A central bank, reserve bank, or monetary authority is an institution that manages the currency, money supply, and interest rates 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 in the state, and also generally controls the printing of the national currency, which serves as the state's legal tender. A central bank also acts as a lender of last resort to the banking sector during times of financial crisis. 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 and responsibilities of the central banks
Functions of a central bank may include:
- implementing monetary policies.
- setting the official interest rate – used to manage both inflation and the country's exchange rate – and ensuring that this rate takes effect via a variety of policy mechanisms
- controlling the nation's entire money supply
- the Government's banker and the bankers' bank ("lender of last resort")
- managing the country's foreign exchange and gold reserves and the Government bonds
- regulating and supervising the banking industry