What defines the main function of a central bank?

The primary function of a central bank is to regulate banks and financial institutions. Central banks play a critical role in the financial system by overseeing and regulating commercial banks, ensuring stability, and maintaining public confidence in the financial system. This regulation includes setting reserve requirements, conducting bank examinations, and providing guidelines for lending practices. By managing monetary policy—such as controlling interest rates and influencing money supply—a central bank helps foster economic growth while safeguarding against risks like inflation or bank runs.

Additionally, central banks act as a lender of last resort to the banking system, providing liquidity to banks in times of financial distress. This regulation centers on ensuring that financial institutions operate safely and soundly, thereby supporting the overall stability of the financial system. The influence of a central bank extends to various other economic factors but primarily centers on regulation and oversight of the banking sector.