Central Bank vs. Commercial Bank — What's the Difference?

By Tayyaba Rehman — Published on October 17, 2023

A Central Bank is a nation's primary monetary authority controlling monetary policy, while a Commercial Bank offers financial services to the public and businesses.

Difference Between Central Bank and Commercial Bank

Table of Contents

➝ Key Differences ➝ Comparison Chart ➝ Definitions ➝ FAQs

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Key Differences

Central Bank actions like adjusting interest rates or engaging in open market operations have broad impacts on a country's economy. In contrast, a Commercial Bank operates within the parameters set by the Central Bank, focusing on customer-specific services and transactions.

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The Central Bank, being a nation's chief financial institution, often holds reserves and implements policy to stabilize or stimulate economic growth. On the other hand, a Commercial Bank's primary focus is to earn profit by lending money at higher interest rates than they pay for deposits.

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A Central Bank is an institution responsible for a country's monetary policy, including issuing currency and regulating money supply. Conversely, a Commercial Bank is a financial entity that offers a variety of services such as accepting deposits, granting loans, and more to individuals and businesses.

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The Central Bank is typically a government-owned or -controlled entity, ensuring economic stability and steering fiscal strategy. A Commercial Bank, however, usually operates as a for-profit business, serving customers and shareholders alike.

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Central Banks play an essential role in setting the direction for a nation's financial health, laying the foundation for economic policies. Meanwhile, Commercial Banks play their part by facilitating daily transactions, providing credit, and supporting economic activity at the grassroots level.

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Comparison Chart

Primary Role

Governs monetary policy of a country

Provides financial services to the public

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Ownership

Often government-owned or -controlled

Typically for-profit and privately owned

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Function

Regulates money supply, issues currency

Accepts deposits, grants loans

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Economic Impact

Shapes macroeconomic policies

Facilitates daily transactions, supports economy

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Customer Base

Not customer-facing; interacts with commercial banks

Serves individuals, businesses, and corporations

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Definitions

Central Bank

A nation's chief financial institution overseeing monetary policy.

The Federal Reserve is the Central Bank of the United States.

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Commercial Bank

A financial institution offering banking services to the public.

I opened a savings account at my local Commercial Bank.

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Central Bank

Governs the financial system ensuring economic stability.

The Central Bank lowered interest rates to stimulate economic growth.

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Commercial Bank

Provides essential financial infrastructure for an economy.

The Commercial Bank's new branch will facilitate trade in the region.

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Central Bank

Typically non-profit, focusing on national economic objectives.

The Central Bank's decisions prioritize the country's economic health over profits.

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Commercial Bank

Operates to earn profits from financial activities.

The Commercial Bank announced impressive quarterly profits.

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Central Bank

Responsible for issuing and regulating a country's currency.

The Central Bank decided to print more money to combat deflation.

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Commercial Bank

Grants loans, accepts deposits, and provides related services.

The Commercial Bank approved my mortgage application.

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Central Bank

Sets the regulatory framework within which other banks operate.

New guidelines were released by the Central Bank to ensure fiscal safety.

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Commercial Bank

Works within regulations set by the country's Central Bank.

The Commercial Bank adjusted its loan rates according to Central Bank guidelines.

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FAQs

Who owns the Central Bank?

Central Banks are often government-owned or -controlled entities.

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How does a Commercial Bank make money?

Commercial Banks earn profits by charging higher interest on loans than they pay on deposits.

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What is a Central Bank?

A Central Bank is a country's primary financial institution responsible for monetary policy and currency regulation.

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How does a Commercial Bank differ from a Central Bank?

A Commercial Bank provides financial services to individuals and businesses, while a Central Bank governs a nation's monetary policy.

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Can I open an account at a Central Bank?

Typically, no. Central Banks are not customer-facing, while Commercial Banks offer such services.

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Can a Central Bank go bankrupt?

While theoretically possible, in practice, Central Banks have measures and backing to prevent such scenarios.

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Why is the Central Bank important for an economy?

Central Banks ensure economic stability, control inflation, and implement monetary policies to support growth.

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What services can I expect from a Commercial Bank?

Commercial Banks offer services like savings and checking accounts, loans, credit cards, and more.

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Why do Central Banks hold foreign reserves?

Central Banks hold foreign reserves to stabilize or influence their currency's value and ensure economic stability.

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Can a Commercial Bank print money?

No, only the Central Bank has the authority to issue (or print) the national currency.

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How many Commercial Banks can a country have?

There's no set limit; a country can have multiple Commercial Banks based on market dynamics and regulatory approvals.

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Does a Central Bank provide loans to individuals?

No, Central Banks don't deal with individuals for such services; that's the role of Commercial Banks.

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Who regulates Commercial Banks?

Commercial Banks are regulated by the country's Central Bank and other financial regulatory bodies.

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How does a Central Bank combat inflation?

Central Banks can use tools like raising interest rates or selling government bonds to reduce money supply and combat inflation.

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Do Commercial Banks need approval from the Central Bank to operate?

Yes, Commercial Banks operate under a license and regulatory framework set by the Central Bank.

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Author Spotlight

Written by

Tayyaba Rehman is a distinguished writer, currently serving as a primary contributor to askdifference.com. As a researcher in semantics and etymology, Tayyaba's passion for the complexity of languages and their distinctions has found a perfect home on the platform. Tayyaba delves into the intricacies of language, distinguishing between commonly confused words and phrases, thereby providing clarity for readers worldwide.