question_answer

Explain the 'Banker's Bank as a function' of the central bank.

Or

Explain the 'Bank of Issue function' of the central bank.

 

Answer:

Banker?s Bank: Central bank is the apex bank of all the commercial banks and financial institutions in the country. It holds the same relationship with the commercial banks as commercial bank holds with its customer. The central bank accepts deposits from the commercial banks and holds it as reserves for them. The commercial banks are compulsorily required to hold a part of their deposits as reserves with the central bank in accordance with the cash reserve ratio (CRR). In addition to the CRR requirements, the commercial banks hold reserves with the central bank for clearing their settlements with other banks and to fulfil their requirements of inter-bank transfers.

Or

Bank of issue function of central bank implies that Central Bank has the exclusive authority to issue the currency (notes + coins). The currency issued by the central bank is known as ?legal tender money? i.e., the value of such currency is backed by the central bank. However, the currency issued by the central bank is its monetary liability. In other wore the central bank is obliged to back the currency issued with assets of equal value such as gold coins and bullions, foreign exchange, etc. In addition to issuing currency to the general public, the central bank also issues currency to the central government of the country. That is, the central government if required, can sell its securities to the central bank and in return gets the required cash currency.