The Functions of Central Banks
- Central Banks play a vital role in maintaining stability in the financial system. Additionally, the policy tools at their disposal help to meet Government economic objectives & create economic growth
Central Banks play four important roles in the economy
- Implementation of monetary policy: This is more fully explained in Sub-topic 4.4.1
- Banker to the government: The Government sets the annual budget but it is the Central Bank that manages the tax receipts & payments. In 2022 there were 5.7 million public sector workers in the UK who had to be paid by the Central Bank each month
- Banker to the banks – lender of last resort: Commercial banks are able to borrow from the Central Bank when they run into short-term liquidity issues. Without this help, they might go bankrupt leading to instability in the financial system - & a potential loss of savings for many households
- Regulation of the banking industry: the high level of asymmetric information in financial markets requires that commercial banks are regulated in order to protect consumers