Commercial and Central banks
There are two main types of banks, Commercial and Central banks. Commercial banks are where you store money whereas Central banks are used to supervise the banking system of a country.
Now let’s look at the purposes of these banks.
Functions of Commercial Banks:
They are profit making banks, such as HSBC, Standard Chartered. 1. Keeping money safe- Individuals/ Companies open bank accounts and deposit money into their saving accounts accounts. Current Accounts are used to store money, which can be withdrawn to make payments. Banks pay them interest rates depending on how much they saved.
2. Lending- When you need financial support, you can borrow money from the bank.
a. Loans – Fixed amount of money for fixed period of time. Money should be returned to the bank plus interest rates
b. Overdraft- Withdrawing more than has been put into accounts
c. Credit Card- Users buy goods but pay later Debit Card- Payment using money from your account
d. Mortgages- loans to purchase land or property, returned over a long period of time, the bank keeps the deeds
3. Used for transactions- cheques/ internet banking, for users to pay another person or company
4. Provide foreign currency- Banks can provide you with different currencies in the world. Automated teller machines (ATM) allows you to easily withdraw money
Functions of Central Banks They are the “banks of commercial banks”, such as People’s bank of China. They kind of supervises all those commercial banks so they won't do anything nasty.
1. Supervise monetary policies- Set interest rate, determine amount of money flow in economy.
2. Facilitate healthy transactions- sets up rules
3. Legal Tender- print notes and coins
4. National debts- helps government borrow money from other countries
5. Sorts out debts between commercial banks
6. Collects tax and carries out government spending
7. Maintain Financial Stability with International Monetary Fund
