The most important link in the banking system and its management in any country is the central bank. The functions of this institute are diverse and quite interesting, because the issues that it deals with lie in various areas of the economic life of the state. Its main task is to ensure the stability of the national currency within the country and maintain its foreign exchange rate.
In most cases, the financial authority is not directly subordinate to the state. Often, formally, the owner of a bank’s property is some government agency, but usually shareholders are private individuals. The main functions of the country's central bank are extremely important and the same for almost all states:
- firstly, the Central Bank is the issuer of banknotes operating in the country, that is, roughly speaking, it prints money;
- secondly, it acts as a “bank of banks”, serves the needs of commercial financial institutions and monitors the stability of the system as a whole, taking the required reserves for preservation;
- thirdly, it serves as a conductor of the monetary policy of the state, in connection with which it implements a number of actions.
So, this is what, in general, any central bank does. The functions that he performs in connection with the conduct of monetary policy are also worthy of attention and are not uninteresting; they have something in common with his relationship with commercial banks.
The Central Bank controls inflation and the national currency, and he does this with the help of three financial instruments:
- Money management. Excessive amounts of money reduce the demand for them and reduce their value. As a result, the currency on the foreign market is becoming cheaper, and inflation is accelerating. A crude tool that seriously affects processes in a market economy.
- Management of the base interest rate and the amount of required reserves. By reducing and increasing these two indicators, the Central Bank also manages the “price” of money and regulates the work of the banking system, through it influencing supply and demand in the money and commodity markets.
- Foreign exchange intervention. The most commonly used instrument, which affects inflation quite slightly, but helps to control the exchange rate of the national currency. By buying or selling reserve or national currency in open markets, the Central Bank can affect its mass in the economy and, accordingly, its price. In addition, he may engage in the sale of securities issued by the state.
The central bank, whose functions depending on the country may be narrower or wider, of course, is an indispensable body in the
financial and credit system of the state. In addition to ordinary banks, he makes loans to the state, engaged in domestic loans and selling government bonds issued by the ministry of finance or a similar body. The functions of the
Central Bank of Russia, and probably also of other countries, do not end there. Most Central Banks are also involved in the collection and publication of statistical information related to macroeconomic indicators, the establishment of official currency quotes and other additional tasks.
In the economic system of any country, it is difficult to find a body that deals with the same important things as the central bank. The functions that it performs and the tasks that it solves are so important that, without them, perhaps, in a market economy, the state simply cannot exist.