As the old saying goes; “money makes the world go round”, but when it comes to monetary policy, interest rates, and cost credit availability, it is central banks that make money go around. So what is a central bank, how many central banks are there, what are the biggest central banks, and what do they do exactly?
What Is a Central Bank?
A central bank is the key financial body responsible for overseeing, formulating, and implementing financial policies and setting interest rates among countries. Central banks also supervise and regulate other member banks.
Moreover, it is worth noting that central banks are often portrayed as politically independent, even though some are nationalized. Nonetheless, even if the government does not own and control a central bank, its privileges are established and protected by law even if it isn't legal.
Most importantly, the key difference between a central bank and other banks is that the former has a legal monopoly on banknotes and cash. Also, in addition to setting requirements for the banking industry, such as maintaining sufficient cash reserves, central banks can lend money to insolvent financial and governmental bodies as a last resort.
What Are the Biggest Central Banks?
There are about 214 central banks in the world from officially recognized countries. While the number of central banks in the world is innumerable, there are a few prominent names that always manage to make it to the headlines and are considered the most influential institutions in the world.
The US Federal Reserve, the European Central Bank (ECB), the Bank of England (BOE), the Swiss National Bank (SNB), the Reserve Bank of Australia (RBA), and the Bank of Japan (BOJ) are considered some of the biggest and most influential central banks.
How Many Central Banks Are There?
There are about 222 central banks in the world from various countries and regions and 8 of them come from countries that are partially or not recognized like Abkhazia, occupied Northern Cyprus, Kosovo, Somaliland, South Ossetia, Taiwan, and Transnistria.
The US Federal Reserve System (The Fed)
The Federal Reserve (Fed) is perhaps one of the most important and powerful monetary policy figures in the world. It’s considered widely popular because this central banking system controls interest rates and influences the US dollar which is used in about 90% of the world’s transactions. It is also responsible for regulating the monetary policy in the world’s largest economy.
The Fed is segmented into 3 entities: the Board of Governors, the Federal Reserve Banks, and the Federal Open Market Committee (FOMC).
The Board of Governors
The Board of Governors is the Fed’s key entity as it guides and influences the latter’s policy decisions. The Board of Governors is located in Washington D.C. and consists of the 7 members elevated by the US President and approved by the Senate. Each governor should come from a different Federal Reserve District and geography.In addition, the responsibilities that are provided by the Federal Reserve Act which is the law that established the Federal Reserve System in 1913, are fulfilled by the Board of Governors. Moreover, the Federal Reserve Act stipulates that each governor must represent a particular sector of the economy, namely financial, agricultural, industrial, and commercial.
While each of the governors can serve for a longer time, generally speaking, their term’s length is 14 years. Nonetheless, the appointment of governors tends to alternate every two years to prevent US Presidents from biasedly appointing governors who support their policies only. Among some of the crucial economic issues, the governors tackle affordable housing, consumer baking laws, and more. The governors also supervise member banks and commercial banks and participate in the FOMC committee.
The Federal Reserve Banks
There are 12 Federal Reserve Banks that are governed by nine-member boards. Each Reserve Bank is located in a different district in the US, namely Chicago, New York, St. Louis, Philadelphia, Minneapolis, Dallas, Boston, Richmond, San Francisco, Atalanta, Cleveland, and Kansas City to ensure that the diverse needs of different communities are being addressed equally. The 12 banks have 24 branches offering services to the public, banks, and the US Treasury.
The Federal Open Market Committee (FOMC)
The Federal Open Market Committee (FOMC) is the Federal Reserve’s monetary policy committee. This committee directs the Fed’s open market operations (OMOs) which are the buying and selling of securities in the open market. There are 12 members in the FOMC of which 7 are from the Board of Governors,4 are Reserve Bank presidents, and one is the president of the Federal Reserve Bank of New York. This FOMC holds monetary policy meetings 8 times a year and it’s known for either its hawkish or dovish stances. Hawkish Fed members are those like Fed Chair, Jerome Powell, who favor monetary tightening, while dovish members are those who favor moderate monetary policies.
The FOMC’s meetings are highly anticipated events by market watchers and traders alike, in general, and over the past year, in particular. This comes in light of the fact that inflation has been surging, recession fears have been growing, and economic turmoil caused by a cocktail of factors ranging from the war in Ukraine to high interest rates and market sell-offs have taken a toll on the economy. Hence, FOMC’s meetings are usually awaited in order to see if anything shifts in the market since they control interest rates.
In the past few FOMC meetings, a more hawkish monetary policy was taken and interest rates were hiked to combat inflation. As a result of higher interest rates, many stocks from the tech sector fell and had to go through layoffs. This is because, in times of inflationary pressure and higher interest rates, traders and investors tend to shy away from tech-heavy stocks and opt for inflation-proof safe-haven assets.
European Central Bank (ECB)
The European Central Bank (ECB) is located in Frankfurt, Germany, and is the Eurozone’s (EZ) central banking system. It has been the European Union’s (EU) central bank since 1998 and is responsible for monetary policy-making and taming inflation in the Eurozone’s 19 European countries.
The ECB is segmented into 3 key bodies; the Governing Council, the Executive Board, and the General Council. The Governing Council is the primary governing board and is comprised of the Executive Board and the EU’s national central banks’ governors. The Executive Board tackles daily ECB tasks and includes within it the ECB President, Christine Lagarde, and 4 other members who are appointed for 8-year terms by leaders of EU countries.
Moreover, the ECB aims for 2% inflation over the medium term, in order to prevent economic destabilization caused by deflation. Accordingly, to do so, each month 6 ECB executive board members meet with 3 national central bank governors to discuss monetary policy.
Bank of England (BOE)
One might find themselves wondering what is the central bank in the UK. The BOE is headquartered in London and was founded in 1694. Stabilizing the UK’s cost of living, taming inflation, producing banknotes, regulating and supervising major banks and financial institutions, and monitoring payment systems like Visa (V) and Mastercard (MA) are some of the Bank of England’s responsibilities.
Moreover, the BOE is governed by Governor Andrew Bailey. Governors usually have the highest executive positions, partake in all committees, and are elected from within the bank. In terms of the hierarchical structure, the BOE consists of the Governor and the Court of Directors which is the central body that governs the bank's operations. In addition to the aforementioned entities, there is a handful of subcommittees in the BOE among which are the Monetary Policy Committee (MPC) which is responsible for interest rates and monetary policymaking, the Prudential Regulation Authority (PRA) which controls the Financials industry, and the Financial Policy Committee (FPC) which maintains the financial system.
Who Owns the Central Bank of England?
The central Bank of England, the BOE, is owned by the UK government, while its capital is controlled by the Treasury Solicitor appointed by the HM Treasury. Nonetheless, it might be surprising to know that despite the fact that the Bank of England is owned by the UK government, BOE claims that its decisions are free from immediate political interference and influence.
Bank of Japan (BOJ)
Based in Nihonbashi, Tokyo, The Bank of Japan (BOJ) issued its first currency and became Japan’s central bank in 1885 and has been operating ever since with the exception of a brief interlude following WWII. BOJ is neither a private corporation nor a governmental agency, but it is a legal entity based on the Bank of Japan Act. Like most central banks, BOJ determines monetary policy, regulates and oversees currency and treasury securities as well as sets interest rates to tackle inflation or deflation.
Additionally, the Bank of Japan collects economic data, researches, and disseminates information. Subsequently, the BOJ’s decisions and interest rates can affect the value of the Japanese yen, which can therefore have a direct effect on the USD/JPY.
Furthermore, the Bank of Japan is headed by Governor Haruhiko Kuroda and has two deputy governors, 6 members from the Policy Board, which is the BOJ’s decision-making board, about 3 auditors, counselors, and about 6 executive directors.
Swiss National Bank (SNB)
Switzerland is known for its impartiality in both the political and economic spheres and similarly to the UK, although it's in Europe, it’s not included in the European Union nor does it count as a Eurozone country.
This means that Switzerland’s central banking system is not the European Central Bank. Instead, its central bank is called the Swiss National Bank (SNB). The Swiss National Bank is headquartered in Zurich and Berne and is responsible for conducting monetary policy under the obligations of the Swiss Constitution. While it abides by the Swiss Constitution, the SNB is considered an independent entity.
Furthermore, similar to all central banks, the SNB strives to maintain economic stability and prosperity while overseeing the supply of Swiss franc (CHF). Moreover, the SNB was founded in 1906 and is managed by chair Thomas Jordan who leads the governing board. The SNB is a joint-stock company which means that it can be traded.
Deutsche Bundesbank (DBB)
The Deutsche Bundesbank (DBB) translates to the “German Federal Bank,” and is the Federal Republic of Germany’s central banking system and is a constituent of the European System of Central Banks (ESCB). The DBB was established in 1957 and is the world’s first fully independent central bank on which the European Central Bank’s model was built in 1998 when the Eurozone came into formation.
Consequently, many note that while Germany’s central bank is the DBB because the ECB was influenced by the DBB’s model, Germany has a significant influence on the latter’s decisions.
In addition, the DBB, like the ECB, is located in Frankfurt Germany. The DBB is managed by the Executive Board which includes DBB President Joachim Nagel and vice-president Claudia Buch along with 4 other members who are all appointed by the German President.
People's Bank of China (PBoC)
Located in Beijing, the People's Bank of China (PBoC) is the central bank of the People's Republic of China. The PBoC was established in 1948 and is responsible for monetary regulations, law enforcement, and managing the State Treasury and financial markets, among other things in Mainland China.
This central bank is headed by Governor Yi Gang, a chief inspector, and 5 deputy governors and is considered one the largest ones in the world with an astounding $3 trillion in Forex reserves.
What Is the Difference Between a Commercial Bank and a Central Bank?
The main difference between the two banks is their authority and agency. Whereas central banks play into monetary policymaking and economic decision-making, commercial banks’ focus is on money flow in the economy as well as providing deposit and credit facilities to financial institutions, businesses, and individuals. In addition, while central banks are public, commercial banks can either be privately or publicly owned and while each country has one central bank, there can be innumerable commercial banks per country.
Additionally, central banks serve governments and other commercial banks, the latter serves businesses and individuals. Most importantly, central banks can decide interest rates that impact the economy directly, while commercial banks cannot have a direct influence on economic policies.
As inflation and recessions fears continue reigning over the economy, now more than ever, traders and investors may want to keep an eye on central banks’ decision-making as they can directly influence the aforementioned economic hurdles.