Understanding the Role of Central Banks in the Financial System

Abstract

The main responsibility of the central banks is to implement monetary policies. In this framework, they define interest rates and the amount of the money in the financial system. Hence, it can be said that central banks have the critical role in the development of the financial system. Because of this situation, it is obvious that central banks should satisfy some requirements, such as independence, in order to contribute to the effectiveness of the financial systems. Parallel to this aspect, this chapter aims to understand the role of the central banks in the financial system. In this context, the purpose and historical background of the central banking are explained. In addition to this situation, the subject of the central bank independence is identified as well. In the final aspect, important accounts in the analytical balance sheet of the central bank are defined.