Central Banks

Central Banks

The largest banks of Canada include the Toronto-Dominion Bank (TD), the Canadian Imperial Bank of Commerce (CIBC), the Bank of Montreal (BMO), the Royal Bank of Canada (RBC), the Scotia Bank and the Hongkong and Shanghai Banking Corporation (HSBC), among others. However, all these banks are commercial banks and individuals are able to open and maintain accounts at these institutions. Alternatively, central banks are banks where only the government can have an account. Central banks print the national currency, regulate the national economy with monetary policy and are capable to stimulate aggregate demand.

Further, examples of central banks include the European Central Bank, the Federal Reserve in the United States of America, and the Bank of England in the United Kingdom. Managing the country's money supply is one of the main functions of a central bank and is commonly known as monetary policy. Also, commercial banks turn to central banks in times of financial crisis. Indeed, central banks act as lenders of last resort. Central banks also manage and set interest rates, which then translate into bank lending rates.

Trust company Bank of Montreal. Photo by Elena

Historically, the first central bank is considered to be the Bank of Amsterdam established in 1609. Notwithstanding, it is widely believed that most modern central banks were modelled after the Bank of England established in the 17th century. Nonetheless, the Bank of England back in the days did not fill the same functions as central banks today. Further, the origins of central banking as it is understood today may lay with the Bank Charter Act of 1844, which restricted the power to issue banknotes to the Bank of England.

Finally, fiscal policy has to do with the collection of taxes. Governments rely on the revenue they collect from taxpayers to fund national defence, infrastructure, build roads, keep the public safe, provide healthcare and so on. The government and central bank of a nation work together to avoid contradiction of monetary and fiscal policies.