Central & Commercial Banks | Economics for GCSE/IGCSE - Year 11 PDF Download

The Functions of Central Banks

Central banks are crucial for ensuring stability in the financial system and for implementing policy measures to achieve government economic goals and stimulate economic growth.

Central Banks play four significant roles in the economy

•  Role 1: Implementation of Monetary Policy: Central Banks execute monetary policies which are crucial for managing economic stability. For example, adjusting interest rates to control inflation.
•  Role 2: Banker to the Government: Central Banks handle government finances, including managing tax revenues and payments. In the UK, for instance, they oversee the payment of millions of public sector workers each month based on the government's budget.
•  Role 3: Banker to the Banks – Lender of Last Resort: Central Banks act as lenders of last resort for commercial banks facing short-term liquidity issues. This prevents bank failures that could destabilize the financial system and endanger people's savings.
•  Role 4: Regulation of the Banking Industry: Due to information imbalances in financial markets, commercial banks require regulation to safeguard consumers' interests. This oversight ensures fair practices and protects individuals' savings and investments.

The Functions of Commercial Banks

• Financial markets encompass systems enabling the exchange of goods, services, and financial instruments like loans, bonds, equities, and currencies.
• Commercial Banks are pivotal within financial markets, facilitating various crucial functions:
  •  Savings Facilitation: Commercial Banks aid in storing money for future needs, crucial for both households and firms. Savings are subsequently lent out by financial institutions, illustrating the cycle of saving and borrowing.
  •  Credit Provision: They extend credit to businesses and individuals, essential for economic progress. Borrowings accelerate consumption and investment, enabling purchases like homes through mortgages.
  •  Facilitating Transactions: Commercial Banks streamline the exchange of goods and services, offering diverse methods such as digital apps, debit/credit cards, and bank transfers.
  •  Forward Markets: They provide platforms for trading in currencies and commodities, offering price stability and opportunities for profit through speculation on future prices.
  •  Equities Market: Commercial Banks facilitate trading in shares of public companies on stock exchanges worldwide, supporting both long-term investments and speculative activities through buyer-seller connections.