Question

11. The assets that appear on the central bank's balance sheet include the category of loans. Who are central banks lending to and are these loans associated with the central bank functioning as the government's bank? Explain.

Answer 1

Commercial Banks take fixed deposits and use that money to give loans to individuals and businesses. While the deposits are demand deposits most of the loans are term loans. This creates the need of commercial banks to borrow money from the central bank. Hence most of the central bank loans are given out to commercial banks.

The central bank acts as the government's Bank by providing financial support to the commercial banks and acting as a lender of last resort.