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Central banks regulate foreign exchange supplies and policies to ensure stability of national currency and money supply. They may distribute foreign currency, implement monetary policy, regulate banking industry, set interest rates, and act as lender to smaller banks. Examples include the Federal Reserve in the US and the European Central Bank in Europe. Supporters argue that central banks prevent financial disaster, while critics claim they disrupt financial markets.
A central bank or reserve bank is the organization within a specific country or a coalition of countries that regulates all foreign exchange supplies and related policies for that particular area. Central banks do a number of things, but their most important job is to make sure that the national currency and the money supply remain stable. Depending on the country, these may be owned and controlled by the government or may be subject to regulations created specifically to prevent extensive government interference.
The specific functions of a central bank can include many different tasks. This type of bank has responsibilities that may include the distribution of foreign currency and the implementation of monetary policy. Regulation of the banking industry and setting official interest rates can also be done there. Some countries ask their central bank to be the bank for the government and also a lender to smaller banks, allowing them to get out in tough times.
In the United States, the Federal Reserve is the main monetary authority. Created by Congress, it operates independently of the United States federal government. In Europe, the European Central Bank controls the euro, which is a form of currency used by member countries of the euro zone, a subset of the European Union (EU). The member countries of the euro zone have eliminated their own national currency and their central banking system. The only European countries without a bank of this type are Monaco and Andorra.
Those who believe that central banks are a vital part of the world economy may argue that without some sort of regulatory agency to limit currency, set interest rates, and regulate banking practices, a country would quickly fall into financial disaster. Proponents may argue that without such control, the value of the country’s currency would be unstable, interest rates would skyrocket, and banks would likely close, leaving depositors with no chance to get their money back. Others argue that central banks disrupt the opening of financial markets and do more harm than good.
Smart Asset.
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