Central & Commercial Banks (CIE IGCSE Economics)

• Central Banks play a vital role in maintaining stability in the financial system. Additionally, the policy tools at their disposal help to meet Government economic objectives & create economic growth

Central Banks play four important roles in the economy

1. Implementation of monetary policy:  This is more fully explained in  Sub-topic 4.4.1
   
   
2. Banker to the government: The Government sets the annual budget but it is the Central Bank that manages the tax receipts & payments. In 2022 there were 5.7 million public sector workers in the UK who had to be paid by the Central Bank each month
   
   
3. Banker to the banks – lender of last resort: Commercial banks are able to borrow from the Central Bank when they run into short-term liquidity issues. Without this help, they might go bankrupt leading to instability in the financial system - & a potential loss of savings for many households
   
   
4. Regulation of the banking industry: the high level of asymmetric information in financial markets requires that commercial banks are regulated in order to protect consumers
   

• Financial markets are any place or system that provide buyers & sellers the means to exchange goods/services & trade financial instruments
  • Financial instruments include loans, bonds, equities, & international currencies
      
• Commercial Banks play a central role in financial markets

1. They facilitate saving: storing money for future use is essential for households & firms. It also provides a pool of money that financial institutions can lend i.e. one person's savings is another person's borrowing
   
   
2. They lend to businesses & individuals: access to credit is a key requirement for economic growth & development. Being able to borrow money speeds up consumption by households & investment by firms. It also allows households or firms to purchase assets & pay them off over an extended period of time e.g. mortgages on home purchases
   
   
3. They facilitate the exchange of goods & services: each purchase of goods/services requires the movement of money between at least two parties. Commercial Banks provide multiple ways for this exchange to happen including phone apps (e.g. Google Pay), debit cards, credit cards & bank transfers
   
   
4. They provide forward markets in currencies & commodities: forward markets are also called futures markets. They provide some price stability in commodity markets & enable investors to make a profit by speculating on future prices
   
   
5. They provide a market for equities: equities are shares in public companies that are listed on stock exchanges around the world. Commercial Banks facilitate both long term investment & speculation by providing platforms which connect buyers & sellers