01/02/2023
When you think of a bank, this might be the first thing that comes to mind: the place where you manage your finances through services and products such as deposits and loans. However, there is one financial institution that has no commercial focus but plays a key role in the economy and is also called a bank: a central bank.
A central bank is a public institution responsible for implementing monetary policy, managing the currency of a country or group of countries and controlling the money supply. Some of the key responsibilities of central banks are:
- Determination of monetary policy– the central banks set macroeconomic objectives, such as to guarantee price stability and economic growth. To do this, the financial authorities have tools such as appointing officialsinterestrates that impact monetary costs. Based on the economic situation, central banks will choose to either increase the official interest rate (to control interest rates).inflation) or reduce (to promote consumption and increase economic growth).
- Regulation of money in circulation– they are the authority forissuing coins and notes, the money supply, and to regulate how much money is in circulation. Central banks do this to inject liquidity into the economy so that different economic actors (families, companies and governments) can use it in their transactions. In terms of currency, central banks are also responsible for conducting operations to ensure that exchange rates remain stable, and for owning and controlling their official reserves.
- Keep an eye on the interbank market– they ensure compliance with relevant financial laws and monitor national payment systems to ensure they function properly.
- Providing liquidity to commercial banks if this is necessary due to solvency problems– in addition to the loans granted between institutions in the interbank market, as mentioned in the previous point, commercial banks can also receive liquidity from central banks in exchange for collateral, such as guaranteed public loansbonds. This means that commercial banks can, if necessary, cover what they need in the short term, while central banks try to guarantee price stability by mediatingcreditfluctuations.
- Taking on an advisory role– they regularly produce surveys and reports useful for e.g. governments or private organizations.
Central banks do all this independently of the political group in power in a given country, as they strive to ensure the stability of the financial system. Their decisions depend directly on the supervisory body that constitutes the financial institution.
Which central banks are there?
Central banks represent a country's financial institutions, but they can also represent a group of them. The Eurozone is an example of a financial institution consisting of a group of countries. In this case, power falls to the Eurosystem, which consists of two basic parts: the European Central Bank (ECB) and the national central banks of the eurozone member states that have the euro as their official currency. Bank of Spain, Deutsche Bundesbank and National Bank of Poland (Narodowy Bank Polski, NBP) are some examples.
Because there are some countries that are part of the European Union but not part of the eurozone, there is another organization in addition to the Eurosystem, the European System of Central Banks (ESCB). This consists of boatsThe European Central Bankand all national central banks of the countries that are part of the EU, regardless of whether they have the euro as their official currency or not.
In the US yesThe Federal Reserve System is the central banking system there.Known simply as the Fed, it is responsible for carrying out the aforementioned tasks: keeping an eye on the country's economy and currency – in this case, the dollar.
There are also other examples of central banks in AmericaBanxico, for Mexico andBrazilian central bankfor Brazil.
