Central Bank

Central Bank, bank that supervises its country's banking system and controls the national monetary system. National central banking systems take various forms; most countries have a single institution, but those in former French West Africa share a central bank, while the United States Federal Reserve System is composed of 12 regional banks. All central banks operate within the constraints of government fiscal policy over which they have varying degrees of influence. Their powers and their independence of government also vary; for example, Germany's Bundesbank is more independent of government than New Zealand's central bank, which is more independent of government than the United Kingdom's Bank of England. Central banks also have their own central bank, the Bank for International Settlements.

Different central banks have different powers and responsibilities, but in general, central banks operate in some or all of the following five main ways. (1) They are the government's banker. Government revenues are deposited with, and government expenditure is paid via, the central bank, which also holds the government's reserves of gold and foreign exchange. When a government needs to borrow money, it may be the central bank that arranges it by, for example, organizing the issue of government bonds, known in the United Kingdom as gilt-edged securities or “gilts”. (2) They supervise the banking system, using legal powers and informal influence. (3) They are the banker for the country's various private banks, taking deposits from and lending to them. (4) They function as a lender of last resort, to provide loans to banks that find themselves in financial difficulty or without sufficient money to pay depositors who want to withdraw their deposits. This is not the same as acting as guarantor to all those who deposit money with a bank, as customers of the failed Bank of Credit and Commerce International (BCCI) discovered. To reduce the chance that they will be asked to act as lender of last resort, central banks often insist that banks abide by certain conditions: for example, requiring that banks deposit a certain proportion of their deposits with the central bank. (5) They issue the currency, with responsibility for keeping it at any level agreed with government, through intervention in the currency markets and/or adjustment of interest rates.