ASSINGMENT NO 2

Name : Momina Yaseen

Roll no : 20102001-090
Department : BBA GREY
Submitted to : Ma’am Shamim
Subject: Money banking and finance
Date : 17-05-2023
Central bank
A central bank is a financial institution that is responsible for managing a country's money supply,
formulating and implementing monetary policy, and overseeing the functioning and stability of
the financial system. It acts as the apex monetary authority within a nation and typically operates
independently of the government or other political institutions.

Role of central bank

The role of a central bank can vary to some extent depending on the specific country and its
economic system, but the following are the primary functions and roles of a central bank:

o Monetary Policy:
One of the key responsibilities of a central bank is to formulate and implement
monetary policy. It controls the money supply and interest rates in the economy to
achieve specific macroeconomic objectives such as price stability, economic
growth, and full employment. Central banks use various tools, including open
market operations, reserve requirements, and setting benchmark interest rates, to
influence the cost and availability of credit and regulate the overall economy.
o Currency Issuance:
Central banks have the authority to issue and regulate the country's currency. They
are responsible for designing and printing banknotes and coins, maintaining their
integrity, and ensuring an adequate supply of currency to meet the demands of the
economy.
o Banker to the Government:
Central banks often act as the banker and financial advisor to the government. They
manage the government's accounts, facilitate transactions, provide short-term
financing, and assist in debt management. They also advise the government on
fiscal and economic policies to ensure their compatibility with monetary objectives.
o Lender of Last Resort:
Central banks serve as the lender of last resort to commercial banks and other
financial institutions during times of financial distress. They provide emergency
liquidity to prevent bank runs, stabilize financial markets, and maintain the overall
stability of the banking system.
o Supervision and Regulation:
Central banks typically have a regulatory and supervisory role over commercial
banks and other financial institutions. They establish and enforce prudential
regulations, monitor financial institutions' activities, and ensure their compliance
with laws and regulations. This oversight aims to safeguard the stability and
integrity of the financial system.
o Exchange Rate Management:

In countries with a flexible exchange rate regime, central banks may intervene in the
foreign exchange market to stabilize the value of the domestic currency. They may buy
or sell foreign currencies to influence the exchange rate and maintain competitiveness
in international trade.

Overall, the central bank plays a crucial role in maintaining price stability, promoting
economic growth, ensuring financial system stability, and providing a stable monetary
framework for the functioning of the economy.

Clearing house

As a clearinghouse, a central bank acts as a central counterparty for the settlement of

financial transactions between banks and other financial institutions. It provides a platform
for the efficient and secure transfer of funds, securities, and other financial instruments
among participants in the financial system. Here's how the central bank works as a
clearinghouse:

Clearing and Settlement: When a bank receives a payment instruction or a request for a
transfer from another bank or institution, it sends the transaction details to the central bank's
clearing system. The clearing system processes and verifies the transactions, ensuring that
all necessary information and funds are available for settlement.

o Risk Management:

As a clearinghouse, the central bank plays a crucial role in managing and mitigating
settlement and systemic risks. It ensures that banks have sufficient liquidity to settle
their obligations, monitors the overall health of the financial system, and takes
necessary actions to address any potential risks or disruptions.

o Oversight and Regulation

:Central banks also provide oversight and regulation of the clearing and settlement
systems. They establish rules, standards, and procedures to ensure the safety,
efficiency, and integrity of the clearing process. They may set requirements for
participant eligibility, risk management practices, and the use of appropriate
technology and infrastructure.
 o Central Bank Money
One important aspect of central bank clearing is the use of central bank money.
Central bank money, which includes reserves and physical cash, is the most secure
and trusted form of money. During the settlement process, banks may need to settle
their obligations using central bank money, which provides a final and irrevocable
settlement.

By acting as a clearinghouse, central banks enhance the efficiency and stability of the financial
system by providing a trusted and secure infrastructure for the settlement of transactions. They
help minimize risks, facilitate liquidity management, and ensure the smooth functioning of
payment and settlement processes among financial institutions.

Advantages of clearing house

o No need to keep large money

o Pleasant relations
o Transmission of cash
o It save the time and labor
o Control over robbery
o Larger credits
o Removal of competition
o Control over credit
o Pace of economic development
o Effective banking system
o Getting information
o Better services to customers
o Useful suggestions
o Development of trades
o Uniform policy