What is the Role of Central Bank

Banking institution are available almost everywhere nowadays, but an extra caution should be made before choosing the best one to entrust savings. It is noted that central banking in Australia came later than in the other advanced industrial economies. Banks here do not naturally evolve as a central bank that has the ability of providing a role that is stabilized. Central banking here mark as a response to circumstances of war instead of the intellectual debate resolution on central banking needs. Banks in this country are closely monitored by the Central Bank aiming to lead economic growth, but have you ever wondered or fully understand their role in the economy?

Managing the currency, supervising banking institutions and issuance of money are the primary roles of the Central Bank. It may sound simple but it is a very complicated task. Setting guidelines for banking institution is a given but one may ask: why is there a need to control currency, why control the issuance of money? Overall, the establishment of a nation Central Bank or Reserve Banks came about to set guidelines in the trading of goods and services.

Centuries ago, we exchange goods with goods. Say for example, one buys a food and pays for it with a piece of cloth. With the continued growth of this barter system, people have learned to put value on items that were in demand and asking a more valuable item for the exchange. If you think about it, how does one determine which is more valuable if exchanges are done in goods? Today, money is the medium of exchange. It is the most appropriate way to put figures as to how much an item cost. Prices are set to products and services depending on supply and demand then money is used to pay for the desired item.

Banking system eventually evolved in order to safeguard money. Yet, confusion came about especially with understanding foreign currency and its value since individual banks created their own notes. This is not just pertaining to currencies outside Australia but back then Australian Banks created their own money notes. Banks also compete with each other perhaps to a degree of compromising depositor’s money. Back then banking system was unreliable.

A central banking system came about to set a recognize currency in the country and guidelines on how banking institution facilitate their transactions.

1. Managing the currency

Can you imagine if all banks created their own notes without control? How can a standard rate or value of the money be determined? Central Bank carefully determines the creation of notes before making them depending on the demand. A set guidelines or basis is made for the production of money making it fair in today’s trading system. Determining acceptable foreign currency also falls in this category. This allows an easy barter of currency when the time comes (ex. exchanging EUR to AUD).

2. Acts as a governing body of Banks

The Central Banks sets policy in interest’s rates, and monitor’s procedure on financial handling. This allows depositors to have trust in banks given that they will not be cheated. By helping with guidelines of loans and interest rates, the Central Banks helps strengthen individual banks. A structured payment system has also been made by the Central Banks allowing its system to facilitate transactions smoothly.

3. Creation of Currency

Centralizing and ensuring one kind of currency is being made in the country. The Central Bank creates a standard identity on the notes assuring the public that it is an effective payment or means of exchange at any other institutions.

As a long term goal, Central Bank’s role is to maintain financial stability in the country through Bank Institutions. It works by accommodating more financial investors whether locally or internationally, setting policies that allow a steady growth within the bank and eventually a domino effect to its depositors and to the country.