Title: The role of central bank money for large value payment systems
1The 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
2Overview
- Some stylised facts about central bank money
- Who must use central bank money
- Who can use central bank money
- Services on central bank accounts
3Importance of money
- Some facts about central bank 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)
4Money, money, money .
Type of issuer 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)
5Central 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.
6Central 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?
7Architectureof deposit money
A balance between safety and efficiency
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
8Advantages 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
9The 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
10Three issues
- 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?
11Payment systems
- Who must use central bank money
- 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)
12 - 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)
13Individual banks?
D
C
B
E
Central bank
A
F
Single-tier structure
14Tiering
- 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
15Concentration
Is this a quasi-system?
Flows via central bank A?B A?F B?C B?D B?E B?F
C?F D?F E?F
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
E
D
C
B
E
Central bank
A
F
Central bank
F
Single-tier structure
Two-tier structure
16Quasi-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
17Who can have access?
- Who can use central bank money
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 bankstaff
18 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
- moral hazard?
- disintermediation?
- risk to central bank?
19 Increasing trend (2)
Remote access
Main issue is risk (especially if credit is
available) Is there demand? NB CLS as key example
Germany
United States
USD
Hong Kong
20 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)
21Services on accounts
- What services should central banks provide?
- 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
22CLS 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
23(2) The current settlement method
X
24 (3) Under CLS
Settlement is on the books of CLS Bank (ie not
central bank money)
Bank Bs USD corresp-ondent
USD
C L S B A N K
USD
BANK A ZURICH
BANK B BAHRAIN
Bank As JPY corresp-ondent
JPY
JPY
CLS BANK NEW YORK
25 (4) Payment system hours
First day (in Japan)
Second day (in Japan)
Japan
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
Time in Switz.
10
16
22
4
10
22
16
Time in USA
26Conclusion
- 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.