A central bank issues currency, is the government's bank and the banks' bank, and runs monetary policy.
A central bank is the bank at the centre of a country's money and banking system. In Singapore, it is the Monetary Authority of Singapore (MAS).
It issues the country's notes and coins. It acts as banker to the government, holding its accounts. It acts as banker to the commercial banks, which keep accounts with it.
It is the lender of last resort. If a commercial bank runs short of cash, the central bank can lend to it and stop a panic. It also supervises banks to make sure they are run safely.
It carries out monetary policy, using tools such as interest rates or the exchange rate to keep prices stable. It also manages the country's reserves of foreign currency.
- Central bank
- Bank at the centre of the money system; in Singapore, MAS.
- Lender of last resort
- Lends to banks in difficulty to prevent panic.
- Other roles
- Issues currency, banks for government and banks, runs monetary policy, supervises banks.
Worked example: The importance of a central bank
Suppose rumours spread that a large bank is about to fail, and customers rush to withdraw their savings.
- Risk: a bank keeps only part of its deposits as cash, so it cannot repay everyone at once.
- Central bank role: as lender of last resort, it lends cash to the bank.
- Effect: customers can withdraw money, the panic calms, and the banking system keeps working.
- Importance: confidence in banks is protected, so people keep saving and firms can still borrow.
Watch out for this
The central bank offers savings accounts to the public.
A central bank works with the government and commercial banks. Ordinary people and firms use commercial banks.
Check your understanding
Which function does a central bank perform that a commercial bank does not?
- Acting as the government's bank
- Providing loans to households
- Offering savings accounts to the public