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Banks around the globe need to follow a set of rules towards a country’s economic goals. These rules are set by the country’s Central Bank. The banks and financial institutions are answerable and controllable to and by the Central Bank, (also sometimes known as the Reserve Bank, while some countries could have an intertwined nature) 

The Central Bank is a financial institution which is given the control over the production and distribution of any money for any country (or a group - EU Central Bank). They are responsible for the formulation of the MONETARY POLICY - controlling inflation, interest rates, the “amount of money” in the economy. This policy in conjecture is used with fiscal policy (spending, taxation) by the government (not the Central Bank) to achieve a certain economic outcome for the economy.

In theory, the Central Bank SHOULD BE solely Independent from the Government. But, time and again, several government leaders (Donald Trump), have tried to order and interfere in the workings of the government. No Doubt, the Central Banks influence the economy in ways you can’t imagine.

Most Central Banks are run by a board and a governor (the head). This committee / institution is said to be the economic powerhouse of the nation.

What is it they do?

Manage foreign reserves:

In several ways, the Central Banks hold the currencies of other nations in a stockpile known as the foeign reserve (mostly the US$ - it is the de facto “global” currency). Firstly, countries do this to maintain their currency at a certain level (price and to peg) to control the costs of goods coming in and out of the nation. (Exchange rates and Import - Exports)

The Central Bank pays for imports to an extent. India, for example, has a huge import bill for crude oil and now, when the rates for crude were lower, the Central Bank (RBI) was able to hold record levels of foreign reserve. 

In case of a financial crisis, the Central Bank helps restore some confidence by using the reserves to maintain the liquidity in the market and counter the aggressive selling-off. Apart from that, the Central Bank maintains and helps clear off some debt taken by the government from outside institutions as well. 

Manipulate interest rates, hence inflation - (Monetary Policy):

The Central Banks have the authority to manage liquidity in an economy. To do so, they strategically manipulate the interest rates. When the interest rates go up, consumers and businesses stop taking loans as the cost to take a loan increases while saving becomes more fruitful. SImilarly, when interest rates go down, saving is not preferred while loans become “relatively” cheaper. This way, when consumers and people have less money (higher rate), they spend less and similarly, when they have more (lower rate), they spend more. Control this intrinsic factor, the Central Bank is able to CONTROL the INFLATION in any economy. 

On a broader level, monetary policy is also able to control the unemployment in the economy either by promoting the growth of industries (make it easy to lend) or not. 

Issuing and managing government bonds / PRINTING Money:

Again, to manage the liquidity in the economy, the Central Bank can venture into the open market. To expand the spending and boost the market, the CB issues more government bonds for people to invest into the economy. To control inflation they absorb some bad debt, the Central Bank does, several times purchase bonds from the market. In 2008, the CB bought mortgage backed bonds to ease the economy whereas right now (2020) the federal reserve (American Central Banking System) is purchasing corporate bonds to boost spending by companies.

Apart from these injections, they can also use a tool at their disposal known as Quantitative easing (QE) which is a mechanism to directly pump money into the economy.  Apart from that, they can just print money.

Regulate member banks: 

Playing such a pivotal role in the economy, Banks have to be regulated and fall under a separate set of rules (formulated by, you guessed it, the Central Bank). 

For starters, the CBs decide the reserve requirements for commercial banks. This requirement is the minimum amount of “cash” banks need to keep at hand in case of a scenario where their depositors want to withdraw all the money and to ensure that in the case the banks over-end (2008, obviously), there is a safety net to an extent. Manipulating this requirement can boost the liquidity in the economy as the “amount” of loans given out to the public can be altered. In case the banks hold more than required, there are several avenues they can use the money.

With this, the Central Bank controls an interesting lending and borrowing relationship with banks with instruments know as repo rate (interest banks get when the Central Banks borrow from them) and reverse repo rate (interest banks have to pay to borrow).

Apart from several core roles, the Central Bank is also the “lender of last resort” for several banks in vain and even governments altogether.

Making these decisions isn’t easy, and accurately estimating what quantifiable effect an action is going to have is nearly impossible. This makes fulfilling this variety of roles crucial to any country, and can mean the difference in becoming a global superpower or a failed economy. Also, we often overlook the extent of impact on the common man this financial institution holds.