Central Bank is set up by the Government of each country to regulate the overall banking system and establish the supervisory framework for the banks operating in that country. It also acts as bank for government and controls the liquidity or money supply in the economy.
The first central bank, the Sveriges Riksbank (Central Bank of Sweden), was established in Sweden in 1664 while the second central bank established in 1694 was the Bank of England (BoE).
The main characteristics and functions of a central bank are outlined below
It acts as a bank for government and facilitates the sale and purchase of government bonds based on the requirement of the government
It controls the overall money supply in the economy by using all the available monetary policy tools like SLR, Reserve Requirement, Repo rate etc.
It regulates all the banks operating in a country. Also set the norms and guidelines for the foreign banks operating in a country
It finalizes all the banking related rules, norms and code of conducts etc. and notifies the same to the banks. It also tracks banking processes for all the banks and takes actions for any violation.
It does not interact with the common people directly but it always interacts with different banks in timely manner. It provides a common trading and transactions window for all the banks
It devises norms for External borrowing of the domestic companies.
It stores the forex reserves and gold for the Government and supports the importers with the foreign currency during crisis time.
It uses its forex reserves to intervene the fluctuations of currency exchange rates whenever required
Also regulates all the NBFCs (Non-Banking Financial Corporations) and Co-operative banking institutions of a country.
The central bank is often referred to as the Banker‘s Bank for its functions and characteristics mentioned above.