Liquidity bridges across central banks for cross-border payments

CPMI Papers  | 
07 September 2022
PDF full text
 |  37 pages

International banks and other payment service providers (PSPs) may incur the cost of holding liquidity and collateral in different currencies across multiple jurisdictions to facilitate intraday payments in large-value payment systems. This fragmentation can drive up the cost of cross-border payments or even discourage PSPs from expanding their services to more markets.

Central bank liquidity bridges could help alleviate these costs by helping international banks and other PSPs manage their global liquidity requirements more efficiently. A central bank liquidity bridge is a short-term intraday liquidity arrangement set up between two or more central banks. In a liquidity bridge, collateral held by a PSP with one central bank can be used by a PSP's related entity in another jurisdiction to get intraday liquidity from that other central bank. Liquidity bridges may also help reduce credit and settlement risks to PSPs arising from foreign exchange (FX) transactions and reduce intraday settlement risk across borders. If the financial risk for the central banks involved is managed carefully, liquidity bridges can support financial stability.

This report provides a practical framework for central banks in considering the potential design and feature choices of central bank liquidity bridges. The report is intended to help central banks make informed decisions whether to establish liquidity bridges, by laying out the benefits, risks, and challenges in the design and operation of liquidity bridges.