Question

Explain the banker’s bank function of the Central Bank.

State two ways by which the central bank of the country act as a bankers’ bank.

Explain the following function of a central bank:

Banker to the Banks

Explain the following function of this institution:

Bankers Bank

How does the central bank act as banker to the commercial banks?

Explain the function of the Central Bank as ‘Banker’s Bank and Supervisor’.

Answer 1

1. As a banker’s bank: Under the banking law, commercial banks are required to deposit cash reserves with the Central Bank. It gives loans to commercial banks as a lender of last resort.
2. As a supervisor: The central bank supervises, regulates, and controls the commercial banks. The regulation may be related to their licensing, branch expansion, amalgamation, etc. It also includes periodic inspection of banks.

Answer 2

The central bank has a relationship with commercial banks similar to the relationship that commercial banks have with the general public. As the banker’s bank, the central bank performs several important functions. It serves as the custodian of the cash reserves of the commercial banks.

Commercial banks are legally required to maintain a certain percentage of their deposits as reserves with the central bank. The central bank also provides credit, mainly in the form of short-term loans, to commercial banks. This assistance comes in the form of discounting bills of exchange submitted by commercial banks or by providing loans and advances against approved securities.

The central bank also offers guidance and supervision to commercial banks and controls and regulates their activities. Commercial banks must align their policies with the guidelines and directions issued by the central bank.