4.4.3 Role of central banks

• What is the role of central banks?

  • To implement monetary policy
  • Banker to the government
  • Banker to the banks (lender of last resort)
  • Regulation of the banking industry
• How are central banks the banker to the government?

  • The government set the annual budget but the central bank manages the tax receipts & payments.
• How are central banks the lender of last resort?

  • Commercial banks are able to borrow from the central banks if they run into short-term liquidity issues.
  • Without this help, they may go bankrupt, leading to instability in the financial system, and a potential loss of savings.
• How do central banks regulate the banking industry?

  • High levels of asymmetric information in the industry requires that commercial banks are regulated to protect consumers.
  • One of the key regulatory actions is the implementations of required reserve ratios.