Question

How is a central bank a banker to the banks?

Answer 1

1. The central bank maintains a relationship with commercial banks similar to the one commercial banks have with the general public. As the banker's bank, the central bank carries out multiple key functions. It serves as the guardian of the cash reserves held by commercial banks.
2. By law, commercial banks are obligated to maintain a fixed portion of their deposits as reserves with the central bank. Additionally, the central bank extends mainly short-term credit to commercial banks.
3. This support is offered by discounting bills of exchange submitted by commercial banks and by granting loans or advances against approved securities. Moreover, the central bank offers guidance and supervision, overseeing and regulating the operations of commercial banks. As a result, commercial banks must formulate their policies in line with the instructions and policies set by the central bank.