Course

• Financial Institutions
• Teacher: Faran Ali
• Recommended Books:
• Madura, Jeff. Financial Markets and Institutions, Florida: Thomson
Learning Inn. (Latest Ed.)
• Thygerson, J. Kenneth. Financial Markets and Institutions (Latest Ed.),
• Saeed, Khawaja Amjad. Financial Institutions in Pakistan: Operational
and Procedural Aspects
• Introduction to Financial Systems & Banking Regulations published by
Institute of Bankers Pakistan (IBP) Publication for ISQ Stage 1

1
 Custodian of cash Reserves
• All commercial banks in a country keep a part
of their cash balances as deposits with the
central bank, may be on account of
convention or legal compulsion. They draw
during busy seasons and pay back during
slack seasons. Part of these balances is used
for clearing purposes. Other member banks
look to it for guidance, help and direction in
time of need.
2
 Custodian of foreign Reserves
• It is the function of the central bank to
maintain the exchange rate fixed by the
government and manage exchange control
and other restrictions imposed by the state.
Thus, it becomes a custodian of nation’s
reserves of international currency or foreign
balances.

3
 Lender of last resort
• Central bank is the lender of last resort, for it
can give cash to the member banks to
strengthen their cash reserves position by
rediscounting first class bills in case there is a
crisis or panic which develops into ‘run’ on
banks or when there is a seasonal strain.
Member banks can also take advances on
approved short-term securities from the
central bank to add to their cash resources at
the shortest time.
4
 Clearing House
• Central bank also acts as a clearing house for
the settlement of accounts of commercial banks.
A clearing house is an organization where
mutual claims of banks on one another are
offset, and a settlement is made by the payment
of the difference. Central bank being a bankers’
bank keeps the cash balances of commercial
banks and as such it becomes easier for the
member banks to adjust or settle their claims
against one another through the central bank.
5
Conclusion

6
 Study Material
• https://www.economicsdiscussion.net/banks
/central-banking/8-major-functions-of-
central-bank-
discussed/8375#:~:text=Eight%20major%2
0functions%20of%20central,8)%20Protecti
on%20of%20Depositor's%20Interest.