Why the central bank controls activities of commercial banks
- To ensure price stability. That is to avoid rapid increases in the general price level, i.e. inflation.
- To maintain external reserves in order to safeguard the international value of the country currency.
- To maintain a reasonable balance of payment between the country's international receipts and payments.
- To ensure full employment.
- To promote stability and a sound financial structure conducive to balanced and sustained rate of economic growth.
Differences between Central banks and Commercial banks
The central banks are primarily government banks and bankers to commercial banks. They do not do direct business with the general public.
They do not aim to maximize profit which is the main objective of commercial banks. The business of the central bank is to control the stock of money so as to promote public interest and the profit ^ motive is subordinate to this principal aim.
Commercial banks are generally owned by shareholders while central banks are normally nationalized institutions.
The People who govern central banks are much more closely involved with the work of government departments than are their counterparts in commercial banks.
Central banks have a supervisory role over the commercial banks, which usually has the backing of the law.
They maintain accounts for commercial banks in the same way commercial banks operate accounts for individual customers and are able to influence the actions or activities of commercial banks and other credit institutions, particularly with regard to lending.
Central banks have the sole right to issue currency.
They do not compete for business with the commercial banks but they usually maintain government bank accounts.
They not provide a full banking service for personal and Commercial customers.
Central banks act as lenders of the last resort to the banking system,