central bank (redirected from Central banks)

central bank, financial institution designed to regulate and control the money supply of a nation, with the goal of fostering economic growth without inflation. Although central banking systems have varying levels of autonomy, there is generally a significant level of government control. The responsibilities of the central bank usually include maintaining adequate reserve backing for the nation's commercial banks and regulating the exchange rate of the nation's currency. Such duties are met by controlling the discount rate, making reserve advances to commercial banks, trading in government obligations, and acting as the government's fiduciary agent in its dealings with other governments and other central banks. The central bank has been called the "lender of last resort" and is expected to lend to its nation's banks at any time, particularly during a panic. Although the term was hardly known before 1900, the concept of central banking dates back to at least 1694, when the Bank of England was founded. Today, all economically developed nations—and most developing nations—possess the equivalent of a central bank; there are 172 central banks around the world. Notable central banks include France's Banque de France, Germany's Bundesbank, and the U.S. Federal Reserve System (est. 1913). The Bank for International Settlements in Switzerland serves as a central bank for the central banks of the world's largest capitalist nations. The World Bank and the International Monetary Fund also serve certain central banking functions for member nations. The European Union established the European Central Bank in 1998 as a prelude to the adoption of the euro (see European Monetary System). In the United States, the inflation crisis of the late 1970s led to greater public awareness of the role of the Federal Reserve in setting interest rates; reaction to its decisions (and expected decisions) concerning interest rates often produces sharp movements in the stock and bond markets.

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central bank

Institution, such as the U.S. Federal Reserve System, charged with regulating the size of a nation's money supply, the availability and cost of credit, and the foreign exchange value of its currency (see foreign exchange). Central banks act as the fiscal agent of the government, issuing notes to be used as legal tender, supervising the operations of the commercial banking system, and implementing monetary policy. By increasing or decreasing the supply of money and credit, they affect interest rates, thereby influencing the economy. Modern central banks regulate the money supply by buying and selling assets (e.g., through the purchase or sale of government securities). They may also raise or lower the discount rate to discourage or encourage borrowing by commercial banks. By adjusting the reserve requirement (the minimum cash reserves that banks must hold against their deposit liabilities), central banks contract or expand the money supply. Their aim is to maintain conditions that support a high level of employment and production and stable domestic prices. Central banks also take part in cooperative international currency arrangements designed to help stabilize or regulate the foreign exchange rates of participating countries. Central banks have become varied in authority, autonomy, functions, and instruments of action, but there has been consistent increased emphasis on the interdependence of monetary and other national economic policies, especially fiscal policies and debt management policies. See also bank; investment bank; savings bank.