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Trading Terms: Glossary and Definitions for Traders
Central Bank

Central Bank

The Central Bank is the body responsible for the implementation of monetary policy and for how the payment system will operate. Also, the Central Bank is sometimes responsible for regulating and supervising the financial sector of the economy of one individual country or several countries.

The Central Bank can take a variety of institutional forms.

Goals and Objectives of the Central Bank’s Work

The fundamental purpose of the Central Bank’s work is to act in line with public interests. In real life, one can encounter several primary (ultimate) goals of the Central Bank, for example:

  • Financial and price stability.
  • Assistance in maintaining balanced economic growth.
  • Support for a stable and reliable exchange rate.
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The ultimate goals of the Central Bank’s activities are specified in the law that regulates the activities of the Central Bank or in the country’s Constitution. They are public, accessible to the public, and their mechanisms of action are explained to the general public. Since these are fundamental goals, legislation regarding their operation is rarely reviewed, and they may remain relevant for decades.

In realizing its goals, the Central Bank focuses on the implementation, planning, forecasting and analysis of the control of monetary and credit mechanisms.

The main tasks of the Central Bank’s functioning include:

  • Conducting monetary issues.
  • The formation of the exchange rate, which is part of the implementation of monetary policy, as well as the management of the money supply.
  • Implementation of transactions with the International Monetary Fund.
  • Acting as a lender of last resort.
  • Making payments.
  • Serving the government in its treasury function.
  • Regulating the payment system, etc.

There are territories and countries where a private bank, together with a central bank, can produce banknotes backed by those reserves that are located in the Central Bank (for example, Hong Kong, Macau).

In some countries, the Central Bank is either a government agent or affiliated with some government organization.

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Central banks typically do not bear financial risk in the traditional commercial sense and are not driven by profit motives; such considerations therefore do not factor into their policy decisions.

As a rule, the Central Bank acts as a regulatory and supervisory authority in the financial sector, exercising control over the activities of banks, sometimes non-bank financial organizations.

If comprehensive regulation and supervision is carried out within the framework of the work of the Central Bank, then it acts as a mega-regulator in the financial sector of the economy.

Sometimes the Central Bank can provide a loan or use a deposit with non-financial organizations.

In powerful economies, the Central Bank has offices and branches in different parts of the country. Their presence may be necessary because different regions of the country may be located in completely different time zones, and the country’s territory is very large. The activities of the Central Bank branches in the regions are inextricably linked and coordinated with the activities of the head office of the Central Bank of the country.

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There are countries that have opened representative offices (branches) of their Central Bank in other countries. These representative offices do not become residents of the country where they are located. Such representative offices may have the status of diplomatic immunity, and they become part of the economic territory where the Central Bank itself is located.

There are countries where the Central Bank’s functions are fully or partially delegated to the government.

It is often a question of delegating functions such as:

  • Implementation of transactions with the International Monetary Fund.
  • Coordination of international reserves.
  • Technical issuance of both coins and banknotes.

When some central banking functions are delegated to government agencies, the concept of “monetary authorities” should be understood broadly, encompassing both institutions together. In this case, the International Monetary Fund advises the introduction and use of a “monetary authority account” that can work in conjunction with the operations of both the government and the Central Bank itself.

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