Central bank controls commercial banks through the following ways:
- Open Market Operations– This is where government securities are sold and bought. E.g. Treasury Bills. This device helps the central bank to increase or decrease the volume of money in circulation. If the central bank wants to increase the amount of money in circulation, it will embark on buying of securities from the commercial banks and the public. But if there is too much money in circulation, the central bank will embark on selling of securities to the commercial banks and the general public, payment of which will reduce the amount of money in circulation.
- Bank rate – This is the minimum lending rate at which central bank rediscounts first class bills.
- Treasury Directives – The central bank gives instruction to the commercial banks to reduce the amount of loans they grant to the public or at times may call for special deposits.