Difference Between Central Bank and Commercial Bank

Difference Between Central Bank and Commercial Bank

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Rashmi
Rashmi Karan
Manager - Content
Updated on Feb 7, 2024 17:29 IST

Commercial and central banks are essential parts of the country’s economy. While commercial banks deal directly with the end users, central banks offer their products and services to the government and other commercial banks. There are several differences between commercial and central banks regarding the services and products offered, the clients they serve, their responsibilities, etc. This blog covers each type of bank and the difference between central bank and commercial bank.

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Central Banks

Central banks do not deal directly with customers. A single central bank in a country controls the entire banking industry. The country’s central bank holds deposits for the government. The government deposits funds to provide health insurance, social welfare, unemployment benefits, etc. Central banks offer short-term loans to commercial banks in the country. These loans are made to banks for overnight financing at interest rates lower than the fed funds rate. Central banks offer baking services such as clearing funds between member banks, issuing government bonds, paying various social security and Medicare programs, etc.

Central banks also play a crucial role in regulating the country's control policy. The central bank raises or lowers interest rates, raises or lowers reserve requirements, etc. The central bank formulates the banking rules and regulations and keeps a tab on whether the implemented banking regulations are complied with by conducting regulatory tests.

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Commercial Banks

Commercial banks are banks that serve customers directly. These banks offer individuals and businesses various banking products and services. The services offered are generally well-tailored to commercial banks’ specific customer segments.

They offer various options to individuals and businesses, such as current accounts, savings accounts, certificates of deposit, etc. A primary function of commercial banks is lending. Credit products include business loans, business financing, home and mortgage, auto, and personal loans. Commercial banks also offer several services to their customers, such as security deposit services, mobilizing savings for capital creation, financing the industry, agriculture, and businesses, financing activities that generate employment, etc.

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Difference Between Central Bank and Commercial Bank

Central Bank Commercial Bank
Central banks offer products and services to the country’s government and other commercial banks.  Commercial banks offer banking products and services to individuals and businesses. 
There is only one central bank that oversees the entire banking operation.    There are several commercial banks in a country with many branches.
The central bank makes decisions related to the nation’s monetary policy that affect the commercial banks that operate in it. Central banks depend on commercial banks to successfully implement monetary policy.
The central bank provides rate services for banks in a region, as well as their respective public entities. Commercial banks offer services ranging from safe deposit boxes to sending foreign currency. They charge specific fees that will vary depending on the scope.

The function of the central bank is to

  • Monitor, control, and direct the economic system of a country
  • Serve as a bank of banks, and the State
  • Control inflation
  • Provide specific regulations that generate liquidity and employment.
Commercial banks offer and deal directly with the public and business entities by delivering products and services to generate an organized business system.
Central banks offer loans to commercial banks. Commercial banks offer lending services to individuals and businesses.

We hope this article helped you understand the significant difference between central and commercial banks. 

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FAQs - Difference Between Central Bank and Commercial Bank

What is a central bank?

A central bank is the apex of a country's financial institution. It is responsible for formulating and implementing monetary policy to maintain price stability, promote economic growth, and ensure a stable financial system. Central banks also regulate and supervise commercial banks and manage the country's foreign exchange reserves.

What is a commercial bank?

A commercial bank is a profit-making institution that provides financial services to individuals and businesses. These services include accepting deposits, making loans, issuing credit cards, and providing investment services. Commercial banks play a vital role in the financial system by providing liquidity to the economy and facilitating the flow of funds.

What is the role of a central bank in the financial system?

The role of a central bank in the financial system is to ensure that the system is stable and operates efficiently. Central banks regulate and supervise commercial banks, manage the country's foreign exchange reserves, and provide economic liquidity.

What is the role of a commercial bank in the financial system?

The role of a commercial bank in the financial system is to provide liquidity to the economy and to facilitate the flow of funds. Commercial banks do this by accepting deposits, making loans, issuing credit cards, and providing investment services.

Who owns central and commercial banks?

A central bank is typically owned by the government of the country in which it is located. On the other hand, a commercial bank can be owned by various entities, including private individuals, corporations, and governments. Commercial banks can also be publicly traded companies.

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Rashmi Karan
Manager - Content

Rashmi is a postgraduate in Biotechnology with a flair for research-oriented work and has an experience of over 13 years in content creation and social media handling. She has a diversified writing portfolio and aim... Read Full Bio

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