A central bank, reserve bank, or monetary authority is an institution that manages the currency and monetary policy of a state or formal monetary union, and oversees their commercial banking system. In contrast to a commercial bank, a central bank possesses a monopoly on increasing the monetary base. Most central banks also have supervisory and regulatory powers to ensure the stability of member institutions, to prevent bank runs, and to discourage reckless or fraudulent behavior by member banks.
Central banks in most developed nations are institutionally independent from political interference. Still, limited control by the executive and legislative bodies exists.
Activities of central banks
Functions of a central bank usually include:
- Monetary policy: by setting the official interest rate and controlling the money supply;
- Financial stability: acting as a government’s banker and as the bankers’ bank (“lender of last resort”);
- Reserve management: managing a country’s foreign-exchange and gold reserves and government bonds;
- Banking supervision: regulating and supervising the banking industry;
- Payments system: managing or supervising means of payments and inter-banking clearing systems;
- Coins and notes issuance;
- Other functions of central banks may include economic research, statistical collection, supervision of deposit guarantee schemes, advice to government in financial policy.