How the central bank controls the financial activities of commercial banks

A country’s central bank controls the financial activities of commercial banks in the following ways:

1. Open market operations: These are the buying and selling of securities from and to commercial banks in order to increase or decrease the volume of money in circulation. When the central bank thinks that the money supply is too low and wants to increase it, it buys securities from commercial banks. Buying securities will increase the volume of money held by commercial banks and increase their ability to lend more to the public, which will help circulate more money. On the other hand, if the central bank thinks the money supply is too high and wants to limit it, it will sell securities to commercial banks. This will drain more money from commercial banks while reducing their lending powers, thereby reducing the amount of money in circulation in the country.

2.Bank Interest Rate: Also known as the discount rate, this is the interest rate charged by the central bank to commercial banks and other financial institutions for discounting their bills. If the central bank feels like restricting the lending powers of commercial banks and other financial institutions, it will raise its discount rate, which will force other interest rates to rise. If the interest rate charged by commercial banks and other financial institutions is high, because the central bank interest rate is high, borrowing will become very exorbitant and people will be deterred, and the lending rate will decrease if the central bank lowers its discount rate, the lending rates of commercial banks and others will also decrease financial institutions. This makes borrowing cheaper and tempts people to borrow.

how central bank controls commercial banks -