What this lesson teaches
I can explain the roles of central banks and commercial banks.
Syllabus K343, 3.1.2. Banking: role and importance of central banks; role and importance of commercial banks
Make a guess
You want to open a savings account. Can you open one at the Monetary Authority of Singapore (MAS)?
- No. MAS banks for the government and the banks, not the public.
- Yes, but just for people with large savings to deposit.
- Yes. MAS is the biggest bank, so it takes deposits from anyone.
Show the answer
No. MAS banks for the government and the banks, not the public.
A central bank holds the government's accounts and lends to commercial banks. Households and firms use commercial banks.
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 of these is a job for the Monetary Authority of Singapore (MAS) but not for a commercial bank such as DBS?
- Providing loans to households
- Offering savings accounts to the public
- Acting as the banker to the government
Show the answer
Acting as the banker to the government
Right. MAS holds the government's accounts and acts as its banker, which commercial banks do not do.
Check your understanding
Which is a function of a central bank rather than a commercial bank?
- Lending to small businesses
- Giving credit cards to customers
- Issuing the country's notes and coins
- Taking savings deposits from households
Show the answer
Issuing the country's notes and coins
Right. Only the central bank, or the authority it works with, issues the currency.