What do banks really do Essay Example | Topics and Well Written Essays - 4000 words

What do banks really do - Essay Example Commercial banks are financial institutions that provide loans, savings and deposits accounts as well as transactional services to entities and individual members of a country. On the other hand, Central Bank is a supreme monetary bank in any country, which regulates and controls economic as well as monetary affairs in a specific country. Central Banks regulates money supply via specific monetary and non-monetary policies to maintain stable and robust macroeconomic environment. This is in order to enhance sustained economic growth and development across different sectors in the economy. Central banks and commercial banks play distinct roles in the economy. In general, the central banks supervise all financial institutions including commercial banks and advices government on what policy action to pursue to maintain robust and stable macro economic environment. Commercial banks provide both monetary and non-monetary services to members of the public and different entities (companies, s ocieties and institutions). To understand the roles of banks in any given country, it is important to state and explain the different roles that different banks play. Therefore, this discussion is divided into two main parts. The first part describes the roles of central banks in any given economy and the second part describes the roles of commercial banks.... They are the only banks with legal mandate to create and issue currencies inform of notes and coins. Central banks are responsible for regulating quantity of all notes and coins issued. They also protect internal and external value of national currency (Backhaus, 2005). Before the central banks issue notes and coins, it must fulfill certain requirements to avoid inflation, currency devaluations and shortage of money in the economy among others. For example, it must keep reserves against all the coins and notes issued at any given time. As a sole issuer of legal tender, central banks easily control credit creation, maintain confidence of the people because it has government backing and recognition, and ensure that all currencies issued are uniform and acceptable. Secondly, central banks act as a bank, an agent and an advisor of banks as well as other financial institutions. Central banks act as lender of last resort. This happens when commercial banks fail to secure loans or advances from other financial institutions to run it banking operations. IMF (2008) asserts that central banks provide funding to financial institutions as lender of last resort to restore confidence in the banking system and avoid fire sales of banks assets by providing liquidity to financial institutions. Central banks also act as custodians and clearing agent for commercial banks. Central bank collects statistical information regularly on matters touching money, public debt, inflation, foreign exchange, trade policies, government securities as well as banking among other information. The information collected and analysed by central banks is disseminated to relevant financial institutions to assist them make informed choices on what strategies to