The central bank and the commercial banks
How exactly does the central bank supervise the commercial banks?
Well, commercial banks have to keep reserves - a certain amount of their deposits - for customers who want to withdraw their money. These are held by the central bank, which can also change the reserve-asset ratio - the minimum percentage of its deposits a bank has to keep in its reserves.
If one bank goes bankrupt, it can quickly affect the stability of the whole financial system. And if depositors think a bank is unsafe they might all try to withdraw their money. If this happens it's called a bank run or a run on the bank, and the bank will quickly use up its reserves. Central banks can act as lender of last resort, which means lending money to financial institutions in difficulty, to allow them to make payments. But central banks don't always bail out or rescue banks in difficulty, because this could lead banks to take
risks that are too big.