The role of central bank money in payment systems

August 2003

The role of central bank money in payment systems raises a number of questions. Developed economies have complex and interdependent payment arrangements in which there is a combination of competition and cooperation between the many institutions involved. The use of central bank money is thus part of the underlying issue of the balance between the services provided by central banks and those provided by commercial banks in the payment system. And given the widespread and fundamental changes that have occurred over the past decade or so, and which continue today, it is useful to consider whether an appropriate balance is being maintained and how the composite use of both monies can best be achieved.

This report therefore looks at a range of practical policy questions. For example, which institutions should have accounts at the central bank? What services should central banks provide to meet the needs of account holders? When should central banks insist that payment or securities settlement systems settle in central bank money; or - when this is not practicable - what sufficiently safe alternatives exist to mitigate credit and liquidity risks? What are the possible benefits and risks of the concentration of payments through a few large banks, and how might central banks approach this issue? And to what extent can the supply of central bank money, normally confined to the area of jurisdiction of the central bank, meet the demands of global players active in multiple currencies?

The report shows that there is much common ground among CPSS central banks in their objectives as well as in the main tenets of their policy concerning the role of central bank money in payment systems. These collective views and practices are presented in the form of 10 propositions. At the same time, however, there are often differences when it comes to the implementation of policy. In setting out both the similarities and the differences, the report is not normative but rather descriptive of central bank policies and the motivations underlying the chosen policies. It aims to provide a useful factual base and a strong analytical framework that will raise awareness and stimulate debate on these key matters.