Central banks serve as bankers to commercial banks by providing crucial financial services and maintaining stability in the banking system. They hold deposits from commercial banks, which helps in the management of liquidity. Central banks also extend credit to commercial banks through lending facilities, particularly during times of financial stress, ensuring that liquidity needs are met.
Additionally, they oversee the payment systems and facilitate interbank transactions, which helps maintain a smooth flow of payments in the economy. By regulating reserve requirements, central banks ensure that commercial banks maintain a certain amount of reserves, enhancing the stability and trust in the banking system. Overall, through these functions, central banks support the overall health of the financial system and promote confidence among commercial banks.
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