as facilitate sustained growth. To control and intervene in an economy, central banks use monetary and fiscal policies; the idea of central banks was aimed at creating a bank that controls an economy without political influences, however the separation has been a challenge in many nations.
Also, Central banks are termed as the bank of the government where policies regarding financial operations of the government are operated. To finance different projects, money comes from the central bank to treasury for implementation. On the other hand, monies collected in an economy as taxation or other central government funds are banked with central bank.
Custodian of commercial banks
Before commercial banks gets an operating license, it must be cleared and accepted by the central bank, the bank considers issues with security, liquidity and the quality of facilities with the applying bank. It is the duty of central banks to monitor the risks that the commercial banks under their purview are taking. Therefore, central banks have the power to conduct audits at regular intervals. These audits consist of a thorough investigation of the assets, liabilities and even the treasury operations of any bank.
Extending credit or lending is the main business of a bank, the central bank controls a commercial bank by keeping a check on the amount of credit issued by a commercial bank. This function of the central bank is known as Credit Control. Since the commercial banks has the objectives to make profits like any business, so when they are lending to the outside customer, they have to charge an interest that is higher than that that the central bank is offering.
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. These are short term policies of controlling inflation.
There are also long term policies that central bank employs to also control inflation which include; issue of treasury bills and bonds and direct participation in the market. Treasury bills and bonds are offered for the general public and companies to buy. When the rate rises, the loan purchasers’ will be discouraged from buying them and circulate the money in other areas of the economy and thus curing the deficit.
In modern globalized world, there is increased trade among nations, for trade to prevail; trading partners needs to have the currencies of other partner. Central banks have a store for foreign currency and with the currency; it controls deficiencies and surpluses of the funds. For instance with the foreign reserve, the bank can decide to sell some of the reserve to cure a deficit; alternatively it can decide to buy from the market to cure a surplus.
In addition to its core functions, CBN has over the years performed some major developmental functions, focused on all the key sectors of the Nigerian economy (financial, agricultural and industrial sectors). Overall, these mandates are carried out by the Bank through its various departments.