The role of central bank money for large value
payment systems
Robert Lindley
Deputy Head, CPSS Secretariat
Regional workshop on reforming payment and securities
settlement systems for the Middle East and North Africa
Bahrain, Wednesday 16 March 2005
1
Overview
1. Some stylised facts about central bank money
2. Who must use central bank money
3. Who can use central bank money
4. Services on central bank accounts
2
1. Some facts about
central bank money
Importance of money
 Almost every economic transaction involves money
 Economic agents free to choose means of payment
 Most money is “fiat” money – so acceptance depends on
trust
 Key role of central bank is to maintain trust in money –
both its value (monetary policy) and its circulation
(payment systems)
3
Money, money, money ….
Type of issuer
Central bank
Commercial
banks
Type of money
Cash (banknotes and coins)
Deposits (current/sight)
E-money

1
X
not now
 limited access

X not yet?

1 Coins are usually issued by the Ministry of Finance (this complication is ignored
in the rest of the presentation)
4
Central bank cash
 Central bank has monopoly
 But universal “access” – everyone can use cash
 Why?
 Cash is a bearer instrument
 Safe and convenient for users to have central bank
monopoly – no need to worry about the riskiness of the
issuer
 A monopoly? Inefficient? Cost may not be too high.
5
Central bank deposits
 Central bank and commercial banks both issue deposit
money but access to central bank deposit money is
usually very limited (eg mostly banks and government).
Why?
6
Architecture
of deposit money
A balance between safety
and efficiency
Central bank
Monobanking
Safe but less efficient?
B
C
A
D
B
Central bank
Central bank and commercial bank money
Efficient - competition between banks (more
important than with cash)
Safe – banks (and customers) indifferent about
where payments come from
C
A
D
“Free” banking
More efficient but less safe?
7
Advantages and disadvantages of settling in
central bank money
Advantages for banks
 Safety (credit and liquidity risk, business continuity)
 Liquidity (routine and emergency)
 Efficiency (single settlement institution)
 Neutrality (central bank is not usually a competitor)
 Other perceived benefits (safety net)
Disadvantages for banks
 No interest paid
 Regulatory costs
8
“The singleness of the currency”
One dollar is one dollar is one dollar … regardless of
whose liability it is.
Originally a result of
 central bank monopoly of cash …
 … and, for deposit transfers, interbank settlement at the
central bank
More recently also supported by:
 deposit insurance
 banking supervision
which mean we worry less about bank failures
9
Three issues
B
A
C
D
 Who must use central bank money – who must have a
central bank account?
 Who can use central bank money – who is allowed to
have a central bank account?
 What services should the central bank provide on the
accounts?
10
2.
Who must use
central bank money
Payment systems
1
Systemically important payment systems
“Assets used for settlement should preferably be a claim on
the central bank; where other assets are used they should
carry little or no credit or liquidity risk”
Core principles for systemically important payment systems (SIPS)
 Reason: safety
 In practice, almost all SIPS do settle in central bank money
 Main exceptions: foreign currency systems (nb: CLS as key
example)
11
2 Other payment systems?
 Usually allowed to settle in central bank money but do not
have to
 In practice, most usually do
 Efficiency and neutrality particularly important
 Sometimes discouraged (particularly if system includes
non-banks as participants)
12
Individual banks?
C
C
D
B
A
E
D
A
Second tier
banks (indirect
participants)
B
F
First tier
banks (direct
participants)
E
Central bank
F
Single-tier structure
Central bank
Two-tier structure
13
Tiering
 Extent of tiering depends partly on costs
 Partly on tradition
 Partly on cartels (especially in the past)
 … but rarely forbidden. (NB Hong Kong.) Usually central
banks leave it up to individual banks to decide. Why?
•
•
•
•
Big banks typically do use central bank money
Efficiency benefits may outweigh safety costs
Difficult to enforce
But ……
14
Is this a
quasisystem?
Concentration ……
Flows
via
central
bank:
A↔B
A↔C
A↔D
A↔E
A↔F
B↔C
B↔D
B↔E
B↔F
C↔D
C↔E
C↔F
D↔E
D↔F
E↔F
C
C
D
E
E
Central bank
A↔B
A
B
A
D
Flows
via
central
bank:
F
B
Central bank
F
Single-tier structure
A↔F
B↔C
B↔D
B↔E
B↔F
Two-tier structure
C↔F
D↔F
E↔F
15
Quasi-systems
 Central banks still considering what (if anything) to do
 Unlikely to lead to limits on tiering
 May lead to oversight of quasi-systems (ie some payment
system standards applied to Bank A)
 Practical issues (eg how big do you have to be to be a
quasi-system)
 Cooperation with banking supervisors likely
16
3.
Who can use
central bank money
Who can have access?
Always or
almost always
Often
Sometimes
Never or almost
never
Banks
Non-bank
securities firms
Other non-bank
FIs
General public
Central banks
and IFIs
Remote access
banks
Corporates
Central
government
Other
government
Central bank
staff
Key:
increasing trend
no change
decreasing trend
17
Increasing trend (1)
Non-bank securities firms and other non-bank financial institutions
May be similar to banks – the border line is not always clear
Advantages of allowing access
 systemic risk?
 competitive disadvantage?
 central bank neutrality?
Disadvantages of allowing access
B
A
C
D
 moral hazard?
 disintermediation?
 risk to central bank?
18
Increasing trend (2)
Remote
access
Germany
United States
Bank
Bank
USD
Bank
Bank
Bank
Main issue is risk
(especially if
credit is
available)
Is there
demand? NB
CLS as key
example
Bank
Hong Kong
19
Decreasing trend
Government (central and other), central bank staff, general
public, corporates
Advantages of allowing access
 “Experience” for the central bank
 Neutrality (for government)
Disadvantages of allowing access
 Unfair advantage? (re general public and corporates)
 No particular advantage – better to have a competitive
tender (re government)
20
4.
What services should
central banks provide?
Services on accounts
 Credit
– Account may be of little benefit without it
– Risk to central bank (so collateral, limits, fees)
 Reducing credit costs
– System design (eg hybrids)
– Wider range of collateral
 Technical changes
– Standards
– Easier connectivity
 Operating hours
– CLS as an example
21
CLS: a key example
Continuous Linked Settlement is an example of settlement in
commercial bank money, remote access, and the need for
longer opening hours
(1) A foreign exchange deal
USD
BANK A
ZURICH
JPY
BANK B
BAHRAIN
22
(2) The current settlement method
USD
payment system
USD
Bank A's USD
correspondent
USD
Bank B's USD
correspondent
USD
X
BANK B
BAHRAIN
BANK A
ZURICH
JPY
Bank A's JPY
correspondent
JPY
Bank B's JPY
correspondent
JPY
JPY
payment system
23
Settlement is on the books of CLS
Bank (ie not central bank money)
(3) Under CLS
USD
BANK A
ZURICH
JPY
Bank A’s
USD
correspondent
Bank A’s
JPY
correspondent
USD
C
L
S
USD
Bank B’s
USD
correspondent
JPY
Bank B’s
JPY
correspondent
B
A
N
K
JPY
USD
BANK B
BAHRAIN
JPY
CLS BANK
NEW YORK
CLS has remote access to RTGS systems around the world to
receive and make these payments …
… and needs all systems to be open at the same time …
24
(4) Payment system hours
First day (in Japan)
Japan
Second day (in Japan)
Day 2
Day 1
“Core” CLS hours
(7 to 12 CET)
Day 1
Switzerland
Day 1
USA (NY)
0
6
12
18
24
6
12 Time in Japan
16
22
4
10
16
22
4
10
16
22
4
10
16
22 Time in USA
Time in Switz.
25
Conclusion
A mixture of central bank and commercial bank money is
important to achieve a balance between safety and efficiency.
But there are no clear rules about who can or must use
central bank money. It is a matter of judgement about where
the best balance lies.
B
A
C
D
26