Central Bank
A central bank is the public institution that issues a country's currency, sets monetary policy, holds its foreign exchange reserves and acts as banker to commercial banks and the government. Most also run the core payment system and lend in emergencies.
Also called: monetary authority · reserve bank · national bank
Commercial banks keep accounts at the central bank and settle what they owe each other across those accounts. That makes the central bank the final layer of the payment system: balances on its books, together with banknotes, are central bank money, the asset in which large payments become final.
Its other functions follow from that position. It sets the interest rate at which banks can borrow reserves, which steers inflation and credit. It manages foreign exchange reserves and, where one exists, the exchange-rate target. In a panic it can lend to solvent banks that cannot fund themselves, the role known as lender of last resort.
For payment and fintech companies the central bank is often also the licensing authority or payment-system overseer, and access to its settlement accounts, directly or through a sponsor bank, decides which rails a firm can reach. Central banks coordinate internationally through the Bank for International Settlements.
In practice
Powers differ by country. In some jurisdictions the central bank supervises banks and licenses payment firms; in others those jobs belong to separate regulators.
See also
- Central Bank MoneyCentral bank money is money that is a direct liability of the central bank: banknotes and coins, and the balances that commercial banks hold in their accounts at the central bank. It carries no credit risk and is the safest settlement asset.
- Commercial Bank MoneyCommercial bank money is the money that exists as deposits at commercial banks. It is a private bank's promise to pay, created when banks lend, and makes up the large majority of the money that households and businesses actually use.
- Bank for International SettlementsThe Bank for International Settlements (BIS) is an international institution in Basel, owned by central banks, that provides banking services to them and hosts the committees that write global standards for bank capital and payment infrastructure.
- Foreign Exchange ReservesForeign exchange reserves are the foreign-currency assets a central bank holds and can use at short notice: deposits and government securities in major currencies, gold, Special Drawing Rights and the country's reserve position at the IMF.
- RTGSRTGS stands for real-time gross settlement: a system that settles each payment individually and finally in central bank money, rather than offsetting many payments against each other and settling only the difference at the end of a cycle.
- Master AccountA master account is an account held directly at a Federal Reserve Bank. It gives its holder settlement in central bank money and direct access to US payment systems, instead of reaching them through a commercial bank that holds an account on its behalf.