Central bank liquidity bridges for cross-border payments

Key takeaways

• The G20 cross-border payments programme has identified funding costs as contributing to the high cost of cross-border payments. This partly reflects the cost of banks' fragmented holdings of liquidity and collateral in different currencies across multiple jurisdictions.
• Central bank liquidity bridges (CBLBs) can help reduce these costs by allowing payment system participants to post collateral at a foreign central bank to be able to draw on intraday liquidity from their home central bank.
• CBLBs entail setup and running costs, and the risks need to be managed through adequate risk control measures (eg haircuts to address foreign exchange risk). By adopting a parsimonious design and leveraging existing systems and arrangements, the associated costs and complexities can be reduced.
• The case for establishing a CBLB depends on the context. The current environment of excess liquidity in many jurisdictions probably weakens that case, everything else equal. But this situation may not last forever.