Central Bank Money and Accounts

Central Bank Money and Accounts

• Liquidity refers to a payment participant having enough money or available balances in their settlement account.
• Central banks issue money, but not all issued money is considered central bank money.
• Physical banknotes are central bank money.
• Electronic money held in a central bank account is also central bank money.
• Money issued by a central bank, but held electronically in a commercial bank account, is not considered central bank money.

Central Bank Money

• Central banks are responsible for issuing money.
• A claim is held by the owner of the money. A claim on a central bank is different from a claim on a commercial bank.
• Central banks often require participants (like commercial banks) to have accounts and maintain deposits representing a percentage of their liabilities. These deposits are called reserve requirements.
• These reserves are important for maintaining financial system stability.

Central Bank Accounts

• Central banks require participants to hold accounts with them, which are used for various purposes.
• Participants may need to maintain reserve accounts with the central bank.
• Reserve requirements are often a set percentage of the participant's liabilities.

Settlement in Central Bank Money

• Payment processors (PSPs) interacting with central banks must have settlement accounts.
• Transfers between PSPs involve the central bank moving funds between accounts.
• Settlement occurs when a payment is made—funds are transferred from one account to another.
• Adequate liquidity for the PSP is necessary for settlement.
• Settlement finality can be legislated.

FACTFIND: The Role of Central Banks in Settlement

• Central banks provide payment system services, settlement accounts to participants, daily liquidity access to settlement accounts, and balance sheet protection.
• Example: The Bank of England in the UK provides these services.