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Central Bank

 A central bank, reserve bank, or monetary authority is an institution that manages the currency and monetary policy of a state or formal monetary union, and oversees their commercial banking system. It contrast to a commercial bank, a central bank possesses a monopoly on increasing the monetary base. Most central banks also have supervisory and regulatory powers to ensure the stability of member institutions, to prevent bank runs, and to discourage reckless or fraudulent behavior from member banks.

Central banks in most developed nations are institutionally independent from political interference. Still, limited control by the executive and legislative bodies exists.

Functions of a central bank include:
  1. Monetary policy: by setting the interest rate and controlling the money supply;
  2. Financial stability: acting as a government's banker and as the banker's bank ("lender of last resort");
  3. Reserve manafement: managing a country's foreign-exchange and gold reserves and government bonds;
  4. Banking supervision: regulating and supervising the banking industry;
  5. Payments system: managing and supervising means of payments and inter-banking clearing system;
  6. Coins and notes issuance;
  7. Other functions of central banks may include economic research, statistical collection, supervision of deposit guarantee schemes, advice to government in financial policy.
Central banks implement a country's chosen monetary policy.


At the most basic level, monetary policy involves establishing what form of currency the country may have, whether a fat currency, gold-backed currency (disallowed for countries in the International Monetary Fund), currency board or a currency union. When a country has its own national currency, this involves the issue of some form of standardized currency, which is essentially a form of promissory note: "money" under certain circumstances. Historically, this was often a promise to exchange the money for precious metals in some fixed amount. Now, when many currencies are fiat money, the "promise to pay" consists of the promise to accept that currency to pay for taxes.

A central bank may use another's currency either directly in a currency union, or indirectly on a currency board. In the latter case, exemplified by the Bulgerian National Bank, Hong Kong and Latvia (until 2014), the local currency is backed at a fixed rate by the central bank's holdings of a foreign currency. Simikar to commercial banks, central banks hold assets (government bonds, foreign exchange, gold, and other financial assets) and incur liabilities (currency outstanding). Central banks create money by issuing banknotes and loaning them to the government in exchange for interest-bearing assets such as government bonds. When central banks decide to increase the money supply by an amount which is greater than the amount their national governments decide to borrow, the central banks may purchase private bonds or assets denominated in foreign currencies.

The European Central Bank remits its interest income to the central banks of the member countries of the European Union (Eurozone). The US Federal Reserve remits most of its profits to the US Treasury. This incone, derived from the power to issue currency, is referred to as seigniorage, and usually belongs to the national government. The state-sanctioned power to create currency is called the Right of Issuance. Throughout history, there have been disagreements over this power, since whoever controls the creation of currency controls the seigniorage income. The expression "monetary policy" may also refer more narrowly to the interest-rate targets and other active measures undertaken by the mobetary authority.

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