Explain the 'banker's banks' and 'supervisor' function of the central bank.
There are
usually hundreds of banks in a country. There should be some agency to regulate
and supervise their proper functioning. This duty is discharged by the central
bank.
Central bank acts as banker’s
bank in three capacities:
(i) It is
the custodian of their cash reserves. Banks of the country are required to keep
a certain percentage of their deposits with the central bank; and in this way
the central bank is the ultimate holder of the cash reserves of commercial
banks,
(ii) Central bank is lender of last resort. Whenever banks are short of
funds, they can take loans from the central bank and get their trade bills
discounted. The central bank is a source of great strength to the banking
system,
(iii) It acts as a bank of central clearance, settlements and
transfers. Its moral persuasion is usually very effective so far as commercial
banks are concerned.
There are
usually hundreds of banks in a country. There should be some agency to regulate
and supervise their proper functioning. This duty is discharged by the central
bank.
Central bank acts as banker’s bank in three capacities:
(i) It is the custodian of their cash reserves. Banks of the country are required to keep a certain percentage of their deposits with the central bank; and in this way the central bank is the ultimate holder of the cash reserves of commercial banks,
(ii) Central bank is lender of last resort. Whenever banks are short of funds, they can take loans from the central bank and get their trade bills discounted. The central bank is a source of great strength to the banking system,
(iii) It acts as a bank of central clearance, settlements and transfers. Its moral persuasion is usually very effective so far as commercial banks are concerned.
