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Committee on Payment and
Settlement Systems
The role of central bank
money in payment systems
August 2003
Copies of publications are available from:
Bank for International Settlements
Press & Communications
CH-4002 Basel, Switzerland
E-mail: publications@bis.org
Fax: +41 61 280 9100 and +41 61 280 8100
This publication is available on the BIS website (www.bis.org).
© Bank for International Settlements 2003. All rights reserved. Brief excerpts may be reproduced
or translated provided the source is cited.
ISBN 92-9131-654-7 (print)
ISBN 92-9197-654-7 (online)
Foreword
Contemporary monetary systems are based on the mutually reinforcing roles of central bank money
and commercial bank monies. What makes a currency unique in character and distinct from other
currencies is that its different forms (central bank money and commercial bank monies) are used
interchangeably by the public in making payments, not least because they are convertible at par.
Central bank money plays a key role in payment arrangements, as it has proved safe and efficient to
have a central reference of value with which all other forms of the currency maintain this par
convertibility. This role is long-established and, for the most part, uncontroversial.
Nevertheless, as explained in this report, the role of central bank money in payment systems raises a
number of questions. Developed economies have complex and interdependent payment
arrangements in which there is a combination of competition and cooperation between the many
institutions involved. The use of central bank money is thus part of the underlying issue of the balance
between the services provided by central banks and those provided by commercial banks in the
payment system. And given the widespread and fundamental changes that have occurred over the
past decade or so, and which continue today, it is useful to consider whether an appropriate balance is
being maintained and how the composite use of both monies can best be achieved.
This report therefore looks at a range of practical policy questions. For example, which institutions
should have accounts at the central bank? What services should central banks provide to meet the
needs of account holders? When should central banks insist that payment or securities settlement
systems settle in central bank money; or - when this is not practicable - what sufficiently safe
alternatives exist to mitigate credit and liquidity risks? What are the possible benefits and risks of the
concentration of payments through a few large banks, and how might central banks approach this
issue? And to what extent can the supply of central bank money, normally confined to the area of
jurisdiction of the central bank, meet the demands of global players active in multiple currencies?
The report shows that there is much common ground among CPSS central banks in their objectives as
well as in the main tenets of their policy concerning the role of central bank money in payment
systems. These collective views and practices are presented in the form of 10 propositions. At the
same time, however, there are often differences when it comes to the implementation of policy. In
setting out both the similarities and the differences, the report is not normative but rather descriptive of
central bank policies and the motivations underlying the chosen policies. It aims to provide a useful
factual base and a strong analytical framework that will raise awareness and stimulate debate on
these key matters.
I would like to pay special tribute to a number of people who dedicated their time, talent and energy to
drafting this report. First, to Shuhei Aoki (Bank of Japan), who contributed countless hours to
coordinating this project from start to finish. Bringing the work to fruition also relied on the enthusiasm
and commitment of Robert Lindley (Bank for International Settlements/CPSS Secretariat), Masayuki
Mizuno (Bank of Japan), Travis Nesmith (Board of Governors of the Federal Reserve System), Ignacio
Terol (European Central Bank) and Alastair Wilson (Bank of England). Discussions held by the
Committee and its working group (the members of which are listed in Annex 6) provided inspiration
and numerous helpful contributions to the project.
Tommaso Padoa-Schioppa, Chairman
Committee on Payment and Settlement Systems
CPSS - The role of central bank money in payment systems - August 2003 i
Contents
Executive summary and introduction .......................................................................................................1
The coexistence of central and commercial bank monies: multiple issuers, one currency ...........1
The pivotal role of central bank money in payment systems.........................................................2
Access to central bank money .......................................................................................................3
Variations in policies ......................................................................................................................4
Current and prospective developments .........................................................................................4
Some key issues for central banks ................................................................................................5
Possible policy responses..............................................................................................................6
Conclusion......................................................................................................................................6
Structure of the report ....................................................................................................................7
1. The coexistence of central and commercial bank money in payment systems.............................7
1.1 Central bank money and central bank objectives................................................................8
1.2 How payment systems function and the role of the settlement institution...........................9
1.2.1 Simple models of how payment systems function.....................................................9
1.2.2 Risks relating to the settlement asset......................................................................11
Risks relating to the settlement institution..........................................................11
Risks between direct participants and their customers......................................12
1.3 Factors determining agents’ choice of settlement asset....................................................13
Safety .................................................................................................................................13
Liquidity and credit.............................................................................................................14
Neutrality............................................................................................................................15
Related payment services .................................................................................................15
Regulatory costs and perceived benefits...........................................................................15
1.4 Conclusion .........................................................................................................................16
2. Influences on payment systems and their impact........................................................................16
2.1 Influences on payment systems ........................................................................................16
Liberalisation......................................................................................................................17
Technological advances ....................................................................................................17
Globalisation ......................................................................................................................17
Consolidation .....................................................................................................................18
2.2 Impact on payment systems..............................................................................................18
2.2.1 The choice between direct participation and non-participation ...............................18
2.2.2 Concentrations of payment flows ............................................................................20
ii CPSS - The role of central bank money in payment systems - August 2003
2.3 Conclusion......................................................................................................................... 22
3. Current central bank policies....................................................................................................... 22
3.1 Settlement in central bank money by systems.................................................................. 22
3.2 Provision of central bank money to individual institutions................................................. 24
3.2.1 Access to accounts ................................................................................................. 26
Banks................................................................................................................. 26
Non-resident banks............................................................................................ 27
Non-banks.......................................................................................................... 28
3.2.2 Access to credit....................................................................................................... 30
3.3 The relationship between policy on systems and policy on institutions............................ 31
3.3.1 The requirement for individual institutions to settle in central bank money............ 31
3.3.2 Criteria for direct participation in systems............................................................... 32
3.4 Conclusion......................................................................................................................... 32
4. Possible implications for central bank policy............................................................................... 33
4.1 Access policy..................................................................................................................... 33
4.1.1 Relevant considerations.......................................................................................... 34
Risk.................................................................................................................... 34
Costs.................................................................................................................. 34
Neutrality............................................................................................................ 34
Other considerations.......................................................................................... 35
Alternatives ........................................................................................................ 35
4.1.2 Examples of policy reviews..................................................................................... 35
4.2 System design and central bank settlement services....................................................... 36
4.2.1 Enhancing efficiency of service .............................................................................. 37
Reducing liquidity costs at the domestic level ................................................... 37
Reducing liquidity costs at the international level.............................................. 37
Enhancing business efficiency .......................................................................... 38
4.2.2 Expanding areas of service .................................................................................... 39
Use of central bank money in ICSDs................................................................. 39
Central bank multicurrency settlement services................................................ 39
4.3 Oversight, supervision and regulation............................................................................... 40
Implications of a concentration of payment activities........................................................ 40
Relevant considerations.................................................................................................... 40
Points for further analysis.................................................................................................. 41
CPSS - The role of central bank money in payment systems - August 2003 iii
5. Concluding remarks .....................................................................................................................42
Ten propositions...........................................................................................................................42
Current challenges and the tools to respond to them ..................................................................43
Central bank policies....................................................................................................................44
Looking forward............................................................................................................................45
Annexes..................................................................................................................................................47
Annex 1 Central bank policies................................................................................................................48
Annex 2 Access policy - specific cases..................................................................................................77
Annex 3 Detailed tables .........................................................................................................................81
Annex 4 Banknotes ................................................................................................................................96
Annex 5 Members of the CPSS ...........................................................................................................107
Annex 6 Members of the Working Group.............................................................................................108
CPSS - The role of central bank money in payment systems - August 2003 1
Executive summary and introduction
Central bank money plays a key role in payment systems. This report analyses that role and looks at
how it may change as a result of current or possible future developments. It develops an analytical
framework that permits a better understanding of how central banks formulate policy in this important
area.
The coexistence of central and commercial bank monies: multiple issuers, one currency
Money is fundamental to the functioning of market economies inasmuch as these are based on
exchange and credit. In a market economy, any two economic agents are free to agree on the means
of payment to be used to settle a transaction.1 Acceptance of any form of money will, however,
depend on the receiver’s confidence that, subsequently, a third party will accept that money in trade.
Fiat money is worth nothing without the trust of a community behind it. Manifestation of this trust is
exemplified by the use of banknotes. Being intrinsically worthless pieces of paper that everyone
accepts from a stranger in exchange for valuable goods and services, banknotes testify to the
presence of certain bonds of confidence that tie together the members of a society.
Today, any widely used form of money is denominated in a given currency. By sharing a currency, the
individuals of a community have in common a measure of economic value, a means to store value,
and a set of instruments and procedures to transfer this value. However, since the value of money lies
in trust, there can be no absolute guarantee that confidence in the currency can be preserved over
time. It may be shaken by a monetary crisis or by the malfunctioning of the payment system. As a
result, maintaining trust in the currency, and thus facilitating its circulation, becomes a major public
interest. The central bank is, in most countries, the institution designated to pursue this public interest.
In pursuit of its task, the central bank issues its own liabilities for use as money (central bank money).
But the central bank is not the only issuer of money in an economy. The multiplicity both of issuers of
money and of payment mechanisms is a common feature in all developed economies. Commercial
banks are the other primary issuers, their liabilities (ie commercial bank money) representing in fact
most of the stock of money.2 A healthy, competitive commercial banking market is seen as an
essential element of an efficient and effective economy.
Thus central bank and commercial bank money coexist in a modern economy. Confidence in
commercial bank money lies in the ability of commercial banks to convert their sight liabilities into the
money of another commercial bank and/or into central bank money upon demand of their clients. In
turn, confidence in central bank money rests in the ability of the central bank to maintain the value of
the stock of currency as a whole (ie not only of the small portion it issues directly), or its inverse, to
maintain price stability.
Money therefore represents an obligation of different issuers, and consumers regularly exhibit
preferences for holding and using different forms of money, which often vary for different types of
transactions. Yet the perception of the public is such that it uses the various forms of money
interchangeably so long as they are denominated in the same currency. Two factors explain this: first,
the existence of a form of money (central bank money) which has the support of public authorities and,
second, convertibility of other monies into central bank money at par value. The combination of these
two factors gives rise to the currency’s single character, the certainty that “one dollar is one dollar”,
whatever form it takes (whether central or commercial bank money). And this “singleness” seems to
be a necessary (but by itself not sufficient) condition for a currency to effectively become “the”
measure of economic value, or the unit of account, shared by members of a modern economy, with
the associated advantages of efficiency and safety in trade.
All central banks represented in the CPSS believe that the composite of central and commercial bank
money is an essential feature of the monetary system and should be preserved. A multiplicity of
issuers of money preserves the advantages of competition in providing innovative and efficient means
1 This report analyses the concepts of money and means of payment from an economic perspective and does not try to
provide legal definitions.
2 In some economies, non-banks also issue private money in more limited amounts.
2 CPSS - The role of central bank money in payment systems - August 2003
of payment and, indeed, in providing financial services generally. The regulated or licensed character
of these issuers (commercial banks) aims at promoting their solvency and liquidity in order to preserve
confidence in the currency. And the use of central bank money in payment systems puts the value of
banks’ liabilities to the test every day by checking their convertibility into the defined unit of value.
This policy position implies a rejection of the two extreme arrangements of monobanking, where the
central bank acts as the sole issuer of money, and free banking, where commercial banks provide all
the money required by the economy. Neither of these corner solutions has proven to be sufficiently
stable or efficient to endure.
The pivotal role of central bank money in payment systems
To facilitate convertibility between different forms of money, central banks support the existence of at
least one payment system for their own currency that is widely accessible to banks. Payment systems
play a fundamental role in the economy by providing a range of mechanisms through which
transactions can be easily settled. As such, banknotes are part of this broad notion of payment
systems. In spite of the expanding role of its various substitutes, the banknote is still a fundamental
payment instrument in economic life. Yet this report focuses on a narrower concept whereby a
payment system is a defined set of instruments, procedures and rules for the transfer of funds from
one bank to another. In these systems, banks hold funds at a common agent (referred to in the report
as “settlement institution”). Payments between these banks are made by exchanging the liabilities of
this settlement institution (the “settlement asset”). Deposits at the settlement institution and the credit
of the settlement institution (when available) are both accepted as money by all the participants in the
system. “Payment systems” include payment mechanisms used by securities settlement systems
(SSSs), whether the payment mechanism is “embedded” within the SSS or external to it. This report
does not distinguish between the role central bank money plays in embedded mechanisms and in
external payment systems, and the analysis which follows is relevant to both.
In practice, most - although by no means all - payment systems settle in central bank money.3 In other
words, the settlement institution is generally the central bank. This role is consistent with the monetary
order described earlier, whereby a commercial bank honours its sight liabilities by converting them into
central bank money if their clients demand it. It also reflects the layered architecture of financial
systems, whereby private individuals and non-financial businesses hold (part of) their liquidity in
banks, and banks in turn hold (part of) their liquidity in the central bank.
The choice of settlement asset in a system - particularly in a system handling large values - is
important because of the exposures that can arise between the settlement institution and the
participants in the system and because of the crucial operational role the settlement institution plays in
the system. The widespread use of central bank money as a settlement asset reflects its overall
qualities of safety, availability, efficiency, neutrality and finality.4 Most importantly, failure of the
settlement institution can have critical systemic consequences and the use of the central bank as
settlement institution minimises the risk of this occurring. CPSS central banks’ common policy in this
area is set out in Core principles for systemically important payment systems5, (“Core Principles”)
which states that the settlement asset in systemically important systems should preferably be a claim
on the central bank or, if other assets are used, that they should carry little or no credit and liquidity
risk. A similar policy is contained in the report on Recommendations for securities settlement
systems,6 (“SSS recommendations”) which says that the assets used to settle the ultimate payment
obligations from securities transactions should carry little or no credit or liquidity risk and that, if central
bank money is not used, steps must be taken to protect members of the central securities depository
from potential losses and liquidity pressures arising from the failure of the settlement institution whose
assets are used.
3 For more information, see Annex 3, Table C.
4 These features are prominent in central bank money but none is exclusive to central bank money.
5 Core principles for systemically important payment systems, BIS, January 2001.
6 Recommendations for securities settlement systems, BIS, November 2001.
CPSS - The role of central bank money in payment systems - August 2003 3
In an era of financial globalisation, however, using the central bank as the settlement institution may
not always be practical. Global players, active in multiple currencies, are confronted with the essential
nature of the central bank as a domestic monetary authority. The supply of central bank money and
central bank services is normally confined within the area of jurisdiction of the central bank, so no
central bank alone can cater for the needs of these global players in full. Central banks can address
some of the consequences of globalisation through mutual cooperation. For example, in the
mid-1990s central banks expressed their preference for a market solution to address the need to
reduce principal risk in foreign exchange settlement.7 Continuous Linked Settlement (CLS), the
infrastructure adopted by the market, was supported by the international central banking community,
and in 2002 the first currencies were authorised by the relevant central banks for inclusion as eligible
currencies in the system. CLS Bank, a private utility which meets the international norms for risk
management laid out by the G10 Governors, is the settlement institution for CLS - ie settlement is not
in central bank money. However, all payments to and from CLS are made through the issuing central
bank, so central bank money retains a necessary role, pivotal but not central, in the settlement of
foreign exchange transactions in CLS. Similar issues arise with other systems, for example the
International Central Securities Depositories (ICSDs) Euroclear and Clearstream Luxembourg
(“Clearstream”), which service international markets and provide settlement in multiple currencies in
commercial bank money.
The pivotal role of central bank money in payment systems must be balanced against the business
decision of any commercial bank to use the payment services of another commercial bank rather than
those of the central bank. As a result of these decisions, most interbank payment systems have a
greater or lesser degree of tiering (ie several layers of settlement). Thus (and assuming that the
settlement institution is the central bank), while some banks are direct participants in a payment
system and settle in central bank money (top-tier banks), others (lower-tier banks) may instead use
the services of a top-tier bank to make and receive payments from other banks. This is standard
practice in international banking, with the widespread use of correspondent banks to make cross-
border payments. It is also the practice in most domestic banking arrangements where, for example, a
(typically) smaller bank may be a customer of a (typically) larger bank. As a result, a payment from
one bank to another may involve settlement in commercial bank money only (between two lower-tier
banks using the same top-tier bank), or in central bank money only (between two top-tier banks), or in
a combination of central and commercial bank money (eg between two lower-tier banks which do not
use the same top-tier bank).
Thus, while central bank money plays a pivotal role in the economy, no central bank sees the use of
central bank money as an end in itself. An increase in the amount of central bank money used for
payments does not necessarily indicate greater economic welfare. Rather, central banks’ interest lies
primarily in the use of central bank money at the apex of large-value payment systems, as a
complement to the use of commercial bank money in such systems.
Access to central bank money
While central banks encourage or require the use of central bank money in systemically important
payment systems, they limit access to it for other purposes. One form of central bank money - namely
banknotes - is, of course, universally available. However, central bank accounts are typically available
only to a limited range of entities, mainly banks. This reflects the fact that while central bank money
plays a key role as a settlement asset in payment systems, central banks do not in general want to
compete with commercial banks in providing banking services to the public. Because of this, central
banks typically open accounts only where there are good public policy reasons for doing so, for
example where the use of central bank money helps to eliminate exposures arising within the payment
process that could give rise to systemic risk.
Even if commercial banks are central banks’ core customers, most central banks do have some other
account holders. In general these other account holders are non-commercial entities - for example, the
government, foreign central banks or international financial institutions such as the IMF. But most
7 The risk of paying out one currency without receiving the other currency in return. See Settlement risk in foreign exchange
transactions, BIS, March 1996.
4 CPSS - The role of central bank money in payment systems - August 2003
central banks also offer accounts to supervised or licensed commercial financial institutions other than
banks - for example, securities firms or clearing houses - mostly in cases where such institutions are
also directly involved in payment or securities settlement systems. And some go further and offer
accounts to a small range of non-financial institutions.
All central banks represented in the CPSS provide access to a form of intraday credit facility to some
of their account holders, and in particular to banks. Those which undertake the privileges and
obligations of participation in the payment system generally find it valuable to have access to some
form of credit in order to use the system efficiently. Intraday credit from the central bank is generally
highly valued because it can be used to redeem any obligation, may be provided in large amounts
(although collateral is generally required), and is provided, in most cases, at quasi-zero price. As a
result, when central banks offer accounts with no credit availability, there may be little demand.
Variations in policies
However, while there are broad areas of common ground as set out above, practical distinctions exist
in the approach of central banks to the use of central bank money. For example, there are some
variations in central banks’ policies on which systems should be required, encouraged or allowed to
settle in central bank money, particularly in relation to lower-value systems.
There is also some diversity in the approach to which institutions are allowed to maintain settlement
accounts. Some central banks have broader policies than others. For example, while some CPSS
central banks are prepared in certain circumstances to permit a wide range of non-bank financial
institutions access to accounts and credit (eg the Bank of Japan, the Bank of England and the Bank of
Canada), others limit access primarily to deposit-taking institutions (eg the Federal Reserve and the
Hong Kong Monetary Authority). And while some are prepared to allow non-resident institutions to
open and operate accounts on a remote basis8 (eg the Bank of England and the Swiss National Bank),
a significant number are not, or will only do so in a limited number of well-defined cases. Finally, while
most central banks adopt a permissive approach to institutions opening settlement accounts
(specifying which institutions may, rather than must, open accounts), a few require or strongly
encourage all banks to do so (eg the Hong Kong Monetary Authority).
Current and prospective developments
The complexity in the pattern of use of central bank money is increasing. Financial markets as a whole
are affected by the powerful forces of technological change, deregulation and globalisation. Payment
arrangements are affected by these forces.
Some developments have already had significant effects on the role of central bank money. While the
role of the central bank as settlement institution is a long-standing one, in many cases this role only
required the central bank to settle the relatively small net positions of commercial banks resulting from
a netting procedure. Moreover, this occurred only once each day, at the end of the day. But with the
introduction of newer, safer systems to handle the substantially increased payment system values,
and in particular with the widespread adoption of real-time gross settlement (RTGS), where each
payment is settled in real time throughout the day, central banks and central bank money have come
to take on a much wider and more active role. Because the settlement of each payment involves a
direct transfer of the settlement asset, RTGS systems require substantially more of the asset to ensure
smooth payment flows. To enable this, most central banks provide intraday credit to banks
participating in these systems in quantities which in some cases dwarf the banks’ overnight balances
or their overnight borrowing from the central bank.
Also relevant to the use of central bank money in payment systems is the possibility of significant
concentrations of payment activities and associated exposures within individual banks. Indeed, a few
banks process very high payment values - in some cases similar to those of large-value payment
systems. Such concentrations may arise for various reasons, such as consolidation between banks,
specialisation by certain banks in correspondent banking (an area of banking that has grown relatively
8 See the discussion on access to accounts by non-resident banks in Section 3.2.1.
CPSS - The role of central bank money in payment systems - August 2003 5
rapidly because of an increase in cross-border payments), or changes in cost structures that
encourage indirect rather than direct participation in payment systems. Significant concentrations of
payments are of interest to central banks because of possible implications for risk and efficiency in the
payment system. They may also indicate that central banks should provide more competitive
settlement services. Finally, they may raise the question as to whether the scale of activity requires
additional supervision from a payment system oversight perspective, and they may call into question
the limitations on some central banks’ supervisory authority over commercial banks that engage in
systemically relevant payment activity.
The increase in cross-border flows, a result of capital liberalisation and financial globalisation, has
important implications not only for correspondent banking but also for access to central bank accounts
and credit. For example, the ICSDs, Euroclear and Clearstream, while processing the majority of their
transactions in euros, have most of their participants located outside the euro area. If the Eurosystem
were the settlement institution for the euro in these systems, it would need to facilitate remote access
to accounts and credit.9 Another example is the request, by a task force of large global banks, for
central banks to facilitate access to intraday credit by broadening the range of eligible collateral to
include a wider range of cash and securities located in other financial centres.
Further developments, while also having risk implications, are perhaps more relevant from the point of
view of competition, market structure and efficiency. For example, there have been requests in some
economies from non-bank financial institutions which are active in payments, or even from certain
non-financial institutions, for direct access to central bank accounts and payment systems. There have
also been requests for central banks to provide new or improved services that affect the way in which
central bank money is used - services such as longer operating hours, interoperability between
systems, liquidity saving mechanisms or even multicurrency functionalities.
Some key issues for central banks
The developments just described can impact on several key ongoing issues that central banks face
when providing settlement services.
Access: who should be allowed to have a settlement account at the central bank? Should
access to settlement accounts be limited to core payment service providers, and in particular
to banks? Alternatively, how might central banks’ access policies adapt to cater for the
emergence of new forms of payment service provider and the increasing values of payments
accounted for by non-banks (particularly securities firms)? Should such institutions also have
accounts? Which account holders should be allowed credit?
Services: do the account-related services currently provided by central banks meet the
needs of account holders and their customers? Should operating hours be longer? Does
technology offer scope to enhance services, or the design of the payment systems to which
they relate, so as to improve the safety and efficiency of the payment process? Are there
principles that place clear limits on the services central banks should offer?
Requirements: both the Core Principles and the SSS recommendations considered the
question of when payment and settlement systems should be required to settle in central
bank money, and when an alternative (high-quality) settlement asset might be acceptable.
When should central banks insist on payment or securities settlement systems settling in
central bank money? Where that is not practicable, what sufficiently “safe” alternatives are
adequate to mitigate credit and liquidity risks?
Concentration: as noted above, not all banks participate directly in payment systems - some
make use instead of the correspondent services provided by other banks. This brings
efficiencies, but may also lead to a concentration of payments through a few banks if there
are only a relatively small number of direct participants or if certain direct participants
9 For a definition and discussion of remote access, see Section 3.2.1.
6 CPSS - The role of central bank money in payment systems - August 2003
specialise in providing correspondent services. What risks does such tiering cause and what
might be done to mitigate them?10
Possible policy responses
While it would be hard at this stage to identify any strong or universal trend in these developments and
the potential impact they may have on the key ongoing issues, it is nevertheless the case that they are
already relevant for some central banks and may well become relevant for others in the near future.
Many central banks have thus undertaken policy reviews.
Central banks need to consider both the costs and benefits of any policy change (or of the absence of
policy change). If central banks decide that a policy response is warranted, all central banks have
broadly similar tools at their disposal. Most directly, if desirable they can modify their access policy to
allow new types of institutions as account holders. They can also alter the sorts of services that are
available to account holders (eg whether credit is provided and if so under what terms) or alter the
design of the payment systems they operate (eg change the technical means of access). More
broadly, they can use their oversight responsibilities, where appropriate in conjunction with banking
supervisors, to determine the standards applicable to payment systems and perhaps also to large
commercial providers of payment services.
Conclusion
The complex matter of competition and cooperation between central banks and commercial banks is
central to the topics examined in this report. Central and commercial bank monies are in many senses
alternatives. Nevertheless, the chain of transactions that lies behind individual payments will often
involve settlement in both central and commercial bank money. Moreover, the use of central bank
money enhances the soundness and efficiency of the payment system as a whole. Consequently,
users of commercial bank money benefit, directly or indirectly, from an externality generated by the
use of central bank money in payment systems. The convention exists that central banks avoid
competing with commercial banks in most of the payment services provided to the non-bank public. It
is this convention that generates the dichotomy between banknotes, that are available to all, and
central bank accounts, that are available only to some. At the same time, a symbiotic relationship
exists by which, on the one side, commercial banks help to extend the use of the currency while not
putting its stability at risk and, on the other side, the central bank provides them with privileged access
to its credit and, where appropriate, to some form of safety net.
However, the delimitation of the roles of central banks and commercial banks is not an absolute one.
In the provision of payment services to other banks an overlap exists. Banks may choose (and should
generally be able to choose) between a central bank and a commercial bank to process their
payments. As well as helping to promote a competitive banking system, this choice creates a healthy
incentive for central banks to provide competitive services. Central banks try to avoid unfair
competition in this area, for example by seeking to apply fair pricing policies.
This report does not attempt to set out a unique approach but instead shows the similarities and the
variations in the policies of CPSS central banks. What has been made evident by history is that policy
in this area is not static but must necessarily evolve with technological change and with changes in
financial, political and legal structures. The role and functions of the central bank itself have in fact
adapted over time, responding partly to change in the technology for making payments, and often
adopting innovations originated in the private sector. For instance, in many countries paper money or
account money represented a revolution in the technology for making payments that was initiated by
private banks.
The CPSS central banks share the conviction that the composite of central and commercial bank
money, convertible at par, is essential to the safety and efficiency of the financial system and should
remain the basis of the singleness of the currency. In other words, central banks would accept neither
10 The effects of consolidation on payment and settlement systems are discussed in the Report on consolidation in the
financial sector, Group of Ten, January 2001.
CPSS - The role of central bank money in payment systems - August 2003 7
an outcome in which central bank money crowds out private initiative, nor an outcome in which central
bank money is phased out by a market mechanism. Neither of these two outcomes is regarded as
plausible in the near future. The everyday policy decisions of central banks, illustrated in this report,
are less dramatic and more pragmatic in nature.
Central banks have generally adopted similar objectives in developing their payment system policies.
As set out in the Core Principles and the SSS recommendations, these objectives fundamentally
include the pursuit of safety and efficiency. The CPSS central banks have endorsed the Core
Principles and the SSS recommendations as the basic norms for oversight of systemically important
payment systems and of securities settlement systems and pursue similar operational strategies, such
as providing RTGS services to banking organisations.
The common ground shared by CPSS central banks in their objectives as well as in their main tenets
of policy concerning the use of central bank money can be summarised in 10 propositions that are set
out in the conclusion to this report (see Section 5).
There are also variations in payment system policies among CPSS central banks. Perhaps one
variation to note here is the degree to which central banks provide settlement services in parallel to
commercial firms (mainly banks) and the extent to which they establish norms delimiting the respective
roles of the central bank and commercial banks. Every central bank develops its own combination of
operational involvement and normative involvement, although it is true that different traditions make
them lean more towards one or the other. The variations may in some cases also involve different
trade-offs between safety and efficiency, as well as different opportunities for improving both safety
and efficiency in particular markets. They may also reflect potentially different risk tolerances in
addressing non-systemic risks. In some cases, legislation or national policies also incorporate differing
social policies or constraints involving consumer protection, banking structure, competition policy or
national security.
Structure of the report
The issues raised in this summary and introduction are explored in more detail in the rest of the report.
Section 1 considers the factors that affect the mix of central and commercial bank money in payment
systems. Section 2 then looks at some of the current developments affecting payment systems and
the impact they may have on the use of central bank money. In the light of this analysis, Sections 3
and 4 turn to central bank policies. Section 3 describes existing central bank policies, while Section 4
looks at the possible implications for these policies of the developments set out in Section 2. Section 5
provides some concluding remarks, including the 10 propositions mentioned earlier. Finally, the
annexes contain more detailed information on some of the topics discussed in the report.11
1. The coexistence of central and commercial bank money in payment
systems
Money is fundamental to the operation of a modern economy. A common feature of developed
economies is the wide variety of ways in which payments are made and the forms of money used.
There is also a wide range of economic agents whose liabilities function as money. The most familiar
issuers of money are central banks, which provide central bank money in the form of both banknotes
and deposit liabilities, and commercial banks, which generally issue private money (commercial bank
money) in the form of deposit liabilities.
Economic activity can in principle take place without the coexistence of central and commercial bank
money. Indeed, both corner solutions - on the one hand, narrow or monobanking where there was only
central bank money and, on the other hand, free banking where there was only commercial bank
11 For definitions of standard payment system terms used in this report, see A glossary of terms used in payment and
settlement systems, BIS, January 2001. (All the BIS publications referred to in this report, including the latest version of the
glossary, are on the BIS website, www.bis.org.) Terms that are specific to this report are defined as they are used.
8 CPSS - The role of central bank money in payment systems - August 2003
money - have existed in the past. But neither has proved sufficiently stable or efficient to survive.
There has been a migration away from the corner towards intermediate solutions in which both types
of money play an important part in facilitating economic activity. CPSS central banks continue to
believe that the most effective and efficient financial system is one in which there is competition
among banks and in which central bank money is used where its particular features are most
important.
An important feature of this coexistence is that, in a given currency, central and commercial bank
monies are convertible into each other at par. Conversion at par removes the very high transaction
costs that could arise for users of a currency if there were multiple issuers whose monies were
exchanged at different values. Conversion between commercial and central bank monies takes place
in a tangible manner when a commercial bank depositor withdraws banknotes from an account.
Conversion between different commercial bank monies takes place through payment systems when a
customer of one bank makes a payment to a customer of another bank, using central bank money as
the bridge in most cases.
This section looks in more detail at this coexistence of central and commercial bank money. It looks
first, in Section 1.1, at central bank money and the central bank’s objectives. Section 1.2 then
considers how payment systems function and the role of the settlement institution, while Section 1.3
discusses the factors determining the choice of settlement asset.
1.1 Central bank money and central bank objectives
Central banks provide central bank money to support their core objectives. CPSS central banks vary in
how they articulate these objectives, but they can be broadly categorised as pursuit of monetary policy
goals, maintenance of the stability of the financial system and promotion of the effectiveness or
efficiency of the financial system. Within the context of these broader objectives, CPSS central banks
recognise that the ability to make payments safely and efficiently is crucial to the functioning of the
financial system, both domestic and global. Sound and efficient payment mechanisms enhance the
allocation of resources, facilitate growth and improve social welfare. This report focuses on the role of
central bank money as a means of payment.
As noted above, central bank money takes two main forms - banknotes and deposit money.
Banknotes are probably the most visible symbol of a currency and play a widespread role in the
making of retail payments. Moreover, the value of banknotes outstanding is generally significantly
larger than the stock of central bank deposit money in existence. However, while banknotes are
undeniably important in an economy and raise a number of issues for central banks - most notably
concerning the costs of distribution and the prevention of counterfeiting - they generally do not raise
the sort of systemic risk issues of core concern to central banks because of the relatively small values
typically involved when payments are made. Banknotes are therefore not directly covered in the rest of
this report, although Annex 4 provides some more information about their features and usage.
On the other hand, central bank deposit money plays a crucial role as the settlement asset in payment
systems which transfer substantial values of funds each day and where there is significant potential for
systemic risk. The quantity of central bank money and/or the terms on which it is available are of
course pivotal aspects of central banks’ monetary policy. But, as illustrated in Figure 1, balances
with the central bank also play an important role from the viewpoint of payments policy. During the
day, deposits with the central bank can be used to make interbank payments, whose completion
is a critical activity for the economy at large. If the intraday balance available for payments is too
small relative to the value of payments to be made in a given time, it could result in gridlock,
preventing payments from being executed. Thus in many cases central banks provide intraday
credit to banks and other account holders. Indeed, particularly with the decline in importance of
reserve requirements in many economies, balances held by banks during the day are often
substantially larger than those held overnight.12
12 Figure 1 is a stylised diagram that is not intended to indicate actual magnitudes of central bank money. Other transactions
(such as sales/purchases of cash or provision/repayment of overnight credit) are included within “intraday balances
injected”. For data on overnight balances and intraday credit on central bank accounts, see Table B in Annex 3.
CPSS - The role of central bank money in payment systems - August 2003 9
Figure 1
Stylised diagram of central bank money
7
The smooth and safe functioning of a payment system is dependent not just on the quantity of the
settlement asset. It also depends crucially on the quality of the asset and thus on the identity of the
settlement institution. To explain this, Section 1.2 considers how payment systems function and thus
the role of the settlement institution in them.
1.2 How payment systems function and the role of the settlement institution
1.2.1 Simple models of how payment systems function
Different forms of money require more or less complex arrangements to enable them to be used to
make payments. The two most common forms of money used to make payments are banknotes and
commercial bank deposit money. Banknotes are bearer instruments and thus the payments process is
simple - the notes are simply transferred from payer to payee, as illustrated in Figure 2.
Figure 2
Payment by banknotes
However, where commercial bank deposit money is used, transfers generally take place within
organised “payment systems” where commercial and central bank money often complement each
other in more complex chains of payments. Although the term “payment system” can be used broadly
to refer to the entire web of payments within an economic area, it is often applied in a more limited
sense to refer to an interbank payment system, incorporating a particular set of payment instruments,
technical standards for the transmission of payment messages and an agreed means of settling claims
among system members, including use of a nominated settlement institution.
The simplest case of making a payment in an interbank payment system is shown in Figure 3. This
stylised payment system has one intermediary, generally (although not always) the central bank,
which acts as the settlement institution. The paying and receiving banks are both direct participants in
the interbank payment system and hold accounts at the settlement institution, and settlement is
effected by a debit from the account of the paying bank and a credit to the account of the receiving
bank. The payment may either be financed with funds already on the account of the paying bank, or
Payer Payee
Banknotes
value Intraday balances used for
interbank payments
time
Intraday balances
injected
Overnight balances
start of day end of day
Banknotes outstanding
10 CPSS - The role of central bank money in payment systems - August 2003
with credit provided by the settlement institution. The receiving bank may leave the funds it receives
on account at the settlement institution or it may decide to pay them away.
Figure 3
Simple interbank payment system
While this is a simple example, it illustrates the crucial role played by the settlement institution, and the
ways in which paying and receiving banks are exposed to it. Settlement takes place in the settlement
institution’s liabilities, and both paying and receiving banks need accounts with that institution. Both
are reliant on the settlement institution’s operational soundness. And they will be exposed to credit risk
on the settlement institution in relation to any funds held on account. These risks may be difficult to
avoid or to control. For example, receiving banks may have very little control over the value of
payments received and held on account with the settlement institution. The larger the value and
volume of payments the institution settles, the more important are its creditworthiness and operational
reliability.
In practice, payment arrangements, both domestic and particularly cross-border, are invariably far
more complex than this, involving tiers within and between which payments are made. As before,
those holding accounts with the settlement institution - the direct participants in the “system” - are
generally banks (“settlement” or “correspondent” banks), which in turn provide accounts and payment
services to their own customers, which may be other banks, non-bank financial institutions,
non-financial firms or individuals. In this world, the “payment system” is a broader construct, involving
various tiers of intermediation, as shown in Figure 4. For clarity, in the remainder of the report the
narrow set of arrangements involving the settlement institution and those holding accounts with it will
be referred to as the “interbank payment system”. The term “payment system” will be used to describe
the broader, tiered arrangements described below.
Figure 4
More complex payment arrangements
In this more realistic example, the payment chains are more complicated. Take a payment between a
customer of Bank A (a second-tier bank - ie one that is not a direct participant in the interbank
Paying bank Receiving bank
Settlement
institution
Interbank
payment
s
y
stem
Bank B Bank C
Settlement
institution
Bank A
Payer Payee
CPSS - The role of central bank money in payment systems - August 2003 11
payment system) and a customer of Bank C (a direct participant in the system). The payment process
involves debiting the payer’s account at Bank A, Bank A’s account with Bank B and Bank B’s account
with the settlement institution. It also involves crediting Bank C’s account with the settlement institution
and the payee’s account with Bank C.
In practice, a number of “payments” are taking place, using different types of “money”. The settlement
institution will generally (although not always) be a central bank, so settlement between direct
participants in the interbank payment system takes place in central bank money. But the accounts of
most payers and payees will be held with intermediary banks, and payments (debits) and receipts
(credits) will take place in commercial bank money issued by different commercial banks. Indeed,
while data are scarce, if the different components of payment chains are aggregated it is quite
possible that in many cases the value of payments settling in commercial bank money exceeds that
settled in central bank money (see Section 2).
The “payment chain” is actually a combination of various payments at different tiers, whose
“settlement” takes place independently. In some jurisdictions, unless otherwise contracted between
payer and payee, the point at which the underlying payment obligation has been extinguished will
coincide with the payment being “settled” within the interbank payment system. In other jurisdictions,
this is not generally the case. In any event, finality does not imply that the payee has yet received the
funds, so the payee may remain exposed to intermediaries even though the payer has legally
discharged its obligation. The moment in which final settlement takes place is defined primarily by the
rules of the interbank payment system. Furthermore, local laws may affect the timing or conditions
under which final settlement takes place.
This model is used for both domestic and cross-border payments. The latter, ie where the payer
and/or the payee is non-resident, generally involve some form of domestic payment. The
payer/payee’s bank may be able, and choose, to access the domestic interbank system directly on a
remote basis. If not, it will use the services of a correspondent bank, which may in turn access the
relevant system directly or use the services of a local bank. Final settlement may take place at a
number of levels (across the books of the settlement institution and/or those of a first- or lower-tier
commercial bank), depending on each counterparty’s payment arrangements.
The model is also applicable to the payment arrangements associated with securities settlement
systems (see Box 1). Such arrangements are included within the definition of “payment system” and
are therefore covered in the analysis in the rest of this report.
1.2.2 Risks relating to the settlement asset13
Essentially the same risks can arise within the sort of interbank payment system described above as
within the “simple” payments model outlined earlier.
Risks relating to the settlement institution
As stated earlier, direct participants have potential exposures to the settlement institution, as does the
settlement institution to the direct participants. Credit exposures may exist where funds are held with
the settlement institution or advanced by it to direct participants. There may be liquidity risks if the
settlement institution fails to meet any commitments it has made to provide liquidity to direct
participants. And direct participants are reliant on the operational capability of the settlement
institution. The nature, size and duration of these exposures depend very much on factors such as the
design of the system, the availability of credit and the arrangements for funding/defunding the
accounts held at the settlement institution.
The use of central bank money as the settlement asset in systemically important payment systems
(SIPS)14 eliminates credit and liquidity risk at the apex of the payment system, where exposures are
13 The term settlement asset is often used exclusively to refer to the asset used for settlement between direct participants in an
interbank payment system. However, for convenience, in the rest of this report the term is also used to indicate the asset
used for settlement between a direct participant and its customers.
14 For an explanation of systemically important payment systems, see Core principles for systemically important payment
systems.
12 CPSS - The role of central bank money in payment systems - August 2003
generally highest and most concentrated, and where direct participants have least choice over the
source of their exposure. And the central bank’s role as settlement institution provides assurance of
continuity in the provision of liquidity and in the provision of settlement services.
Box 1
Securities settlement systems
Securities settlement systems (SSSs) are systems which mainly provide custody services and final delivery of
securities from the seller to the buyer. When securities are traded in exchange for funds (as is usually the
case), SSSs also ensure the transfer of the related funds in the relevant payment system. This payment
system may be embedded in the SSS or external to it.15
If the payment system is embedded, both securities and cash are transferred within the same organisation.
Examples of SSSs with embedded payment systems are central bank CSDs (for the settlement of government
securities), which naturally use central bank money, or, on the other side of the spectrum, private CSDs (or
ICSDs) using commercial bank money.
An example of an SSS with an external payment system is a CSD which is privately owned but which settles in
central bank money. When the payment system is external to the SSS, a number of issues arise. For example:
the participant of the CSD also needs to have access (directly or indirectly) to the payment system;
the CSD and the payment system need to have compatible operating hours;
where collateral is needed to obtain credit in the payment system, there may be advantages to CSD
participants if the assets held at the CSD can be used as collateral.
Risks between direct participants and their customers
Similar exposures arise between direct participants and their customers. Customers are operationally
reliant on their chosen intermediary to make payments on their behalf, and incur credit risk where
receipts of funds are held with the intermediary. In turn, intermediaries incur risks on their customers
where they provide them with credit for payments. Such risks are not unusual - they arise, and are
managed, in the normal course of banks’ and their customers’ activities. But exposures arising within
the payment system may be very large, especially when the customer is a bank, since the values
transferred can be very significant. They may also be difficult to control and, depending on the degree
of tiering within the system, the number of direct participants may in practice be low, limiting the choice
of intermediary.
The distribution of payments affects the distribution of risk within the system. Where large values of
payments flow through a small number of direct participants, the consequent exposures may be very
large in relation to each direct participant’s capital. Each direct participant stands between its own
customers and other direct participants, such that other direct participants are to some degree
sheltered from the risk of default by non-participants and vice versa. However, as a consequence,
direct participants acting for a large number of customers may incur very high exposures, both to their
customers and to other direct participants, and may be more vulnerable to shocks within the payment
system or their customer base. At the same time, the impact of the correspondent’s failure on others
may be greater. In systems in which flows are highly concentrated, each direct participant’s ability to
15 Other models which are neither completely embedded nor completely external also exist. An example is the settlement
model developed by the French CSD and the Bank of France. The Bank of France has granted the securities settlement
system a mandate to operate dedicated accounts in central bank money. The cash leg of securities trades is settled on
these dedicated accounts. This architecture enables Euroclear France to check the availability of the securities on the
seller’s securities account as well as the availability of cash on the buyer’s dedicated account, and to transfer
simultaneously securities and funds between the participants in a way that ensures delivery versus payment and real-time
finality in central bank money. The Bank of France has also mandated Euroclear France to operate intraday credit
operations on its behalf for those participants whose dedicated account balance is not sufficient to settle a trade. Since this
intraday credit is automatically allocated to the dedicated cash accounts operated by Euroclear France, no permanent link is
necessary with the RTGS system. Consequently, these automated intraday repos can take place even outside the RTGS
operating hours.
CPSS - The role of central bank money in payment systems - August 2003 13
manage the associated risks is one determinant of how easily financial shocks to one part of the
system are transmitted throughout the system and to other parts of the financial sector.16
1.3 Factors determining agents’ choice of settlement asset
The example in Figure 4 illustrates how different forms of settlement asset (generally central and
commercial bank money) coexist. The balance between the different forms will depend on various
factors, including the design of the interbank payment system and the policies of the relevant central
bank. These are discussed in Section 3. But a key determinant of the balance will be the choices
made by potential payment system users.
In general, payment system users have a choice between being a direct participant in the system or
using a correspondent, and in the latter case a choice between correspondents. Their choice will be
influenced by the private costs and benefits associated with each option. Some of these costs and
benefits will relate to features of the institution providing the settlement asset, such as its
creditworthiness and neutrality. Others will relate to the services, such as credit, which that institution
is prepared to provide and to the design of the payment system within which the asset will be used.17
Differences between settlement assets are usually a matter of degree - safety and many of the other
relevant features are relative concepts, not qualities which assets either do or do not possess.
Safety
The “safety” of different forms of money, in the context of their use as settlement assets, essentially
means the likelihood of the asset retaining its value to the holder, and hence its acceptability to others
as a means of payment.
Central bank money is generally completely safe in its jurisdiction. Central banks are more
creditworthy institutions than commercial banks in their own currency. They have explicit or implicit
state support. In a fiat money system, where not constrained by a convertibility rule to another
asset/currency, the central bank can always cover its obligations by issuing its own currency. In
addition, central banks tend to be risk-averse institutions which seek, as far as possible, to engage
only in low-risk financial activities. Indeed, the term “ultimate settlement” has sometimes been used to
indicate settlement in central bank money, although the term needs to be used with care (see Box 2).
The creditworthiness of commercial banks is tested through their ability to convert on demand their
sight liabilities into the money of another commercial bank or into central bank money. In practice in
CPSS countries, the generally high credit standing of commercial banks means that default risk is
unlikely to be a significant disincentive to maintaining settlement accounts with commercial banks.
Prudential supervision reduces the likelihood of default by supervised institutions, improving the safety
of claims on these institutions. And the existence of investor/depositor protection schemes has the
effect of maintaining at least partial convertibility of a failed bank’s liabilities into other forms of money,
and hence supporting their value as settlement assets. Utilities like clearing houses often go further in
lowering default risk by fully collateralising any exposure to their members and not engaging in any
further financial activities which could expose them to risk. Thus other factors, including the asset’s
availability and liquidity, are likely to be a more significant determinant of choice of settlement asset.
It should be noted, however, that the safety of both central and commercial bank money is influenced
by the ability of the central bank to maintain the value of the stock of currency as a whole - ie price
stability.
16 The analysis in Section 1.2.2 is based on the assumption that banks that are not direct participants in a system use a
commercial bank to act as their correspondent (eg in Figure 4, Bank A uses Bank B). However, in a few cases central banks
themselves provide correspondent services to customer banks that are not direct participants in systems that settle in
central bank money. In these circumstances, the risks that arise are likely to be similar to those that arise where banks are
direct participants.
17 Those choosing direct participation are of course constrained to use the settlement asset that has been collectively chosen
by the system. Thus the choice of settlement asset cannot be made independently of the wider choice between direct
participation and non-participation, which will depend on a wider range of factors than those relevant to the settlement asset
itself.
14 CPSS - The role of central bank money in payment systems - August 2003
Box 2
“Ultimate settlement”
The term “ultimate settlement” is sometimes used to denote final settlement in central bank money (see
A glossary of terms used in payment and settlement systems). As such, the term combines two distinct
concepts - finality and the nature of the settlement asset used to achieve finality in payment systems.
Finality is achieved when settlement of an obligation is irrevocable and unconditional. As discussed in the Core
Principles, finality within an interbank payment system is generally determined by the system’s rules and the
legal framework within which the rules function. The definition should apply even in abnormal circumstances.
For example, some systems have rules or procedures that allow payments to be unwound if a participant fails
to meet its settlement obligation. Settlement cannot be considered final until there is no further possibility that it
will be unwound, because all conditions have been satisfied. In practice there can be many obstacles to
achieving finality. Some can be overcome by a proper contract between the parties. Others may require
changes to the law. A significant obstacle can be insolvency law, which typically takes precedent over contract
law and can thus overturn what would otherwise be a settled transaction (eg zero hour rule). Because of the
complexity of legal regimes and system rules, a number of jurisdictions have special laws designed to secure
payment system finality (eg the European Union’s Settlement Finality Directive).
Subject to any specific requirements of the law, parties are usually free to choose which asset to use as the
settlement asset. Many interbank payment systems use central bank money, but this is not always the case
(see Annex 3, Table C). Regardless of the settlement asset used, it is necessary to establish when finality
occurs. In general, the law does not distinguish between assets in this respect: settlement finality is no easier
or harder to achieve in central bank money than in any other asset. On the other hand, as discussed in the
main text, the choice of settlement asset is important for other reasons, not least because, even when the
original payment obligation is fully extinguished, for the payee there can be both credit and liquidity risks
associated with holding the resulting settlement asset.
The term “ultimate settlement” thus combines the concept of settlement being final with the concept of the
settlement asset being the least risky possible. As noted in the Core Principles, claims on the central bank are
typically free of the credit and liquidity risks associated with settlement assets. Where this is the case, it may be
appropriate to use the term “ultimate settlement” to denote final settlement in central bank money.
Liquidity and credit
“Liquidity” is a valuable characteristic for a settlement asset to possess. Certain forms of settlement
asset are usually said to be more liquid than others, with central bank money generally held to be the
most liquid. However, used in the context of the demand for different forms of money for settlement
purposes, liquidity can have more than one meaning.
As a rule, an asset’s “liquidity” is defined as the holder’s ability to dispose of it quickly without material
loss of value. Within the payment system of an economy, that translates as its ability to be used as a
means of making payments to a wide range of counterparties. In part, that will reflect the
creditworthiness of the issuer and thus is closely related to safety. However, the efficiency with which
money can be transferred between customers of different banks is also highly relevant. This will reflect
the scope of the payment network of end users and the speed and cost of transferring funds within
and between banks and interbank payment systems.
“Liquidity” is also often used to describe the issuer’s ability to expand its balance sheet by issuing
additional liabilities to its customers at short notice. In this context, commercial banks are constrained
by the desire to avoid a destabilising “run”, perhaps supported by prudential or statutory requirements.
Central banks do not face this constraint,18 and their ability to inject very large amounts of liquidity,
where appropriate, in order to facilitate the smooth operation of large-value payment systems even
when the financial system is under stress is one argument for their acting as settlement institution.
Particularly in large-value payment systems, account holders are likely to want access to some form of
routine credit facility. The absence (or insufficiency) of credit can impose costs on payers, by requiring
18 Central banks do not face this constraint vis-a-vis other assets in the same currency but there can of course be runs on a
currency as a whole, a possibility which may inhibit central banks’ ability to provide very large amounts of liquidity.
CPSS - The role of central bank money in payment systems - August 2003 15
closer control over payment flows, and/or by resulting in failed payments which can generate penalties
and damage business relationships. The terms on which credit is provided can thus influence the
choice of the settlement asset. Providers of credit usually make a charge, explicitly in the form of
facility and drawdown charges and/or implicitly by requiring collateral. CPSS central banks (with the
exception of the Federal Reserve) provide intraday credit free of charge but require collateral.19
Commercial banks are generally free to lend unsecured and may be more willing to do so, but would in
many cases apply higher direct charges to reflect the higher risk.
Central banks generally require intraday credit to be repaid by close of business and may impose high
charges where accounts are overdrawn. Commercial banks may be more willing to extend overnight
credit. Moreover, commercial banks typically remunerate positive balances held at close of business;
central banks may not, at least not at market rates.
The amount of liquidity - and thus potentially the amount of credit - needed to fund payment flows will
be another factor in the choice of settlement asset. Direct participation in interbank payment systems
typically requires significant amounts of liquidity. And while design features have been introduced into
some systems in order to economise on liquidity, correspondent banks may be able to manage their
customers’ payment flows so as to reduce the amount of liquidity and credit each customer needs to
obtain.
Neutrality
Another relevant factor is the extent to which use of an asset makes the holder reliant on the services
of a competitor, or requires the holder to provide a competitor with sensitive business information. In
this context, central banks, as primarily non-profit-maximising organisations, are generally perceived to
be broadly neutral by market participants, which may favour their liabilities being held for settlement
purposes.
Related payment services
The costs and benefits of holding different forms of settlement asset cannot be understood simply by
reference to the intrinsic qualities of each asset or its issuer. In this context, the asset is held
specifically in order to make payments, and users will need a range of related services.
The services available, and their cost, are important components of demand for different forms of
settlement asset. Provision of settlement accounts may come bundled up with other payment services,
for example the provision of information on balances or on the progress of particular payments.
Central banks often provide quite sophisticated information flows on account balances, in part to
ensure the smooth operation of the interbank payment system, but few other value added services.
Related services more likely to be provided by commercial banks include the ability to use a single
account in a number of contexts, for example to settle transactions in different markets, and perhaps in
different currencies. Commercial banks may be better able to provide expertise in the operation of a
range of payment and settlement systems. Operating hours, and related factors such as the hours in
which the account can be accessed, payment instructions input and settlement achieved, will also
influence users’ choice.
Regulatory costs and perceived benefits
Finally, the provision of central bank money may be associated with other costs and perceived
benefits that have little to do with the service provided or the quality of the settlement asset. For
example, most central banks will only provide account facilities, and credit, to financial institutions that
are subject to regulation, and regulation may imply significant private costs.
Equally, there may be some perceived financial benefit in utilising central bank money, and in
maintaining an account at the central bank, because of the perception that access to an account
provides semi-automatic access to emergency liquidity from the central bank - ie moves the institution
19 The Federal Reserve charges a fee for intraday credit and sets net debit caps. Certain institutions can obtain credit beyond
their cap by pledging collateral.
16 CPSS - The role of central bank money in payment systems - August 2003
within the central bank “safety net”. Central banks do whatever they can to correct this misperception,
but there is anecdotal evidence that it continues to persist in some markets.
1.4 Conclusion
Section 1.2 explained how the typical payment system operates, and how both central and commercial
bank monies are used within it. Section 1.3 illustrated how the two forms of money are, to some
extent, substitutes. Factors such as safety, liquidity and neutrality may point towards the use of central
bank money. Others - such as availability and cost of services - may not. Central banks therefore need
to be mindful of the factors that potential holders of their liabilities take into account in making private
decisions.
Of course, in the real world, not all users have access to both forms of money. Central banks apply
policies which limit access to their liabilities, and associated services such as credit, to a subset of
institutions. Moreover, other constraints may exist, for example membership criteria applied by
interbank payment systems, which further limit choice. Conversely, central banks may require private
agents to use central bank money in some contexts.
Before reviewing central banks’ policies in this area, the report explores a range of ways in which
recent and continuing developments are affecting the structure and use of payment systems, and the
use of central and commercial bank money within them.
2. Influences on payment systems and their impact
The payment system “model” described in Section 1 is not uniform across CPSS countries. Nor is it
static. Today’s payment systems are the product of many years of change in the design of payment
and settlement systems and in the markets in which they operate. Many important changes originated
in the mid-1980s, with the liberalisation of capital flows between developed economies and the
accompanying liberalisation of, and opening-up of competition within, financial markets. Other
changes originated from a growing recognition among CPSS central banks, in the late 1980s and
early 1990s, of the importance of a robust market infrastructure, and in particular sound payment and
settlement systems, for financial market stability and efficiency.
In consequence, payment and settlement systems have gone through a process of significant change
over the past decade, with the introduction, where they did not already exist, of risk-reducing features
such as real-time gross settlement (RTGS) into interbank payment systems, and delivery versus
payment (DVP) into securities settlement systems; the use of new technology to offer improved
functionality and communications at reduced cost; and the integration and automation of different
elements of post-trade processes.
That process of change is still under way. This section looks at a range of recent developments that
have affected, and continue to affect, the use of payment systems within CPSS countries, and which
are relevant to policy on the use of central bank money.
The analysis in this section is to a large extent based on anecdotal evidence. A considerable body of
data exists on the amount of central bank money in circulation and on its use as a means of payment.
However, data on other relevant factors, for example on values of payments made in commercial bank
money, or on the degree of concentration of payment activities within correspondent banks, are
scarce. Nevertheless, it seems likely that the developments identified are taking place, to a greater or
lesser degree, in all CPSS countries, and that they need to be monitored. If this is to happen, better
information may be required on payment activities outside the interbank payment systems.
2.1 Influences on payment systems
There are a number of wider economic forces, affecting the financial system as a whole, that have
implications for payment systems and in particular for the balance of use of central and commercial
bank money. Specifically, over the last couple of decades financial markets have been affected by the
powerful forces of liberalisation, technological innovation, globalisation and consolidation. Payment
CPSS - The role of central bank money in payment systems - August 2003 17
arrangements have been affected by these interrelated forces, which continue to be important and
may become more so in future, through a number of channels.
Liberalisation
Liberalisation of the activities that different types of institutions can carry out inevitably blurs the
distinctions between these institutions. It has long been the case that different countries have placed
differently the distinction between banks and non-banks but the situation becomes more complex in a
world of global service providers. For example, in the wholesale area, large non-bank financial
institutions such as securities firms (and in some cases insurance companies) are increasingly
involved in making payments in order to settle securities or foreign exchange deals on their own and
their clients’ behalf. The size of payment activities of such institutions may be equivalent to that of
many banks. And in some markets specialist institutions have emerged to provide payment-related
services that would previously have been provided by banks (eg non-bank operators of automated
teller machines (ATMs)).
Technological advances
Interbank payment systems have also been affected by technological advances in a number of ways.
Improved technology has facilitated and reduced the cost of access to payment systems by a wider
range of institutions, for example by allowing institutions to take advantage of cheap, off-the-shelf
access and processing packages and by encouraging the use of standardised, widely used
communications protocols. It has also made it possible for interbank payment systems and their
participants to process large volumes of payments not only quickly and at low cost but also in a
concerted manner with other payment-related activities such as providing credit, providing collateral
and settling securities and foreign exchange transactions. On the other hand, it also means that
correspondent banks may need to make greater investments in order to meet their customers’
demands for sophisticated payment services.
In the retail area, technology and innovation have led to changes in payment services such as the
growing use of card payments and the introduction of e-money and internet payments that involve
some non-bank payment service providers. Such developments are likely to become increasingly
important in the future.
Globalisation
Another important force is globalisation. Among other things, the liberalisation of capital movements
has resulted in significant growth in cross-border flows in recent years. As a result, financial institutions
active in the securities, foreign exchange, derivatives and other financial markets have, over a period
of time, become more active in making and receiving payments in multiple currencies. Such payments
are processed largely through correspondent banking arrangements that have, as a result, acquired
growing importance.
The widespread use of correspondents reflects a number of factors. Non-resident institutions may find
it difficult to directly access remote interbank payment systems for a number of reasons. Even where
that is not so, accessing multiple foreign payment systems may be costly and complex, requiring
investment in technology and in acquiring the necessary understanding of local markets. Commercial
correspondents are able to achieve economies of scale and scope, and to offer a range of services
that are attractive to firms operating in multiple markets and that central banks are currently unable or
unwilling to provide. In particular, commercial banks offer multicurrency payment services and
associated expertise in the operation of multiple payment systems, which can greatly reduce
settlement costs for global financial and non-financial institutions.
Recent years have also, however, seen the emergence of other more formalised services to cater for
such needs. The prime example is CLS Bank for the settlement of foreign exchange deals on a
payment versus payment (PVP) basis. CLS is widely predicted to lead to greater concentration of
correspondent activity into those banks that are direct participants in, or act as nostro agents for, CLS.
On a smaller scale, the introduction of US dollar and euro RTGS systems in Hong Kong SAR similarly
reflects a desire among participants in the Hong Kong markets to achieve cost savings in their US
dollar- and euro-based activities through collective use of, in effect, a highly concentrated
correspondent banking arrangement.
18 CPSS - The role of central bank money in payment systems - August 2003
Consolidation
Finally, consolidation - both within the financial market infrastructure and more particularly among the
major financial market intermediaries that are the main direct and indirect users of payment systems -
is also a powerful force for change. Consolidation can itself be spurred by the other forces of
liberalisation, globalisation and technology that between them may encourage the development of
larger institutions with a greater range and scope of activities.
From the point of view of this report, there are perhaps two aspects of consolidation which are of
particular relevance. Perhaps the most important aspect is that consolidation can result in a
concentration of payment flows and hence risks in a relatively small number of institutions. But where
consolidation is caused by liberalisation that enables mergers between banks and other types of
financial institutions - as, for example, in the United States as a result of the GLB legislation20 - a
second aspect could be a further blurring of the distinctions between those with access to central bank
accounts and those without access, in this case because some entities have access through affiliates
while others do not.
Consolidation is not new. Nor is the concentration of financial market activities within a smaller number
of firms that typically results from consolidation. Changes in the pace of consolidation are, in most
countries, more a matter of degree - at least as far as they relate to the payment system. The
Ferguson Report21 nevertheless found evidence of consolidation in recent years among the world’s
major financial firms, including those providing correspondent banking and custody services.
2.2 Impact on payment systems
One very important consequence of some of the developments discussed in Section 2.1 is that the
payment system infrastructure is significantly safer overall than was the case, say, 15 years ago.
Awareness of the potential for systemic risk in payment and settlement arrangements grew as
liberalisation and globalisation caused the values handled by these systems to increase. This has led
to major changes in the design of payment and settlement systems (such as RTGS, DVP and PVP), in
many cases facilitated by improvements in technology. While there has as a result typically been no
change per se in the settlement asset used within interbank payment systems (which was, and
generally continues to be, central bank money), increased safety has been achieved by changing the
type and form of intraday credit used. Poorly visible and weakly managed intraday exposures between
system participants have been replaced by explicit, controlled intraday credit provided by the central
bank. In many systems, therefore, there is more active and extensive use of central bank money than
used to be the case.
However, the developments also have other effects, the implications of which are less clear. The rest
of this section therefore considers the possible impact of the developments on payment systems in a
world unconstrained by central bank policy. First, it looks at how the developments could affect
institutions’ choices between direct participation and non-participation in interbank payment systems.
Then it considers the possible impact on the pattern of payment activity and, in particular, the extent to
which the developments may lead to greater concentrations of payment flows. Existing policies on the
use of central bank money, and how central banks may respond to the impact of these developments,
are then considered in Sections 3 and 4 respectively.
2.2.1 The choice between direct participation and non-participation
The changes described above can shift the balance of costs and benefits between, on the one hand,
direct participation in interbank payment systems and, on the other hand, non-participation
(ie accessing the system as a second-tier bank, using a direct participant as a correspondent). Such
shifts are of course of direct relevance to those, such as banks, which are allowed to have an account
20 The 1999 Financial Services Modernization Act (also known as the Gramm-Leach-Bliley Act) authorised the creation of
financial holding company structures that could contain banking, securities and insurance affiliates, thereby removing some
of the restrictions contained in the 1933 Glass-Steagall Act.
21 See Report on consolidation in the financial sector.
CPSS - The role of central bank money in payment systems - August 2003 19
at the central bank and thus already have the choice between direct participation and
non-participation. But equally they are of relevance to other institutions currently not allowed access to
central bank money but which - insofar as the developments tilt the balance for them in favour of direct
rather than non-participation - may request central banks to change their policies.
In fact, the balance could shift either way. Each of the changes discussed below may have multiple
effects, some of which may encourage direct participation and some of which may discourage it.
Moreover, the strength of the various effects may differ from institution to institution and thus it is
impossible to generalise whether the net effect will be an increase or decrease in direct participation
overall.
Some design improvements have increased the cost to direct participants of managing the liquidity
they need to finance their payment flows. Moreover, with RTGS systems the cost of liquidity has
become explicit rather than implicit. In non-RTGS payment systems, intraday liquidity is implicit and
free of charge. The costs are the uncertainties associated with maintaining an open exposure. In
RTGS systems, however, intraday liquidity is explicitly provided in the form of central bank credit. Such
intraday credit involves a cost - either the opportunity cost of holding the collateral required by the
central bank or an explicit charge. Similarly, the introduction of Model 1 DVP22 with settlement in
central bank money entails an increase in the collateral needs of SSS direct participants or the
settlement banks acting on their behalf. Moreover, the introduction of CLS has potentially significant
implications for settlement members’ liquidity management. While considerable effort has gone into
designing CLS so as to minimise the amount of liquidity required to settle transactions through the
system, the requirement to fund (net) positions at specific times during the day introduces a new
element for treasury managers.
On the other hand, technological advance tends to reduce the cost of operating and communicating
with interbank payment systems, and so the cost of direct participation. For the reasons set out above,
access to cheap, off-the-shelf technology can make it easier for a wider range of institutions to access
interbank payment systems directly. Of course, such technology also enables direct participants to
offer their customers improved services at lower cost, so the impact on the relative cost of direct
participation and non-participation is difficult to determine.
Increases in the volume of business may also have an ambiguous effect on the balance of advantage
between direct participation and non-participation. For example, some of the developments (such as
the growth in cross-border business) have probably resulted in more payments being channelled
through correspondent banks. Other things being equal, this should allow those banks to achieve cost
reductions through economies of scale and scope, some of which would probably be passed on to
their customers - encouraging them to remain non-participants. But equally, those customers
themselves may be handling greater volumes that may tilt the balance in favour of direct participation.
Other factors may also be relevant. In some countries, a blurring of the distinction between banks and
non-banks may mean that there is a greater range of entities involved in the provision of payment
services, which are thus potential candidates for direct participation. The neutrality of the settlement
institution may also be a more important factor for non-banks when they are competing directly with
banks in other lines of business such as insurance.
The overall impact of all the changes on the balance of costs and benefits of direct and
non-participation in interbank payment systems is extremely difficult to quantify. Indeed, individual
institutions are likely to be affected in different ways. Recent years have seen requests for access to
payment systems from a wider range of institutions, which may in part reflect changes in the relative
cost of direct participation. However, at the same time the number of participants in most interbank
payment systems overall has remained broadly static or contracted, and central banks have been
requested to address some of the perceived costs - particularly those related to liquidity - of direct
participation.
22 Model 1 DVP means gross, simultaneous settlement of securities and funds transfers. See Delivery versus payment in
securities settlement systems, BIS, September 1992.
20 CPSS - The role of central bank money in payment systems - August 2003
2.2.2 Concentrations of payment flows
The developments discussed in Section 2.1 above also have the capacity to affect, and in some cases
have affected, the concentration of payment flows in the payment system.
Other things being equal, consolidation could result in increased concentration of payment
flows among a smaller number of large payment intermediaries. Consolidation between
direct participants in the interbank payment system leaves a smaller number of direct
participants responsible for settling broadly the same value of customer payments.
Consolidation involving non-participants may also result in individual direct participants
accounting for a larger proportion of total payments.23
Increases in cross-border flows from non-resident institutions may also result in larger values
of payments being made and received by direct participants on behalf of non-resident
customers. Since it is typically the case that some direct participants specialise in such
correspondent banking, this is likely to increase concentration.
To the extent that the cost factors discussed in Section 2.2.1 might tend to discourage direct
membership of the interbank payment system, increased tiering could result in a larger
proportion of total payments being accounted for by non-participants (and passing through
and between a smaller number of direct participants).
The result can be greater concentration of payment activities through individual direct participants in
interbank payment systems.
Moreover, any of these developments can offer greater scope for direct participants to internalise
customer payments (as “on-us” payments)24 rather than settle them through the interbank payment
system. As a result, a greater proportion of payments may be made between holders of commercial
bank money, perhaps without central bank money being involved at any stage in the chain of
payments. At the extreme, the concentration of payment activities could result in the emergence of
correspondent banks that deal with such large values of “on-us” payments, and whose activities are
sufficiently integral to the smooth functioning of the economy, that they have some of the
characteristics of interbank payment systems - so-called “quasi-systems”, discussed in more detail in
Section 4.
Most interbank payment systems already exhibit a degree of tiering and many have significant
concentration. Section 1 described a “typical” payment system, with direct participants - correspondent
banks - providing payment services to other institutions. However, there are reasonably wide
variations in the degree of tiering and concentration. Data are limited and partial. Table 1 illustrates the
extent of tiering and concentration within most of the main systems in CPSS countries.
There are some indications that, in some countries and in certain markets, more highly concentrated
or tiered payment arrangements have developed. For example, in the United Kingdom, a recent
merger brought together the banks accounting for 20% and 10% of flows through CHAPS respectively,
although the merger is not yet operationally complete, so the implications for payment flows are not
yet clear. Mergers in the Swiss market have reduced the number of major payment banks to two. The
market for clearing US Treasury securities has likewise reduced to two major firms which, as a result
of mergers and acquisitions over a period of years, now account for more than 70% of securities-
related settlements in Fedwire. In Japan, the risk management costs associated with the new FXYCS
have encouraged a larger number of banks to access the payment system indirectly, reducing the
number of direct participants to less than 20% of the previous total. And in Belgium, tougher access
criteria and higher entry fees introduced in the ACH have also encouraged an increase in tiering in this
system.
23 For example, this would occur where there was a merger between two non-participants which had previously used different
direct participants, or where there was a merger between a direct participant and a non-participant that had previously used
a different direct participant.
24 In other words, settled on a direct participant’s own books between two of its own customers.
CPSS - The role of central bank money in payment systems - August 2003 21
Table 1
Tiering and concentration in selected payment arrangements
Tiering by number of institutions: number of banks that are not direct participants relative to all domestically located banks.
Tiering by value of payments: percentage of total payments originating from banks that are not direct participants.
Concentration: percentage of volume/value of payments accounted for by the five largest direct participants in the system.
In many cases the descriptions are estimates.
Tiering Concentration
Name of system By number of
institutions By value of
payments (e) By volume of
payments By value of
payments
Belgium
Ellips high low 82% 86%
Euroclear* nap nap nav nav
Canada
LVTS high nav 84% 82%
CDS debt* high nav 90% (e) 90% (e)
Eurosystem
TARGET high mixed nav 30% (e)
EURO1 strong mixed nav nav
France
TBF mixed mixed 46% 56%
PNS strong mixed 60% 56%
RGV/Relit* mixed mixed nav nav
Germany
RTGSplus strong1 nav nav nav
ELS low nav nav nav
Clearstream Frankfurt* high nav nav nav
Hong Kong SAR
HKD RTGS none none nav 48%
Italy
BI-REL low low 36% 39%
LDT* mixed mixed nav nav
Japan
BOJ-NET high2 none 18% 33%
FXYCS strong low 65% 61%
Zengin high low 40% 56%
TCH-BCCS high nav 47% 69%
Netherlands
TOP low low 73% 72%
Singapore
MEPS mixed nav 55% (e) 49% (e)
Sweden
K-RIX high low 90% 90%
VPC* high mixed “high” (e) “high”(e)
Switzerland
SIC low low 55% 68%
United Kingdom
CHAPS Sterling strong mixed 82% 79%
CHAPS Euro high mixed 72% 84%
United States
Fedwire funds mixed mixed 32% 44%
Fedwire securities* mixed mixed 79% 82%
CHIPS strong mixed 54% 60%
Descriptions of degree of tiering (number of institutions): none = all or virtually all domestically located banks are direct participants in the
system (or exceptions to this are not significant); low = at least 75% are direct participants; mixed = 25-75% are direct participants;
high = 5-25% are direct participants; strong = less than 5% are direct participants.
Descriptions of degree of tiering (value of transactions): none = all or virtually all payments by value are accounted for by direct participants
themselves (rather than by other domestically located banks using these direct participants); low = at least 90% of payments by value are
accounted for by direct participants; mixed = direct participants account for 25-90%; high = direct participants account for 10-25%; strong =
less than 10% of payments by value are accounted for by direct participants.
Selected systems that handled more than USD 5,000bn equivalent in 2000. For more details see Table C in Annex 3. * indicates payments
relating to a securities settlement system. (e) = estimate. 1 Tiering is “strong” due to the continued existence of ELS. 2 “High” tiering is due
to cooperative banks not having access to accounts at the Bank of Japan.
22 CPSS - The role of central bank money in payment systems - August 2003
This trend is not universal - as would be expected, given that some of the developments identified
earlier will tend to reduce the cost of direct access to the payment system and so reduce the level of
tiering. For example, the advent of liquidity saving features and intraday finality has led to decreased
tiering in the new CHIPS in the United States as non-settling participants have become full
participants. Nevertheless, as identified in the Ferguson Report, the trend does seem to exist.
2.3 Conclusion
The sorts of developments explored in this section raise various policy issues for central banks. Such
issues typically arise from the cumulative effect of a wide range of developments of varying
importance rather than any one single development. Indeed, while this report has focused on forces
that have caused changes in payment systems directly, some issues have been triggered even when
there have been no specific changes in payment systems themselves.25 In order to understand where
and why such policy issues might arise, it is important first to understand central banks’ current
policies in this area, and how these policies were determined. Indeed, because many of the
developments discussed are not new, current policies are already influenced by them to some extent.
Section 3 thus reviews current policies. Section 4 then assesses possible continuing implications of
recent developments for these policies.
3. Current central bank policies
While they may articulate their policy foundations in different ways, central banks typically distinguish
between two questions: for which systems should they act as settlement institution, and which
institutions should have access to settlement accounts (and on what terms). Section 3.1 addresses the
first question, and provides further detail on individual central banks’ policies, while Section 3.2
addresses the second. (More details of central banks’ policies are contained in Annex 1.)
3.1 Settlement in central bank money by systems
As noted in Section 1.3, both central and commercial bank money can be used as a settlement asset.
In practice, most - although by no means all - interbank payment systems use the central bank as the
settlement institution and thus the direct participants in these systems use central bank money as the
settlement asset.26 The arguments in favour of a central bank being the settlement institution fall into
five broad categories. They are:
risk - the use of a risk-free settlement asset can help reduce systemic risk;
service continuity - the use of a default-free settlement institution can limit the risk of
service interruption;
liquidity - the ability to create unlimited liquidity in domestic currency may be important for
the smooth operation of the system;
competitive neutrality - the use of central bank money means participants do not have to
rely on a competitor for settlement services;
efficiency - the use of a single settlement institution to settle different sorts of transactions
may enable participants to economise on, for example, liquidity usage.
25 Three examples of possible exogenous triggers may be briefly noted: first, the development in recent years of international
standards to encourage financial stability, such as the Core Principles and SSS recommendations; second, significant
institutional changes, such as the creation of the Eurosystem or the transfer in some countries of the function of banking
supervision into a separate regulatory body; and, third, specific events, such as the terrorist attacks of 11 September 2001,
which led to renewed concern over possible concentrations of payment flows which may be vulnerable to disruption.
26 See Annex 3, Table C for information about settlement in selected payment systems and arrangements.
CPSS - The role of central bank money in payment systems - August 2003 23
These arguments - particularly the first three - are most potent in the case of SIPS, where the values
transferred are very large in relation to the balance sheets and capital resources of at least some of
the direct participants. The failure of the settlement institution in a SIPS could cause serious and
widespread disruption within the financial system and thus the economy as a whole, both because of
exposures of the direct participants to the settlement institution (where they had credit balances) and
because the SIPS would be unavailable until alternative settlement arrangements could be put in
place.
This disruption could occur regardless of the cause of the settlement institution’s failure. To the extent
that the settlement institution provided credit to the direct participants in the SIPS, the failure of one of
the participants with a debit balance could be the cause of the settlement institution’s failure. In that
way the settlement institution could cause problems to be propagated between the participants. Or,
particularly where the settlement institution was a commercial bank, the failure might be the result of
activities unrelated to the payment system. The settlement institution could thus cause outside
problems to be propagated within the SIPS. Again, these dangers emphasise the importance of the
soundness of the settlement institution for SIPS and hence for the economy at large.
Accordingly, central banks have a clear collective policy on the use of central bank money as a
settlement asset in SIPS. Core Principle VI stipulates that, for such systems, “assets used for
settlement should preferably be a claim on a central bank; where other assets are used, they should
carry little or no credit risk and little or no liquidity risk”. This reflects the collective decision that high
concentrations of such risks should be eliminated or significantly reduced by requiring those systems
to settle in a “safe” asset. Likewise, SSS Recommendation 10 states that the assets used to settle the
ultimate payment obligations from securities transactions should carry little or no credit or liquidity risk
and that, if central bank money is not used, steps must be taken to protect members of the central
securities depository from potential losses and liquidity pressures arising from the failure of the
settlement institution whose assets are used.
But even here some discretion is allowed. The Core Principles and the SSS recommendations
recognise that - as noted in Section 1.3 - “safety” is not the sole prerogative of central bank liabilities,
that the use of central bank money by large-value systems is not always practicable (eg where cross-
border or multicurrency payments are involved), and that other issuers of settlement assets could be
sufficiently well protected to adequately mitigate risk within the system.
A number of significant systems do in fact currently settle in commercial bank money - including the
ones described in Box 3. The relevant central banks’ willingness to permit these arrangements
sometimes reflects their acceptance that settlement in central bank money is difficult to achieve
because of the need to offer multicurrency facilities (eg where there is insufficient overlap of the
opening hours of central banks in different time zones or remote access is not allowed). In other cases
it reflects their acceptance that the system and its direct participants have chosen to settle in
commercial bank money. However, for those systems that are systemically important, steps have
been taken to limit the risk of issuer default. For example, CLS Bank’s design incorporates risk
controls which meet internationally recognised standards, and funding and defunding of participants
accounts takes place across the relevant central banks’ accounts.
The central bank’s competitive neutrality and the efficiency gains from using a single settlement
institution for multiple systems might also be used to justify the provision of its settlement services to
significant but non-systemically important systems such as the principal retail clearing systems or the
card networks. However, central banks’ policies in relation to such systems are somewhat more
diversified. This is in part because, while the factors listed above might point towards a broad role for
the central bank as settlement institution, there are important counterarguments to the central bank
providing this service in all circumstances. For example,
market choice and competitive distortion - all CPSS central banks place significant
reliance on market forces to ensure the provision of financial services. It is possible that the
provision of such services by the central bank to private sector systems and institutions
could in some circumstances disintermediate commercial providers of accounts and related
services. Clear public policy grounds are needed to justify discouraging the emergence of a
market-oriented solution.
risk to the central bank - provision of credit to the system’s participants puts public funds at
risk. But the system may require credit to operate efficiently. In general, only clear public
policy grounds would justify this. In non-SIPS such grounds may be less persuasive.
24 CPSS - The role of central bank money in payment systems - August 2003
moral hazard - as noted in Section 1.3, the provision of account facilities could encourage
the misperception that the account holder was within the central bank’s “safety net”.
As examples of policies, the Deutsche Bundesbank, the Netherlands Bank, Sveriges Riksbank and the
Swiss National Bank accept and even encourage settlement in central bank money within most or all
systems, regardless of the values passing through them. In similar but not identical vein, the ECB
recently issued a consultation document which, while not actively encouraging all systems to settle in
central bank money, stated that where retail payment systems are not of systemic importance,
settlement in central bank money is not obligatory but is allowed (and in fact most such systems in the
euro area do settle in central bank money).27, 28
The Federal Reserve offers its (net) settlement services to all deposit-taking institutions and their
related clearing organisations, without drawing distinctions between SIPS and non-SIPS. The Federal
Reserve believes that its provision of services in this area ensures the integrity and efficiency of
settlement for the wider economy, fosters the accessibility of settlement services and competition in
the provision of private clearing services, and enhances the soundness of financial institutions.
The Bank of England draws a distinction between those non-SIPS for which it is willing to act as
settlement institution and those for which it is less inclined to do so. In a recent policy statement,29 the
Bank identified, as a distinct category, “systems of system-wide importance” (SWIPS), for which it is
willing to act as settlement institution without insisting on doing so. Such systems are of importance to
the economy as a whole, are widely used and have few short-term substitutes. Although they would be
unlikely to generate or transmit financial instability, they could cause considerable disturbance to the
economy as a whole. However, the Bank is not normally willing to act in this capacity for systems
which are neither SIPS nor SWIPS (although it would be prepared to consider the case for doing so,
for example on neutrality grounds).
3.2 Provision of central bank money to individual institutions
Closely related to the question of which systems settle in central bank money is the question of which
institutions have accounts at the central bank and whether they are allowed access to credit on that
account.30 Clearly, in a system that settles in central bank money, an institution can only be a direct
participant, responsible for its own settlement, if it has access to an account at the central bank.
Moreover, as noted earlier, access to an account without credit may be of relatively little value.
The provision of accounts to banks has historically been a core aspect of central banking, and it
remains at the heart of CPSS central banks’ banking activities. However, few central banks limit
accounts strictly to banks. Indeed, some provide accounts to a very wide range of financial and even
non-financial institutions. The extent to which each is prepared to broaden the population of account
holders, and to make available to those account holders accompanying services, reflects each central
bank’s judgment as to what weight to place on a range of policy considerations.
Those considerations are very similar to those determining which systems should settle in central bank
money. In some countries these considerations are largely determined by legislation and the central
bank is constrained by statute as regards those to whom it may provide accounts. However, whether
set by central bankers or politicians, the considerations are broadly the same across CPSS countries.
27 Oversight standards for euro retail payment systems, European Central Bank, July 2002.
28 The Eurosystem’s view is that retail payment systems may, but need not, be systemically important. Those that are would
be expected to comply with the Core Principles. Others would be expected to comply with the recent policy statement, once
finalised. For example, the Bank of France has concluded that the principal French retail payment system is systemically
important.
29 Bank of England settlement accounts, Bank of England, November 2002.
30 For the purposes of this report, accounts referred to in this section are accounts held with the central bank that can be used
for settling obligations within a payment system.
CPSS - The role of central bank money in payment systems - August 2003 25
Box 3
Systems where settlement involves commercial bank money
This box provides a brief explanation of how settlement takes place in five systems where commercial bank
money is involved.
CLS
CLS Bank (CLSB) is an Edge Act Corporation, based in New York and owned by approximately 70 financial
institutions. Each direct participant (“settlement member”) in CLS holds an account at CLSB which is divided
into sub-accounts, with one sub-account for each currency that CLSB settles (currently the US, Australian and
Canadian dollars, euro, yen, pound sterling and Swiss franc). Members start and end each day with zero
balances on these accounts and sub-accounts.
Foreign exchange deals are settled one by one (gross) on these accounts by simultaneously debiting the
sub-account of the currency being sold and crediting the sub-account of the currency being bought. Settlement
thus takes place in “CLSB money”, with members accumulating debit balances in currencies where overall they
and their customers are sellers and credit balances in those where overall they are buyers.
CLS draws a key distinction between this gross settlement process and the net funding by members of those
sub-accounts in which they have debit balances. Where they accumulate debit balances, members have to pay
in funds to CLSB in order to restore their sub-account in that currency to zero by the end of the day.
Correspondingly, CLSB makes payouts to members with net long positions. These pay-ins and payouts are
made using RTGS systems or their equivalent to transfer funds to and from accounts CLSB holds at the central
banks of the currencies concerned. Central bank money is thus used in the funding and defunding process,
which is an integral part of the overall CLS settlement process because of the requirement that members start
and end each day with zero balances at CLSB.
For the Canadian dollar and pound sterling, CLSB accesses the central bank and thus the corresponding
interbank payment system as a customer of the central bank. In other currencies, CLSB is a direct participant
in the system used. Since it participates from New York, CLSB represents a significant case of remote access
for the Australian dollar, euro, yen and Swiss franc systems.
Euroclear
Since 2001, the Euroclear system has been operated by Euroclear Bank, a Belgian credit institution acting as a
limited purpose bank. As an ICSD, Euroclear provides settlement services, as well as depository and custody
services, for international and domestic securities issued by entities from over 110 countries.
Euroclear has about 2000 participants from more than 80 different countries, the vast majority of which are
banks, broker-dealers and other institutions engaged in the issuance of securities, the provision of custody
services, market-making and trading in securities. Each participant holds both cash and securities accounts at
Euroclear Bank, which provides them with settlement-related banking services, including credit, foreign
exchange, securities lending and borrowing and collateral management services. Intraday credit is generally
free of charge, but interest charged on overnight credit is typically above the market rate, which limits its use.
Conversely, since no interest is paid on cash balances held with Euroclear Bank, they are generally low. Credit
extensions are generally fully collateralised.
Trades are settled by book entry on a simultaneous DVP (Model 1) basis. Whilst a majority of trades settled are
denominated in euros, Euroclear also settles in more than 40 other currencies. More than 90% of settlement
takes place in the overnight batch process using commercial bank money. But Euroclear also offers a real-time
daylight settlement process in which participants may, in principle, choose to settle euro-denominated
transactions in either commercial or central bank money, the latter across accounts of the National Bank of
Belgium (NBB). However, because most Euroclear participants are located outside Belgium and the NBB only
provides credit to institutions in Belgium, the option to settle in central bank money is little used in practice.
Settlement of non-euro denominated transactions takes place only in commercial bank money for efficiency
reasons, including the practical difficulty of accessing non-euro area central bank accounts (eg due to
non-overlapping operating hours) and central banks’ policies on access to accounts and credit.
Clearstream
Cedel was founded in 1970 to provide the clearing, settlement, custody and management of securities and
precious metals. On 1 January 1995, with the intention of increasing the company's effectiveness, Cedel
became Cedel Bank (and later Cedelbank) in order to allow its customers to take advantage of capital
adequacy regulations. In January 2001, Cedelbank was renamed Clearstream Banking and now belongs to the
Clearstream group of companies within the Deutsche Börse Group.
Box continued overleaf
26 CPSS - The role of central bank money in payment systems - August 2003
Box 3 (cont)
Systems where settlement involves commercial bank money
Clearstream has about 1,500 customers from more than 100 different countries, the vast majority of which are
banks and other institutions engaged in the issuance of securities, the provision of custody services, market-
making and trading in securities. Each participant holds both cash and securities accounts at Clearstream,
which provides them with settlement and custody-related banking services, including credit, foreign exchange,
securities lending and borrowing and collateral management services. Intraday credit is generally free of
charge, but interest charged on overnight credit is typically above the market rate, which limits its use. Credit
extensions are generally collateralised.
Trades are settled by book entry on a simultaneous DVP (Model 1) basis. Whilst most trades settled are
denominated in euros, Clearstream also settles in more than 30 other currencies. Most settlement takes place
in the overnight batch process using commercial bank money. Since the second half of 2002, the Central Bank
of Luxembourg together with Clearstream has offered a new service to Luxembourg-based banks participating
in Clearstream’s overnight processing, the so-called Night Time Link. It should be noted that with this
procedure, cash credit granted by Clearstream to customers overnight is collateralised by central bank money.
Settlement of non-euro denominated transactions takes place only in commercial bank money for efficiency
reasons, including the practical difficulty of accessing non-euro area central bank accounts (eg due to
non-overlapping operating hours) and central banks’ policies on access to accounts and credit.
US dollar and euro RTGS systems in Hong Kong SAR
In Hong Kong there are two RTGS systems that settle foreign currency (namely, the US dollar and the euro).
The Hong Kong Monetary Authority (HKMA) appointed the Hongkong and Shanghai Banking Corporation
(HSBC) as the settlement institution for the US dollar RTGS system for five years from August 2000, and
Standard Chartered Bank as the settlement institution for the euro RTGS system for five years from April 2003.
In both systems, all transactions are settled in real time on a gross basis across the books of the relevant
settlement institution. Participation in the systems is voluntary. Banks which choose to use the systems are free
to do so as either direct participants or via a correspondent bank.
The systems are used mainly as an alternative to traditional cross-border correspondent banking arrangements
for the settlement of the US dollar and euro legs of commercial remittances and foreign exchange transactions.
Real-time links between the Hong Kong dollar RTGS system (which settles on accounts at the HKMA), the US
dollar RTGS system and the euro RTGS system allow counterparties to a USD/HKD, EUR/HKD or USD/EUR
foreign exchange trade in the Asian region to settle both sides of the trade simultaneously.
Once again, a key objective is to mitigate high concentrations of credit, liquidity and operational risk by
providing a safe, liquid settlement asset and a high degree of assurance of service continuity. Another
is to treat financial market participants in an even-handed manner and in some circumstances to
permit access to a competitively neutral settlement institution. Such considerations might, on the face
of it, imply fairly wide provision of central bank money. But a check is provided by three further
objectives: first, promoting a competitive banking industry in which innovation is encouraged, and
therefore not unnecessarily disintermediating banks; second, limiting the risk borne by the central
bank; and, third, avoiding moral hazard as far as possible. Accordingly, access to central bank money
is restricted to circumstances where its special features are particularly valuable in terms of social
costs and benefits, and thus limited to particular classes of institution.
3.2.1 Access to accounts
Banks
In practice, banks are generally the primary holders of settlement accounts. Banks’ special status in
this context reflects the fact that they are the principal providers of payment services in the economy,
and banks providing payment services to other banks and non-banks account for the largest flows
through most payment systems. All central banks provide accounts to banks, and Table 2 shows that,
while there are exceptions, banks generally account for a high percentage of the value of overnight
balances on central bank accounts.
CPSS - The role of central bank money in payment systems - August 2003 27
Table 2
Percentage of balances on payment accounts
at the central bank that are held by banks
Country % of balances on
payment accounts Country % of balances on
payment accounts
Belgium > 90% (e) Netherlands 69%
Canada 100% Singapore 9%
France 74% Sweden 40%
Germany 99% Switzerland 80%
Hong Kong SAR 100% United Kingdom approx 100% (e)
Italy 100% United States 88%
Japan 85%
Figures for 2000. For more details, see Table A3 in Annex 3. (e) = estimate
Precisely what constitutes a “bank” differs between countries. A common denominator across different
jurisdictions is that an institution that simultaneously accepts deposit and provides credit is defined as
a “bank”. Several EU member states extend the requirement for a licence (and the definition of bank
or, in EU legal terms, “credit institution”) to institutions that grant credit but do not take deposits and
those institutions may be granted access to central bank money. In the United States, “bank” is
synonymous with depository institution, including both domestically chartered institutions and US
branches and agencies of foreign banks. In Table 2 for the United States, the “bank” category also
includes state-licensed trust companies that are members of the Federal Reserve System, such as the
Depository Trust Company, and Edge Act corporations, such as CLS Bank; these types of institutions
are also allowed to maintain an account.
In many countries, there are additional considerations. Limits on access to banks can also reflect a
conscious desire to maintain a balance of privileges and responsibilities between regulated and
unregulated institutions. In such countries, access to central bank accounts is regarded as part of a
“package” of privileges and burdens given to banks. The “privileges” - including access to accounts
and to credit, and in some cases participation in deposit insurance schemes and the ability to take part
in monetary policy operations - are granted in part to give an incentive to institutions to undertake the
“burdens” of banking regulation and supervision, including capital and reserve requirements.
Non-resident banks
While resident banks are core central bank customers, the same is not true of non-resident banks;
indeed, until relatively recently no central bank allowed so-called remote access. The term “resident
banks” refers to banks with some specified form of authorised establishment within the currency area,
which may include banks with local branches but primarily chartered elsewhere. By contrast,
non-resident banks have no such establishment. In line with the definition of resident and non-resident
banks, remote access is defined to be where the holder of the account at the central bank has neither
its head office nor any of its branches located in the country of the central bank concerned.
Prohibitions on remote access reflect a number of factors. A first argument is the risk for the central
bank. Dealing with non-resident banks subject to other countries’ laws and regulations can be more
risky, since the effect of overseas laws is more difficult to predict and may be inconsistent with
domestic law. Although dealing with local branches of overseas banks can generate similar risks,
those risks may be easier to contain in part because they are generally subject to domestic law. It may
be more natural to maintain a relationship with resident institutions, with which the central bank is
more likely to interact in other contexts. Where the account holder has access to credit (see below),
the central bank may feel less able to rely on the effectiveness of overseas supervisory regimes to
help protect its position. A second argument lies in the balance between incentives and regulatory
costs to the resident banking industry. Resident banks safely extend the use of the currency within the
central bank’s jurisdiction by providing retail payment services to the general public. They are subject
28 CPSS - The role of central bank money in payment systems - August 2003
to supervision by the local authorities. These resident banks in turn have the business opportunity to
provide access to the currency and payment services to non-resident banks (correspondent banking).
Remote access, by relaxing the link between “location” and “access to the central bank”, could change
this balance of incentives and costs.
However, in recent years this approach has changed in some countries, not least because
globalisation has increased the use of currencies outside national boundaries. This is perhaps most
evident in Switzerland, where since 1998 the Swiss National Bank (SNB) has allowed remote access
to SIC (the Swiss RTGS system) for international joint ventures and clearing organisations, as well as
for the banks that are direct participants in such arrangements, provided they make a sizeable
contribution to the reduction of systemic risk or are of major significance to the Swiss financial centre.
For reasons of legal and operational security, this applies only to institutions from countries which
have at least the same standards as Switzerland with respect to banking supervision, the fight against
money laundering and telecommunications infrastructure. In order to smooth the settlement of
payments in SIC, remote participants are allowed intraday credit. They can also participate in the
SNB’s money market operations and can now also obtain overnight lombard credit (although in
practice only one remote participant has so far established a lombard credit line.)
The SNB’s policy towards remote access partly reflects a view that globalisation, competition between
European financial centres and cross-border mergers have made traditional access policy outdated. It
also reflects two more specific developments. The first of these was the merger in 1998 between two
of the three big Swiss banks, which gave rise to concern about concentration and reduced liquidity in
the Swiss franc money market; remote access was seen as a way to encourage non-resident banks to
become more active in Swiss markets and thus increase competition. The second development, also
in 1998, was the merger between the Swiss SOFFEX exchange and Deutsche Terminboerse (DTB) to
form Eurex. SOFFEX was linked to SIC to enable margin calls to be paid; to enable the same facility to
be used in Eurex, the many German banks that participated in DTB had to be given remote access.
In the European Union, Eurosystem central banks do not allow remote access to settlement accounts
by non-EEA-resident institutions but internally, that is within the European Economic Area (EEA), they
do allow remote access to accounts.31 Sveriges Riksbank and the Bank of England go further for their
own currencies, also allowing access by non-EEA-resident banks where assurance can be provided
(through legal opinions) that no unacceptable conflicts of law exist. But in practice usage is very
limited.
However, it is worth noting that the distinction between the policy of only allowing foreign-owned banks
to have an account if they are resident in the country and the policy of allowing remote access is not
always clear cut. There are a number of intermediate cases where a foreign-owned bank may have a
local branch, entitling it to an account at the host central bank, but where all or part of the operation of
that account is managed remotely (eg by a centralised treasury operation in another country or even
outsourced to a third party that is remotely located). For example, this is allowed on a case by case
basis in Japan.32 In the United States, such activities are allowed under the Federal Reserve’s broader
policy of permitting the outsourcing of account services.
Non-banks
Payment services are provided by an increasingly wide range of institutions. Non-bank financial and
even non-financial institutions are increasingly assuming responsibility for managing their own and
their customers’ payments.
One possible policy decision to address this development, albeit one often not directly within the
authority of the central bank, is to expand the coverage of the banking licence to these providers of
payment services. Many, such as the larger securities firms, already compete directly with banks in a
31 In the European Union, legislation underpinning the single market imposes very strict limits on how far member states can
impose distinctions based on location for institutions resident in the EEA. (The EEA consists of the EU member states plus
Iceland, Liechtenstein and Norway.) Accordingly, all EU central banks allow access by non-resident banks (and certain
other institutions) provided they are resident in the EEA, although in practice restrictions on the provision of credit (see main
text below) mean that use of the possibility is limited for accounts in euros.
32 Institutions with this form of remote access are required to have the front-end-processor and at least one BOJ-NET terminal
in Japan.
CPSS - The role of central bank money in payment systems - August 2003 29
number of areas and account for large values of payments. While it is true that the “burden” of being
supervised is no longer applied exclusively to banks, in many cases regulation of banks remains
tighter than that of other institutions. By bringing such non-banks within the coverage of a banking
licence they would become subject to the corresponding costs (such as tighter regulation) and benefits
(such as access to a central bank account).
Another possible policy decision, not in contradiction with the previous one and followed by many
central banks, is to be prepared to provide access to categories of non-banks, particularly where their
activities can result in highly concentrated exposures which might be mitigated by providing such
institutions with central bank money or where there are efficiency or competitive equality issues
because such institutions compete directly with banks in providing payment services to both banks
and other non-banks. These arguments are considered in more detail in Section 4.
The range of other types of financial institutions to which access is extended varies from country to
country.33 For example, most central banks provide, or would be willing to provide, settlement
accounts to clearing houses to facilitate settlement of obligations to and from their direct participants.
Many are prepared to allow securities firms to open accounts to settle payment obligations arising
from settlement systems in which they are a direct participant as a way to enable central bank money
to be used for these transactions. Some provide accounts to other types of non-bank financial
institution, such as insurance companies or non-bank credit card issuers. And a few provide accounts
to certain other types of non-financial institution, for example operators of automated teller machines.
Aside from financial institutions, most central banks have traditionally provided accounts to the central
government. In addition, in Germany, France and the United Kingdom, certain firms and companies
hold grandfathered accounts at the central bank, although new accounts are now generally not
allowed. In France, Germany, Switzerland and the United Kingdom, central banks’ own employees are
also granted access to central bank accounts.
The Swiss National Bank allows access to a wide range of financial institutions, whether resident in
Switzerland or not. In contrast, the HKMA limits access to resident banks (including restricted licence
banks). The Federal Reserve generally confines access to institutions with a banking or similar
licence, including both domestically chartered institutions and US branches and agencies of foreign
banks.34 However, a clearing house may have access to an account if it has such a licence, as is the
case for CLS Bank, or if the account would be maintained in the name of participants in the clearing
arrangement that have such licences, as is the case for CHIPS. While the Eurosystem has a uniform
policy towards allowing accounts for credit institutions in the EEA, each national central bank may at
its own discretion decide whether or not to allow accounts to securities firms (or “investment firms”, as
defined by EU legislation) and/or clearing houses. In practice, most national central banks do allow
these accounts. The Bank of England’s policy is that in principle any direct participant in a system for
which the Bank is settlement institution should be allowed to have an account and that non-resident
banks should have the same facilities as resident banks provided they are appropriately supervised
and contingent on the provision of assurances regarding compatibility of legal systems.
In practice, all central banks allow themselves an element of discretion in this area. The types of
payment for which an account can be used may be circumscribed, both by the systems of which the
account holder is a direct participant, but also by conditions applied by the central bank.35 And access
to an account may well be conditional, for example non-resident banks may need first to provide
assurances regarding compatibility of legal systems.
33 For more detailed information, see Annex 3, Table A1.
34 Institutions with similar licences include state-licensed trust companies that are members of the Federal Reserve System
and Edge Act corporations. The Federal Reserve also has a limited selection of other account holders, including
government entities, other central banks, international financial institutions and certain government-sponsored institutions,
such as the Federal Home Loan Banks.
35 In the United Kingdom, for instance, an account opened by a CREST settlement bank could not be used to settle payments
that were not related to securities transactions, even where the account holder was a direct participant in both systems; in
addition, different conditions might apply to CREST and CHAPS accounts, for example, on access to credit.
30 CPSS - The role of central bank money in payment systems - August 2003
3.2.2 Access to credit
For many institutions, particularly direct participants in large-value interbank payment systems, access
to an account may be of little or no use without access to credit,36 so the central bank’s policy on the
latter is an important element of its overall access policy. Indeed, once allowance is made for the fact
that, where no credit is available, few institutions typically opt to open an account, some of the
apparent differences in access policy are less strong. Particularly relevant in the euro area is access
by securities firms, where intraday credit is generally limited, and remote access by banks, where no
intraday credit is available. In both cases, little use is made of central bank accounts.
There is broad uniformity in central bank policies towards resident banks, in that in general they are
provided with both intraday credit in RTGS systems and overnight credit.37 However, there is less
uniformity about providing credit to non-bank financial institutions. In many cases, where these
institutions are allowed an account they are also allowed intraday credit. The most common
exceptions to this are clearing houses (which often do not need credit anyway). Another qualification,
just mentioned, is that the Eurosystem allows euro zone central banks to provide intraday credit to
resident securities firms but the credit is limited unless a guarantee is provided by a resident bank.38
This reflects the fact that the Eurosystem, while ready to open accounts for non-banks, does not want
to disintermediate banks in the provision of credit. Moreover, the Bank of England would allow
non-bank regulated firms access to intraday credit only where the scale of their own payment activities
would make them significant direct participants in a SIPS and where it is persuaded that such
participation would reduce risk for the financial system. There is also less uniformity about whether
non-bank financial institutions are entitled to overnight credit as well as intraday credit.
Turning from financial institutions to a broader set of institutions, while there are exceptions it is
typically the case that credit is not provided. Entities which have access to accounts but not to credit
generally include the government, other central banks and international financial institutions. This
reflects in part the fact that such entities are not direct participants in the payment system and thus
that their need for credit from the central bank is less pressing, and in part the broader reasons why
central banks limit the provision of credit, as mentioned below.
Central banks limit the provision of credit for a number of reasons. As noted in Section 3.1, only clear
public policy grounds justify putting public funds at risk. In practice, the central bank may not have total
discretion in how far to “unbundle” the provision of credit from access to an account: for large-value
interbank payment systems, direct participants’ access to credit is often essential for the smooth
operation of the payment system and to avoid payment gridlock. Nevertheless, credit is generally
provided only to a limited set of account holders, where necessary to ensure the orderly flow of
payments.39
Where central banks provide credit they are potentially exposed to credit risk and consequently they
require collateral, set limits and/or charge fees. This alone may limit the population of account holders
to some degree, particularly where the central bank only treats a limited range of collateral as eligible.
Moreover, like any financial institution, central banks carry out various forms of credit assessment of
those to whom they are exposed. Supervision is a form of credit risk assessment. So, as noted above,
36 A survey recently carried out by the Eurosystem central banks confirmed that most large financial institutions view access to
credit as critical to the effective operation of a settlement account.
37 For more information about central banks’ policies on providing credit, see Annex 3, Table A2.
38 If a national central bank decides to grant credit to securities firms, each securities firm can choose between two modalities.
They may obtain unlimited intraday credit if the credit is guaranteed by a resident bank. Alternatively, they may obtain
intraday credit without a bank guarantee, but only up to an individual cap imposed by the central bank according to the risk
profile of the securities firm.
39 This section considers the provision of intraday credit for payment system participants. It does not address the factors which
determine which institutions should have access to routine overnight credit or be eligible as counterparties for open market
operations or their equivalent. For information, however, the latter is typically provided to a different set of institutions. In
some countries, this will be a subset of those with access to intraday credit. In others (such as the United Kingdom), a
broader population of counterparties have access to overnight than to intraday credit - for example, the Bank of England’s
counterparties for open market operations include securities firms. In the Bank of England’s case, this reflects the view that
overnight credit tends to be more susceptible to control by the central bank, is typically lower in value, and is less useful as a
means of dealing with rapid withdrawals of funding and hence carries less moral hazard.
CPSS - The role of central bank money in payment systems - August 2003 31
most central banks limit access to settlement accounts, at least those accompanied by credit, to
“supervised” institutions - at a minimum, resident banks.
Monetary policy considerations may discourage central banks from giving intraday credit to institutions
that are not monetary policy counterparties. Views differ on this. Some central banks believe that any
potential linkage between the provision of intraday liquidity to payment system participants and the
conduct of monetary policy can be avoided by, for example, a penalty charge to discourage borrowers
from failing to repay intraday credit at the end of the day (thereby limiting the risk of “spillover” into
overnight credit in a way that might threaten the implementation of monetary policy). Others consider
that the failure to repay intraday credit by close of business is not only a realistic possibility but may
also have adverse consequences for the operation of monetary policy; if so, it is desirable to limit the
number of institutions that are given credit.
Moral hazard is also relevant here as elsewhere. This report has already noted the possibility that
holders of settlement accounts may be misperceived to be within the “safety net” and hence likely to
be eligible for emergency credit. This may be particularly so where access to an account is
accompanied by access to routine credit.40 Moreover, intraday credit facilities could be used to meet
unforeseen outflows of funds, albeit only for a very short period. Where that happened, the central
bank would be acting as, in effect, lender of first resort, which it may well prefer not to do.
Finally, broader policy objectives can affect policy choices. For example, the Eurosystem operates on
the principle of decentralisation, and therefore avoids policies which might encourage the
centralisation of operations within particular central banks. One consequence is that euro area central
banks are prohibited from granting intraday or overnight credit to institutions resident elsewhere in the
euro area, on the grounds that allowing this might encourage activity to migrate to certain central
banks.
3.3 The relationship between policy on systems and policy on institutions
As noted earlier, while central banks typically distinguish between their policy towards systems and
their policy towards institutions, the two policies are, of course, not independent. This subsection looks
at two issues that show how these policies are related.
3.3.1 The requirement for individual institutions to settle in central bank money
Policy towards settlement by individual institutions in central bank money is generally framed in terms
of who is allowed to have an account. Usually there is no requirement that central bank money be
used. In other words, institutions that are allowed an account usually still have a choice between direct
and non-participation in an interbank payment system. In this sense, policy towards institutions is
somewhat different from policy towards systems, where, at least for SIPS, there is a requirement that
a suitably safe settlement asset, preferably central bank money, be used.
It is true that in some economies all banks are required to have an account at the central bank, but
usually this is because of reserve requirements. It is also true that in some economies all or virtually all
banks are direct participants and thus settle in central bank money, but typically this is a matter of
standard practice rather than a requirement (although sometimes of course the distinction can be
blurred). Hong Kong SAR is to some degree an exception from these general positions in that banks
are required to have a settlement account for payment purposes and are expected to use it.41
40 On the other hand, moral hazard might arguably be reduced by offering very wide access, which could limit the possibility of
such misperceptions arising in the first place.
41 Among other countries, Australia was also an exception until recently. When RTGS was introduced in Australia in 1998, all
banks were required to settle their RTGS transactions directly through their own settlement account at the Reserve Bank of
Australia (RBA). However, following a review, that policy has recently been changed so that banks with few transactions
(defined as less than 0.25% by value of all RTGS transactions) may in future settle indirectly, although they still need to
keep an account at the RBA for use in a contingency. Any bank wanting to settle indirectly (or to settle directly but provide
services to other banks that want to settle indirectly) must obtain prior approval from the Australian Prudential Regulation
Authority, which will be based on an assessment of the operational risk and liquidity management arrangements in place.
32 CPSS - The role of central bank money in payment systems - August 2003
The relative lack of formal requirements partly reflects the (tacit or explicit) view that requiring banks to
maintain settlement accounts is of little use without some means of requiring them to use those
accounts for settlement purposes, and that the latter is difficult to achieve where, for example, it is not
possible to identify where banks also use accounts with other banks for settlement purposes. But it
also reflects the view, or the implicit assumption, that policy objectives can be achieved without taking
this additional step, because most significant banks will choose to become direct participants in the
payment system and to hold accounts at the central bank. In other words, the broad objective of
having central bank money play a pivotal role in the payment system can be achieved without a
specific policy of requiring direct participation. As already noted, it is in fact the case across CPSS
countries that in practice most banks, or at least large banks, use accounts at the relevant central
bank to settle most large-value payments. However, as described in Section 2.2.2 there are some
significant exceptions already, and in the future there is a possibility that there could be increased
tiering.
Any concentrations of activity caused by tiering are not necessarily destabilising, and any implications
for central banks’ risk objectives need to be set against countervailing efficiency benefits to market
users. But in markets where tiering is marked the central bank is, other things being equal, more likely
to want to review the appropriateness of its policy in this area, and the extent to which broader risk
objectives are met.
3.3.2 Criteria for direct participation in systems
The analysis in Section 3.2 concentrated on central banks’ policies on access to settlement accounts.
However, in payment and settlement systems that are not operated by the central bank but settle in
central bank money, the system’s participation criteria may not necessarily coincide with the central
bank’s account criteria. Many systems apply additional criteria (eg operational criteria), and some
apply stricter criteria. For example, CLS limits membership to financial institutions with a certain credit
rating. Conversely, many securities settlement systems have a far broader range of members than
would have access to central bank accounts. Such inconsistencies are not central to the analysis in
this report. But it is useful to note that access to a central bank account is not a sufficient condition for
being a direct participant in an interbank payment system, even when the central bank is the
settlement institution. So central bank access criteria are not the only determinant of, for example, the
degree of tiering within the payment system.
There is also an interesting distinction between those central banks which apply criteria in the
expectation that they will be the prime determinant of who has access to the payment system, and
those which do not. In most cases, an account with the settlement institution is the key prerequisite of
membership of the interbank payment system. Not all central banks take this approach. The Bank of
England’s policy, for example, is to offer accounts (although not necessarily credit) to any direct
participant in the payment system for which it acts as settlement institution. Even so, the Bank
reserves the right to apply discretion case by case.
3.4 Conclusion
As noted, there is much common ground in central banks’ policies on which systems should settle in
central bank money - common ground represented by the Core Principles and the
SSS recommendations, as well as the reality that in practice most systems do settle in central bank
money. Where there are variations in approaches to which systems should be required or allowed to
settle in central bank money, they typically reflect variations in the importance attached to
considerations such as neutrality, efficiency in the use of liquidity or the degree to which alternative
assets are considered sufficiently safe.
There is also much common ground on policy towards institutions, both in terms of banks being central
banks’ core customers and in the importance of providing credit. Where there are variations here, they
reflect specific judgments as to the implications for the financial system, and for the central bank, of
permitting broader or narrower access to accounts and to intraday credit. Other things being equal,
permitting or even encouraging broader access to accounts may help reduce worrying concentrations
of activity and risk. It may also limit the potential for inconsistent treatment of functionally similar
institutions. Equally, it may affect the degree of competition for payment services, may require the
central bank to extend larger amounts of credit to less creditworthy institutions and may generate
moral hazard.
CPSS - The role of central bank money in payment systems - August 2003 33
4. Possible implications for central bank policy
Developments such as those highlighted earlier in the report can be an important catalyst in causing
central banks, as a matter of good practice, to review the policies set out in the previous section. Such
reviews are likely to reflect two broad concerns.
First, developments which encourage greater concentration of activity, and perhaps migration of
payment flows away from the top tier of the payment system, could generate concentrations of credit,
liquidity or operational risk and greater reliance on less safe settlement assets. Second, some of these
developments may be evidence of avoidable costs in the payment process, or of inconsistencies in the
treatment of functionally similar market participants, which in part reflect central bank policies.
In either case, the question for central banks is whether those risks and inefficiencies are evident; and
if they are, whether they might be avoided through a change in policy, and at what cost, for example in
terms of risk borne by the central bank.
In practice, these questions are generally articulated in three broad ways:
Given the range of developments affecting the clarity of the distinction between those
currently allowed access to central bank accounts and credit, and certain types of institution
that are not, should central banks re-examine their policies in this area?
Given the focus among users (direct and others) and of central banks within the CPSS
countries, both individually and collectively, on improving the design of interbank payment
systems, both to reduce the costs and risks of using them and to broaden the range of
services available from central banks or other operators of those systems, how should
central banks move forward?
Given the blurring, in some instances, between the activities of traditional interbank payment
systems and correspondent banking services provided by large commercial banks, and the
existence or emergence in some countries of highly tiered payment structures, should
central banks review the scope of application of their policies, in particular in relation to their
oversight activities?
Accordingly, the report now discusses the possible implications of the various developments for
central banks’ policies in each of these three areas.
4.1 Access policy
As Section 2 described, there are various categories of institution, including non-bank financial
institutions and non-resident banks, whose importance in the payment system may be growing in
some countries, but which are not in all cases allowed access to central bank money. Across CPSS
countries, institutions that are not direct participants in interbank payment systems - whether securities
firms and mutual funds in the United States, insurance companies in Japan, or SSS participants in the
United Kingdom - are generating higher values and volumes of payments. In some countries, one
immediate consequence has been requests for access to settlement accounts by specific institutions
not previously or currently eligible.
Another consequence can be to concentrate flows of payments within a small number of
correspondent banks and to shift the balance of activity away from the top tier of the payment
systems. Such concentrations may become sufficiently marked for worrying exposures to exist. If so,
one option may be, either in isolation or as part of a wider set of policy changes, to broaden the range
of institutions allowed direct access to the settlement asset. The objective would be to allow, and
indeed encourage, broader use of central bank money, if that can be done without adversely affecting
market efficiency or simply transferring risk to the central bank.
Moreover, where such firms currently have to participate indirectly, this could impose avoidable costs
on them, and perhaps in some cases hinder competition between direct participants and others in the
provision of payment and related services. Such an outcome may not be optimal from an efficiency
standpoint. And the application of different rules to functionally similar institutions raises questions
over the objectivity and fairness of policy. Once again, the question for central banks is whether these
costs or inequities are evident, and whether they might be avoided through a change in policy, and at
what cost.
34 CPSS - The role of central bank money in payment systems - August 2003
4.1.1 Relevant considerations
When reviewing policies on account access, the considerations set out in Section 3.2 are applied to
the facts of the case. For each possible account holder, or class of account holders, the central bank
needs to consider:
the strength of the grounds for expanding access - such as whether permitting access better
enables the central bank to achieve its objectives by eliminating concentrations of risk in the
payments process, reducing costs and/or addressing an anomaly - compared to any
counterarguments, such as any adverse impact on competition;
whether the account holder would expect or require credit, and whether the central bank is
prepared to provide it;
in the event that credit were needed, what assurances of repayment the central bank might
obtain (eg from the existence of an effective supervisory regime), and how it might protect
itself from default (limits, collateral, third-party guarantees etc);
the impact on moral hazard, and any means of limiting that impact;
what precedents the provision of an account might set - whether the grounds are
institution-specific or entire classes could be affected by the outcome.
To make such a judgment, the central bank will need a certain amount of information. It will want to
understand the level of demand for accounts and credit from particular classes of institution, and
whether that demand reflects (for example) the desire to avoid risk, to reduce costs, to avoid reliance
on a commercial competitor, to receive equal treatment or simply to obtain the (perceived) imprimatur
of the central bank.
Risk
As far as risk is concerned, the central bank will want to assess the financial exposures that exist. It
will want to understand whether risks reflect credit exposures, with large values held on account with
commercial institutions or large amounts of credit provided to customers; liquidity exposures, reflecting
customers’ reliance on commercial institutions to make large values of payments on their behalf; or
operational risks reflecting reliance on a third-party bank to perform a critical business function. It will
want to assess whether any exposures are such as to have systemic effects were they to materialise.
It will want to consider how far non-participants are at least able to choose between a range of
correspondent banks to intermediate on their behalf. And it will want to understand whether expanding
access to settlement accounts would in fact have the desired effect of encouraging broader direct
access to the payment system, and any negative consequences of that happening, perhaps stemming
from lower use of institutions (commercial correspondents) with expertise in the provision of payment
services and the financial resources to support their activities.
Costs
As far as costs are concerned, the central bank will want to understand what costs might be avoided
through broader direct access to its accounts, and why that might be so. Costs might reflect a lack of
innovation within the interbank payment system or among payment service providers, which it is felt
wider participation in the payment system, and a broader intermediary role for the central bank, might
help to address. If so, one question is why that inertia has arisen and how else it might be resolved. In
any event the central bank may need a broad understanding of the cost structure within the payments
industry, of the degree of competition between commercial payment service providers and of the
governance of the principal systems.
Neutrality
Where those currently without access to accounts wish to use the central bank to avoid relying on (or
providing information to) a commercial competitor, the central bank will want to establish the legitimacy
of the concern and why it arises. The same applies where current policies appear to treat similar
institutions in an inconsistent way. By implication, a certain blurring of functions has occurred, resulting
for example in banks and non-banks, or even financial and non-financial institutions, competing
directly in certain markets. The degree of overlap will be relevant to the central bank’s decision, as will
the particular disadvantages the current policy imposes on non-account holders.
CPSS - The role of central bank money in payment systems - August 2003 35
Other considerations
In all these cases, the direct implications for the central bank will need to be examined. Probably the
most important consideration here will be whether the account holder requires access to credit, and
how much is likely to be needed. Moral hazard will also need to be addressed.
In some cases, direct access to central bank money may be requested to enable or facilitate the
provision of a payment service (eg to facilitate the settlement of multilateral net amounts by a system
operator or to allow a direct participant to make and receive payments arising from the clearing). The
central bank will want to consider whether the use of central bank money for that service can be
justified in such cases, given that there are very few (if any) services that cannot be provided without
the use of central bank money. In principle, access to central bank liquidity is not a necessary
condition for the provision of payment services. Non-banks still rely largely on the provision of liquidity
by a licensed bank.
Alternatives
Central banks may also want to explore what alternatives might be available, particularly if extending
access seems problematic. Such alternatives may already be in use in some cases. One alternative
may be for non-bank issuers of money and providers of payment services to adopt a banking licence,
hence acquiring the same privileges and responsibilities as existing banks. As regards clearing
houses, they may not need an account themselves if central banks provide suitable settlement
services to the direct participants in the systems for which they clear. Another example is where,
instead of permitting full remote access, central banks allow banks to process payments remotely
(either by a remote office of the bank or by a remote third party) but manage liquidity locally, so as to
achieve some of the main benefits of remote access. In other cases, non-account holders might be
able to make use of ancillary services (such as data processing or clearing) provided by the central
bank and to transmit payment instructions directly to the central bank while settling those payments
through their banks (as in CHAPS in the United Kingdom and the Federal Reserve’s ACH system in
the United States).42
As an illustration of the factors discussed here that are relevant to any review of access, Annex 2
considers the cases of five types of institution which are not currently allowed access to settlement
accounts in all countries, but which could potentially seek access: securities firms, insurance
companies, non-resident banks, non-financial corporations and specialist payment service providers.
4.1.2 Examples of policy reviews
The foregoing discussion has considered, fairly briefly, the sort of policy factors which central banks
may consider in any review of access policy. On the face of it, none of the developments described in
Section 2 fundamentally alter the balance between provision and prohibition reflected in central banks’
existing access policies. Nor do any undermine the basic conclusion (albeit expressed in different
ways between central banks) that access to central bank money should be restricted to cases where
its special features (such as safety and neutrality) are particularly valuable in terms of social costs and
benefits; or that there are valid risk and competition grounds for limiting access broadly as at present.
And there are no unequivocal arguments in favour of substantially greater uniformity among central
banks’ policies in this area.
Nevertheless, certain central banks have in fact responded to the developments by reviewing, and in
some cases changing, their policy on access and related facilities. The collective decision by CPSS
central banks to allow CLS Bank, a bank incorporated under the US Edge Act, access to account
facilities on a remote basis represents one such change, albeit one with very limited application. The
central banks concluded that arguments against remote access were outweighed by the benefits of
allowing CLS Bank, which handles very significant sums each day, to fund and defund in central bank
money.
42 “Settling” participants in CHAPS control their exposure to “non-settling” participants by setting limits on non-settling
participants’ payments.
36 CPSS - The role of central bank money in payment systems - August 2003
In setting up the Eurosystem, a review of the access policies of the participating national central banks
(NCBs) became necessary. The result was a set of common principles applying to all, and a set of
individual decisions to be taken by each NCB. The common principles were the provision of accounts
and credit to banks (ie credit institutions), the collateralisation of all credit, the predominant role for
banks in intermediating credit43 and the availability of credit only from the NCB of the country in which
the financial institution is established. The individual decisions left for each NCB to make were whether
to provide accounts to securities firms (ie investment firms) and/or clearing houses, whether to provide
intraday credit to these institutions (so long as it was guaranteed by a bank) and whether to set more
restrictive access criteria based on financial strength, the expected minimum number of transactions,
payment of an entry fee, and legal, technical or operational aspects.
In the revision to its policy explained in Section 3, the Bank of England recently indicated its
willingness to provide accounts to any direct participant in a payment system for which it agrees to act
as settlement institution (although the Bank retains the discretion to deny access case by case where
it feels it appropriate to limit its own risk or in pursuit of wider objectives). Credit would only be
provided where the scale of the account holder’s payment activities would make them significant direct
participants in a systemically important payment system and where their direct membership would
reduce risk for the financial system. The Bank’s review was motivated by a range of factors, including
the desire - reflected in the Core Principles - to implement transparent and objective access criteria,
and the fact (mentioned above) that a number of non-bank payment service providers have applied for
access to accounts in the context of the Bank of England’s role as settlement institution for the LINK
ATM network.
In Germany, the Bundesbank has in the past opened some accounts for businesses and individuals
but only in cases where very active use of the account in terms of number and value of payments was
expected. However, following a recent policy review, the Bundesbank has now decided that, for
competition reasons, no new accounts will be opened for such customers and existing accounts will be
closed by the end of 2003.
In Canada, following a review of policy by the Department of Finance and the Bank of Canada, the
Canadian Payments Act (2001) opened membership of the Canadian Payments Association (CPA) to
life insurance companies, securities dealers and money market mutual funds. As a result, the Bank of
Canada is currently working with the CPA and the Department of Finance to review the CPA’s
eligibility conditions for direct participation in its retail clearing and settlement system, as well as
examining its own policy on access to settlement accounts.
4.2 System design and central bank settlement services
For both historical and policy reasons, central banks have traditionally had an influential role in the
design, development and operation of the large-value interbank payment systems settling in their
currency. As noted earlier, central banks have an interest in ensuring that central bank money
represents a viable alternative to commercial bank money and that potential holders are not
discouraged by the associated costs from participating in the systems in which it is used. They
therefore have a natural interest in promoting robust and efficient designs and in responding to users’
needs as far as it is realistic to do so.
However, central banks face choices about the operation of interbank payment systems. It may be
possible for a central bank to achieve its objectives in providing central bank money while minimising
costs for its participants by utilising an existing settlement platform and/or outsourcing the operation
and administration of its accounts to other central banks or other financial service providers. These
decisions require careful analysis of the risk/efficiency trade-offs.
Where they operate their own systems, central banks are aware of the possible issue of competition
with commercial banks in providing services. As noted in the executive summary, as well as helping to
promote a competitive banking system, a choice of providers creates a healthy incentive for central
banks to offer efficient services and provides market discipline.
43 As noted in Section 3.2.2, credit is also provided to certain non-banks but unlimited credit is only available if guaranteed by
a bank. Thus the Eurosystem avoids disintermediation from a risk perspective, though not from an operational perspective.
CPSS - The role of central bank money in payment systems - August 2003 37
4.2.1 Enhancing efficiency of service
Reducing liquidity costs at the domestic level
Section 2 noted that one consequence of recent improvements in interbank payment systems such as
the widespread implementation of RTGS, DVP and PVP has been to raise the cost of direct
participation in some respects, primarily because of the increased cost of more active liquidity
management. Although there are, as yet, few indications that this is causing any significant switch
from direct to non-participation, one consequence has been requests for central banks and system
operators to introduce mechanisms to reduce such costs by allowing direct participants to economise
on liquidity needs. In most countries, a wide range of participants voiced concerns about the costs
associated with RTGS before its introduction. Similar concerns were expressed before the introduction
of Model 1 DVP in securities settlement. And the introduction of CLS, with large, timed intraday
payments, generated similar issues. Concerns related both to the added costs for direct payment
system participants and their customers, and to the possibility for more regular, and more severe,
shortages of liquidity to emerge with the potential to generate significant disruption in payment
systems.
While such concerns have yet to materialise to any significant degree, these developments have
already led the market to push for mechanisms such as hybrid systems and other liquidity saving
devices. Technological advances and legal changes have facilitated the introduction of some of these
liquidity saving features into certain systems without reintroducing the kind of uncertainties and risks
which characterised the unprotected deferred net settlement systems which RTGS and protected DNS
systems often replaced.
Examples of steps in this direction are the introduction of hybrid settlement mechanisms into the large-
value systems in France (with PNS) and the United States (with the new arrangements in CHIPS).
Also relevant is the introduction of liquidity saving features into the RTGS system in Germany
(RTGSplus). These mechanisms have in common “liquidity optimisation” features which combine the
provision of intraday finality with “offset” mechanisms which reduce, potentially very significantly, the
amount of liquidity required to finance payments. The CLS settlement process also includes features -
such as the combination of gross real-time settlement with net funding of positions, as well as the
continuous recycling of funds - that are designed to reduce the liquidity impact of reducing settlement
risk in foreign exchange deals. BOJ-NET in Japan, CREST in the United Kingdom and Euroclear also
have liquidity saving mechanisms that facilitate real-time DVP by allowing securities in the course of
being purchased to be used as collateral for intraday credit or to be repoed to create the liquidity to
fund the purchase. In its Model 1 DVP arrangements, Clearstream uses rapid batches with technical
netting to reduce liquidity needs.
Liquidity optimisation mechanisms are not new per se; many RTGS and securities settlement systems
include them as end-of-day or contingency measures, to be used if gridlock arises. The step change
with the new optimisation mechanisms is that settlement via such mechanisms is continuous, not at
discrete intervals. A number of other central banks, including the Bank of England, are at the early
stages of discussion with direct participants over the arguments for and against introducing such
features into local RTGS systems.
The introduction of such features changes both the quantity of settlement in central bank money and
the role central bank money plays in the functioning of the payment system. While in systems such as
RTGSplus and PNS settlement takes place in central bank money, in the case of CLS and new CHIPS
it occurs across internal accounts maintained by CLS Bank and CHIPS, but with funding and
defunding of positions in central bank money. The value of central bank money used in settlement is
not necessarily a good indicator of its importance, or of the soundness of the payment system.
Nevertheless, the achievement of an appropriate balance of risk management and efficiency within
such systems rests in part on the quality of the settlement asset used in various parts of the settlement
process and provides an important reason for central banks to monitor closely the evolving design of
interbank payment systems, and to influence and promote design changes where appropriate.
Reducing liquidity costs at the international level
The concerns touched on earlier in this report about the cost of liquidity have resulted in some major
banks reviewing alternative means for managing payment liquidity in a global environment. One such
effort was initiated by the Payments Risk Committee (PRC), a private sector group sponsored by the
38 CPSS - The role of central bank money in payment systems - August 2003
Federal Reserve Bank of New York on which many of the largest global banks are represented. In a
recent report, the PRC makes two broad recommendations.44
The first recommendation is for action by individual institutions to develop new, well constructed
intraday liquidity services. The PRC advocates collateralising such services and eliminating obstacles
to moving collateral across borders in support of the services. The report identifies a variety of
possible arrangements for consideration, such as intraday real-time repos, cross-border collateral pool
facilities and intraday currency and collateral swaps. The PRC also indicates that it plans to work with
private sector entities interested in developing such market-based liquidity services.
The second recommendation is for action by central banks to broaden the range of foreign currency
denominated and foreign-located securities they will accept as collateral when providing intraday
liquidity. In the near term, the PRC recommends that each G10 central bank consider accepting a
range of high-grade sovereign debt from the G10 countries as part of its collateralised intraday liquidity
facilities. In order to receive and manage such collateral, the report recommends that each central
bank consider establishing an account at, and using the services of, ICSDs or national
CSDs/custodians with account links to ICSDs.45 The PRC also recommends that, over time, each
central bank determine whether further expansion of the range of eligible foreign securities as
collateral is warranted.
Enhancing business efficiency
The developments highlighted in Section 2 may also encourage central banks and other payment
system operators to consider how to enhance efficiency in payment systems in other ways, for
example by introducing technical changes and longer operating hours.
Incremental but nevertheless important changes have been made in areas such as network
infrastructure and message protocols. For example, in 2001 the CHAPS Sterling system in the United
Kingdom and the RTGSplus system in Germany each moved from a proprietary network to SWIFT, both
to reduce costs for direct participants and to remove technological constraints in expanding direct
participation. The Bank of Japan plans to make adjustments to BOJ-NET so that it will accept
message formats based on SWIFT and other international standards, and is examining the feasibility
of replacing dedicated terminals with PCs. The Monetary Authority of Singapore has also embarked on
a project (MEPS+) to upgrade the functionality of its RTGS system to improve system connectivity and
increase efficiency.
Longer system operating hours may in some circumstances be important. SIC, the Swiss RTGS
system, has since its inception in 1987 been open virtually 24 hours a day to take advantage of the
relatively low marginal cost of using the overnight period primarily to process retail payments. Longer
hours may also contribute to strengthened interbank settlement for cross-border markets by allowing
for overlap between different RTGS systems. This was one rationale for the Federal Reserve’s 1994
policy to extend Fedwire operating hours into the early morning hours, which was implemented in
1997. The Federal Reserve also hoped the resulting overlap would contribute to a reduction in foreign
exchange settlement risk through innovations in payment and settlement practices. CLS is the obvious
example of such an innovation. Other central bank-run systems also supported the implementation of
CLS by extending hours of operation. For example, LVTS in Canada brought forward its opening
hours into the early morning, while BOJ-NET in Japan and RITS in Australia extended the closing
times of their systems. The Federal Reserve has recently decided to bring forward Fedwire's opening
time even further, to 21:00 EST, to further facilitate global settlements of US dollar transactions.
44 Managing payment liquidity in global markets: risk issues and solutions, Payments Risk Committee, March 2003.
45 In the United States, the Federal Reserve permits eligible depository institutions to pledge certain non-US sovereign debt
and Brady bonds through its accounts at Euroclear and Clearstream. In the European Union, an arrangement called the
Correspondent Central Banking Model exists between EU central banks to enable eligible collateral held in one EU member
state to be used to obtain euro credit obtained in another, the main purpose being to promote the integration of euro area
money markets. Another arrangement was recently introduced in Scandinavia where the central banks have agreed to allow
cash held with one central bank to be eligible as collateral for credit from another.
CPSS - The role of central bank money in payment systems - August 2003 39
4.2.2 Expanding areas of service
Use of central bank money in ICSDs
The consolidation of a significant proportion of European securities settlement within the Euroclear
group raises a range of issues relevant to the use of central bank money in payment systems.46
The CSDs that as a result of the consolidation form part of the Euroclear group currently settle in
central bank money, while the ICSD participants basically settle in commercial bank money.47 When
the consolidation is complete, the Euroclear group plans to migrate all settlement to a single technical
platform, which Euroclear Bank will operate. Euroclear Bank participants will be able to settle in both
central and commercial bank money through a single entry point. The plan is also to improve the
fungibility between balances held in central bank accounts and balances held in Euroclear accounts.
An issue under consideration is therefore how the Euroclear group will develop its central bank money
services by linking its settlement module to the relevant central banks in order to make them a
convenient alternative for Euroclear users. One option, in effect implemented already by the French
CSD and the Bank of France, is for participants to hold a sub-account at the central bank, the
operation of which is, in effect, outsourced to the CSD. This raises questions over how to manage the
risks associated with outsourcing the operation of a portion of central bank accounts to a third party.
Such questions are not new to central banks, which have in the past sought to manage those risks in
a variety of ways.
Settlement by ICSDs in central bank money also raises other practical and policy issues. For example,
as noted in Box 1 earlier, in certain cases there needs to be sufficient overlap in operating hours
between the ICSD and the relevant central bank payment systems, which may require extensions to
operating hours for those systems, as just discussed. Moreover, ICSDs provide multicurrency facilities
(eg providing credit in a foreign currency, accepting collateral denominated in a foreign currency)
which central banks may not be ready to provide. Finally, if ICSDs use central bank money, given the
international character of their participants the question of remote access to central bank money could
arise.
Central bank multicurrency settlement services
Some developments may also prompt central banks to consider the services which they, individually
and perhaps also collectively, offer account holders. Section 1 noted that cross-border payments
generally involve the use of a correspondent to settle payments in the domestic payment system on
behalf of the non-resident customer bank. And Section 2 noted that increases in cross-border flows
may result in non-resident banks accounting for a larger share - and certainly larger absolute amounts
- of total payments in each currency.
Allowing remote access by those institutions (primarily banks) most active in cross-border flows would
give them the option of settling directly in central bank money rather than using a correspondent bank.
As noted earlier in this section, however, it is not clear how much demand there is for widespread
remote access.
In principle, another option could be for central banks themselves to offer multicurrency settlement
facilities, using the accounts most already hold with one another. This would provide locally resident
institutions with the option of using their local central bank account to settle payments and hold
proceeds rather than using a correspondent. Provision of multicurrency facilities would raise significant
policy issues, not least concerning any possible provision of credit. In practice, central banks in most
cases provide services only in their domestic currency.
In providing either remote access or multicurrency facilities, central banks would to a certain extent be
competing with correspondent banks. In providing remote access, they would be competing with
primarily resident correspondent banks providing services in the domestic currency. In providing
multicurrency services, they would be acting as global correspondents. The extent to which they would
46 Ownership consolidation has already taken place. Technical and operational consolidation is in progress.
47 As explained in Box 3 earlier, for euro-denominated securities the option to use central bank money exists in theory but is
effectively not used in practice.
40 CPSS - The role of central bank money in payment systems - August 2003
want to take such a path (individually or collectively) would shift the present public policy
considerations on the desired balance of competition between the public and private sector.
4.3 Oversight, supervision and regulation
Implications of a concentration of payment activities
While the Ferguson Report found evidence of consolidation among the major financial intermediaries,
evidence of significant impact on the degree of concentration or tiering in the payment system is
limited and often anecdotal. However, there are nevertheless significant concentrations of payment
activities and associated risks in some markets.
The implications of concentrations of activity were addressed by the Ferguson Report (albeit
specifically in the context of consolidation), which analysed their impact on the financial markets
generally, including payment and settlement systems. In relation to the latter, the report drew out
clearly the risk- and efficiency-related benefits of a concentration of activities, for example because of
large players’ ability to invest in technology and to benefit from economies of scale and scope, and to
provide their customers with broader services and with a wider a pool of expertise, or from potential
improvements in credit and liquidity risk controls. More generally, the existence of specialist payment
intermediaries - correspondent banks - helps ensure that financial market participants and their
customers have ready access to the payment services which are essential to their own operations and
to the smooth functioning of the financial markets, which in many cases helps to mitigate risk.
But the Ferguson Report also spelled out the risks associated with such concentrations, including the
concentration of payment- and settlement-related exposures on large correspondent banks and
custodians, the high reliance on those firms to provide an effective payment service, the exposures
those firms in turn incur on their customers that could become a source of their default, and the impact
on the functioning of the market should any of those risks materialise, given the pivotal role these firms
play.
Relevant considerations
As described in Section 3.3, central banks do not in general specify which institutions must maintain
and use settlement accounts at the central bank. This reflects the view that policy objectives can be
achieved without taking this additional step, primarily because most significant financial institutions will
choose to become direct participants in the interbank payment system and hold accounts at the
central bank. Nevertheless, imposing stricter requirements on the use of central bank money by
particular institutions or classes of institution remains an option.
However, perhaps more relevant policy questions may lie in the implications of the concentration of
payment flows in a small number of commercial institutions for central banks’ provision of settlement
services and for central banks’ oversight of payment systems.48 The implications for the provision of
settlement services were analysed in Section 4.2; the implications for oversight are analysed
hereafter.
Oversight, and the application of formal standards which that oversight requires, tends to be limited to
the core interbank payment systems. The rationale here is essentially that it is primarily in these core
systems that the sorts of exposures exist which could give rise to systemic risk. But a feature of highly
concentrated systems is that institutions exist - large correspondent banks - that have many of the
features of core payment systems. They provide payment services to a wide range of customers,
many of which settle across the books of the correspondent. The values settling across those books
are, in some cases, extremely large. And customers may, in practice, have little choice in the short
term over which correspondent to use.
48 Some central banks (eg Sveriges Riksbank, the Bank of England and the National Bank of Belgium) are also considering
how to integrate assessment of the systemic risks posed by concentrations of activity within the payment system and
elsewhere into their broader macroprudential surveillance of the health of the financial sector.
CPSS - The role of central bank money in payment systems - August 2003 41
On the face of it, there is a case for considering these banks to be a form of large-value “payment
system” and for treating them in a compatible (but not necessarily identical) way, for example
developing certain supervisory tools for use in influencing the quality of risk management and applying
more formal payment-related “standards” to such institutions. The Ferguson Report noted that:
“because of consolidation, central bank oversight of payment systems is becoming more
closely linked with traditional bank safety and soundness supervision at the individual firm
level. Increasing cooperation and communication between banking supervisors and
payment system overseers may be necessary both domestically and cross-border.”
It added that:
“central banks and bank supervisors should carefully monitor the impact of consolidation
on the payment and settlement business, and should define safety standards where
appropriate. In particular, central banks, in conjunction with bank supervisors, may need
to consider various approaches, possibly including standards, that could be used to limit
potential liquidity, credit and operational risks stemming from concentrated payment flows
through a few very large players participating in payment systems.”
Points for further analysis
However, defining such standards would be highly complex. The term “quasi-system” has been coined
to describe these institutions. But this simple term masks a host of unresolved areas of debate.
At a high level, a quasi-system might be defined as:
“A commercial institution responsible for clearing and settling payments on behalf of
customers which represent, by value, a substantial percentage of payments in a particular
currency, a significant proportion of which are internalised by being settled across the
books of the institution rather than through an organised payment system.”
But such a definition is deceptively - perhaps even misleadingly - simple. There are differences
between interbank payment systems and commercial banks. Standards appropriate for payment
systems (such as the Core Principles or the SSS recommendations) may not be appropriate for
commercial entities without significant modification. To the extent that they are applicable, payment
system standards may already be applied by the prudential supervisors of these firms.
So policy assessments of how to identify and perhaps deal with “quasi-systems” need to consider a
wide range of factors. Some of these factors are as follows:
The nature of the institutions. Careful consideration is needed of the possible reasons for
concern about quasi-systems. These might include the high exposures implied for the
institutions or their customers and the potential systemic impact of those exposures
materialising; the absence of alternatives to whom customers could incur exposure; the
degree of reliance on a small number of institutions, and the impact of any credit, liquidity or
operational problems in one of the institutions on the economy overall; or a concern to treat
functionally similar institutions consistently.
The criteria for defining a “quasi-system”. Possibilities include the values (or volumes)
processed by an institution, its market share, the average size of payments
processed/settled, the extent to which settlement of customer payments is internalised, the
degree to which an institution employs consistent rules and procedures that are similar to
those of interbank payment systems, the number or type of customers (eg whether banks or
non-banks), the number of competitors and the financial resources of the institution. In
addition, whatever criteria are chosen, it seems unlikely that there is any clear dividing line
between banks that are quasi-systems and those that are not.
The sort of “standards” that might address any concerns. As well as the more familiar (for
financial institutions) areas of governance, risk management and operational reliability, the
standards applied to interbank payment systems deal with, among other things, legal
soundness, transparency, default rules and efficiency. It is not clear to what extent such
standards are meaningful for commercial banks. Where standards are judged to be
meaningful, it must be determined whether or not they are already applied by, for example,
banking supervisors in a way that would address any concerns about quasi-systems.
42 CPSS - The role of central bank money in payment systems - August 2003
Moreover, any standards may need to take account of the unclear dividing line between
quasi-systems and other banks.
Regulatory powers. Central banks typically rely on a variety of powers, including
non-statutory powers, to carry out payment system oversight, and these powers may not be
sufficient to conduct oversight of quasi-systems, however identified. And overseers will need
to consider how closely they could or should work with banking supervisors in considering
these issues and in implementing any subsequent policy changes.
This list of factors is no doubt incomplete but it illustrates the complexity of the issues. It is not yet
clear what, if any, policy initiatives will result from central banks’ consideration of this topic but it is
clear that were any additional regulatory standards to be proposed, they would need to have a sound
basis and it would be vital to consider very carefully any possible impact on market participants and
market structure. Correspondent banking is a key aspect of the payment system and the financial
markets it serves. Central banks are rightly wary of undertaking any initiative that unwittingly changes
the balance of costs and risks so as to discourage activity in this important area.
5. Concluding remarks
Ten propositions
The CPSS central banks share considerable common ground in their objectives as well as in their
main tenets of policy concerning the use of central bank money. Such common ground can be
summarised in the following propositions:
A. General principles
1. Market principle: private economic agents are generally free to decide the means of payment
used for settling their transactions. The multiplicity of issuers of money provides the
advantages of competition in fostering innovative and efficient payment practices.
2. Public interest: a public interest exists, mainly entrusted to central banks, in providing the
economy with sound, efficient and stable payment systems. There is a consequent public
interest for central bank money, including banknotes and deposit money, to play a pivotal
role in an economy and its payment system. This pivotal role of central banks and central
bank money is one of the pillars that preserves the payment architecture as described
hereafter.
3. Payment architecture: the payment architecture is framed by the interaction between public
authorities (in particular the central bank) and private agents (in particular commercial
banks). Central banks and commercial banks try to keep this architecture flexible enough to
avoid deterring innovation.
B. Architecture
4. Composite use of central and commercial bank money: contemporary monetary systems are
based on the mutually reinforcing role of central and commercial bank money. To foster
safety and efficiency in the financial system, central banks pursue policies to maintain the
convertibility of commercial bank monies into central bank money at par (and vice versa).
The singleness of the currency is thereby maintained and the public can use its different
forms interchangeably when making payments.
5. Commercial bank money: commercial banks are the primary suppliers of money as well as
of payment services to the general public in developed economies. They also provide
specialised payment services to other banks, mainly via correspondent banking. The joint
supply of deposits and loans gives commercial banks the unique function of providing the
liquidity needed to make payments. The licensing and regulation of commercial banks
CPSS - The role of central bank money in payment systems - August 2003 43
promotes their solvency and liquidity, helping to preserve confidence in the currency.
Commercial banks use liquidity from the central bank to facilitate their payment activity.
6. Central bank money: to foster the safe and efficient operation of payment and settlement
systems, central banks provide accounts and deposit money to banks and, in certain cases,
to other organisations. Central bank money is a highly liquid settlement asset with negligible
credit risk for these systems. Central banks also provide banknotes to the general public in
order to provide a financially secure means of transacting and discharging debts.
7. Intraday credit: the usefulness of central bank money as a settlement asset in payment
systems, particularly in RTGS systems, depends in part on the central bank’s ability and
willingness to extend intraday credit. Access to an account may be of less value if not
accompanied by access to the central bank’s intraday credit. While all CPSS central banks
provide intraday credit to banks in some form, only some grant intraday credit to other
account holders.
8. Tiering and concentration: the architecture of payment systems is normally tiered and
payments often concentrate in intermediate tiers. If central banks consider the concentration
of risk too high in a payment system, they may need to consider additional measures to
contain systemic risk, such as broader access, enhanced services, or expanded supervision
or oversight.
9. Systemic risk: systemic risk is inherent to large-value payment systems. In recent years, it
has been reduced within and across CPSS countries. The widespread adoption of RTGS
systems settling in central bank money has enhanced the safety of the payment system
within countries. Similarly, the development of CLS Bank, which uses central bank money for
funding and defunding, addresses the major risk in the settlement of foreign exchange
transactions across countries.
10. Multicurrency systems, single currency central banks: in multicurrency systems, the
traditional use of central bank money as the settlement asset may be impractical, because
the supply of central bank money and central bank services is normally confined within the
area of jurisdiction of the central bank. In line with the existing understanding in the G10,
central banks in most cases provide services only in their domestic currency. Consequently,
multicurrency systems normally settle in commercial bank money, although every central
bank may retain a role as the gateway to these systems for its own currency.
Current challenges and the tools to respond to them
There are various developments that may prompt central banks to review their policies towards the
use of central bank money. One development is the possibility of greater concentrations of payment
activities and associated exposures within individual banks - concentrations which may arise for
various reasons, such as consolidation between the banks themselves, greater specialisation by
certain banks in areas such as correspondent banking that have grown relatively rapidly, or changes in
cost structures that have encouraged indirect rather than direct participation. This development is
clearly of interest to central banks because of the possible implications for the level and distribution of
risk in the payment system.
Two other developments, while also having risk implications, are perhaps more relevant to central
banks’ efficiency and fairness objectives. One concerns the requests from some payment system
users for new or improved services that change the way in which central bank money is used -
services such as longer operating hours, interoperability between systems, liquidity cost-saving
mechanisms or even multicurrency functionality. The other is the apparent desire on the part of some
non-bank financial institutions that are active in payments, or even of certain non-financial institutions,
for central bank settlement accounts and direct access to payment systems.
While it would be misleading to suggest there is any strong or universal trend, nevertheless it is the
case that some central banks are already facing these developments while others may face them in
the near future. Sometimes, having reviewed the situation, central banks may decide that no policy
change is needed. But where they decide that the developments do warrant a response, all central
banks have broadly similar tools at their disposal. Most directly, if desirable they can modify their
access policy to allow new types of institutions as account holders. They can also alter the sorts of
services that are available to account holders (eg whether credit is provided) or the design of the
44 CPSS - The role of central bank money in payment systems - August 2003
interbank payment systems they operate (eg changing the technical means of access). And more
broadly, they can use their oversight responsibilities, where appropriate in conjunction with banking
supervisors, to determine the standards applicable to payment systems and perhaps also to
commercial providers of payment services.
Central bank policies
While the developments they face may often be similar, and while sharing a broadly common set of
policy tools, there are variations among central banks in their approach to achieving their policy aims.
As noted in the executive summary, there are a number of relevant issues for central banks
concerning the use of central bank money in payment and settlement systems. These include: when
such systems should be required to settle in central bank money; when an alternative (high-quality)
settlement asset might be acceptable; when the use of central bank money can be limited to the
funding and defunding process; what circumstances render the use of central bank money impractical;
and what risk management measures constitute a close proxy to central bank money.
Recent reviews of access criteria for individual institutions have also highlighted a diversity of
approaches - primarily in relation to whether access to settlement accounts should be limited to core
payment service providers, and in particular to banks; or alternatively how far access, and credit,
should be extended to other financial and even non-financial institutions. While (as noted in Section 3)
there is broad agreement on the “core” set of account holders, there are variations of policy on which
classes of institution beyond the core should be entitled to maintain central bank accounts. Behind
these variations lie differences in, for example, the extent of the trade-off between efficiency and
safety in opening up access to accounts, and in the implications for the financial system and for the
central bank of permitting broader or narrower access to accounts and to intraday credit.
Other reviews have focused on (or are beginning to do so) the optimal design of payment systems,
including from a liquidity management perspective, and on the role of “oversight” in monitoring and
assessing risk in the payment system as a whole, including in relation to risks arising in lower tiers (the
“quasi-system” issue).
One particular variation to note here is the extent to which central banks are prepared to provide
settlement services in parallel to commercial firms (mainly banks) and the degree to which they are
ready and able to establish norms delimiting the respective roles of central and commercial bank
money. Every central bank develops its own combination of operational involvement and normative
involvement, although it is true that different traditions make them lean towards one approach or
another.
It is understandable that there will be variations in central banks’ responses to developments. Given
the variety in countries’ circumstances, different policies may be necessary even in order to achieve
common objectives. Moreover, any variations need to be seen in the context of the broad similarities
among the overall policies of central banks towards the use of central bank money. While the possible
variations in responses to the developments are not trivial, they do not change this broad commonality
of view. Most fundamentally, all CPSS central banks believe that it is essential to preserve a mix of
central and commercial bank money, and that belief remains unchanged by the developments
discussed here.
To the extent that the majority of the issues considered in this report concern the use of each central
bank’s own currency, it is inherent that central banks have a substantial degree of autonomy in making
their own policy choices. Nevertheless, particularly when issues arise which have an international
dimension, central banks may deem a collective response to be appropriate. Central banks are well
used to such collective decisions, which need not necessarily imply general harmonisation of policies.
CPSS - The role of central bank money in payment systems - August 2003 45
Looking forward
Central banks are likely to continue to review their policies from time to time and this report is intended
to provide a framework for any such reviews. It is clear that central banks need to remain responsive
to further changes in the environment in which the important policy instrument of central bank money
is utilised. There is an increasing variety and sophistication of global payment processes and systems.
These developments have not rendered central bank money obsolete, nor are they likely to do so.
This is partly because central banks have responded to change proactively, in their payment system
policy or by influencing design changes in payment systems. Such flexibility needs to be maintained to
respond to new challenges.
CPSS - The role of central bank money in payment systems - August 2003 47
Annexes
Annex 1: Central bank policies
Annex 2: Access policy - specific cases
(i) Non-resident banks
(ii) Securities firms
(iii) Insurance companies
(iv) Non-financial corporations
(v) Specialist payment service providers
Annex 3: Detailed tables
Table A1 Accounts held at the central bank: which institutions have accounts?
Table A2 Accounts held at the central bank: is credit available on the account?
Table A3 Accounts held at the central bank: number and value
Table B Overnight and intraday use of central bank money
Table C Interbank payment systems and arrangements: settlement method, tiering and
concentration
Annex 4: Banknotes
Annex 5: Members of the CPSS
Annex 6: Members of the Working Group
48 CPSS - The role of central bank money in payment systems - August 2003
Annex 1
Central bank policies
This annex provides, for each CPSS central bank, information on the following topics.
1.1 Policy on interbank payment systems: content of policy
Which systems currently do not settle in central bank money? Are any systems (either existing
systems or in theory) discouraged from settling in central bank money or not allowed to do so? Which
systems are required, expected or encouraged to settle in central bank money?
For systems that do settle in central bank money, how is consistency with the policy on institutional
access (described in 2 below) achieved (eg in deciding whether an institution can be a direct
participant, does the system have to conform to central bank rules on account access)?
1.2 Policy on interbank payment systems: implementation of policy
Is the policy explicit? How is the policy implemented?
2.1 Policy on institutions: content of policy (“required to have an account”)
Do banks (and any other institutions) have to hold an account/hold funds at the central bank for
reserve or liquidity requirements or similar purposes? If so, can the funds be used for payment
purposes (either directly or in some other way - eg as collateral for credit)?
Do institutions that choose to be the central bank’s counterparties for monetary policy operations need
to have an account? If so, are any institutions obliged to be counterparties (and thus obliged to hold an
account for this reason)?
Is there any requirement (implicit or explicit) that certain institutions be direct participants in certain
systems that settle in central bank money (eg a requirement that large banks be direct participants in
the RTGS system)?
Are there any other reasons why certain financial institutions have to hold an account at the central
bank?
2.2 Policy on institutions: content of policy (“allowed to have an account”)
What types of institutions and individuals are allowed to have accounts?
2.3 Policy on institutions: implementation of policy
Are the policies in 2.1 and 2.2 transparent (eg set out explicitly in regulations, policy statements,
speeches, etc)? How are the policies implemented?
3.0 Policy on types of payments
Is there any policy on how certain types of payments should be made which may affect whether these
payments settle in central bank money and, if so, what is its relevance for the use of central bank
money?49
49 For example, a central bank may have a policy that all large-value payments should be made using an RTGS system that
settles in central bank money, the purpose of the policy being to ensure that such payments are not processed by systems
that lack the necessary safety features. However, typically such a policy is not intended to prevent non-participation. That is
CPSS - The role of central bank money in payment systems - August 2003 49
National Bank of Belgium
(For the full text of the questions to which this information applies, see the introduction to this annex.)
1.1 Policy on interbank payment systems: content of policy
Settlement in central and commercial bank money
The NBB would in general be willing to settle for any system (subject to the condition set out below).
The RTGS system (ELLIPS) is required to settle in central bank money in accordance with Core
Principle VI for systemically important payment systems. Other systems such as NBB SSS, CEC,
Euronext Brussels/CIK and Clearing House of Belgium settle in central bank money for historical
and/or practical reasons.
Euroclear (for most of its operations) and credit card arrangements (American Express, Diners Club
and cross-border operations of Visa/MasterCard) do not settle in central bank money. In the case of
Euroclear the option to settle in central bank money exists and Euroclear plans to improve its central
bank money settlement services in the framework of its consolidation process with local CSDs.
Moreover, a risk/efficiency analysis led to the conclusion that settlement in central bank money should
not be required. The credit card arrangements concern limited amounts and are not systemically
relevant/important.
Coordination between policy on systems and policy on institutions
For systems settling in central bank money, as regards the decision on whether an institution can be a
direct participant, the system has to conform with central bank rules on account access.
1.2 Policy on interbank payment systems: implementation of policy
The policy, which is explicitly set out, is implemented by the NBB through its operation and/or
oversight of payment systems.
2.1 Policy on institutions: content of policy (“required to have an account”)
According to ESCB statutes and guidelines, banks have to hold monetary reserves at the end of the
day. Those funds are released at the beginning of the next banking day. They are not currently used
for payments.
Credit institutions eligible for monetary policy operations are not obliged to be counterparties. Nor is
there any requirement that certain institutions be direct participants in any system. Should a major
Belgian bank apply for indirect participation in an important domestic interbank payment system, the
NBB would evaluate the situation.
2.2 Policy on institutions: content of policy (“allowed to have an account”)
The NBB has no formal policy concerning the opening of accounts in its books. The NBB has the right
to refuse to open an account and will justify this refusal if requested.
In practice, the following institutions can open accounts:
credit institutions and securities firms for use as direct participants in the payment or clearing
system; foreign institutions can also open accounts for this reason;
to say, a bank wanting to make a large-value payment may do so by submitting it to its correspondent (which then enters it
into the RTGS system); the bank does not itself have to become a direct participant. Thus, even with such a policy,
settlement of large-value payments may involve commercial bank as well as central bank money.
50 CPSS - The role of central bank money in payment systems - August 2003
clearing houses and central counterparties;
certain government agencies and accountants (to meet legal requirements);
IFIs and other central banks can have accounts as ordinary customers.
Most institutions that could have an account at the NBB do have such an account.
2.3 Policy on institutions: implementation of policy
Not applicable since the policy is expressed in terms of allowing/refusing accounts rather than
encouraging or requiring them.
3.0 Policy on types of payments
No policy (except general ESCB policy).
CPSS - The role of central bank money in payment systems - August 2003 51
Bank of Canada
(For the full text of the questions to which this information applies, see the introduction to this annex.)
1.1 Policy on interbank payment systems: content of policy
Settlement in central and commercial bank money
LVTS, ACSS and CDS debt clearing are required to settle in central bank money for reasons
described below (see 1.2). LVTS and ACSS settle on Bank of Canada accounts. CDS settles payment
obligations over LVTS.
The CDS equities settlement system, the Canadian Derivatives Clearing Corporation settlement
system and credit card systems do not settle in central bank money.
The Bank's preference is to accommodate industry-led initiatives for interbank systems to settle using
central bank money if they are consistent with payment policy objectives. As an industry-led initiative,
the CDS equities settlement system will be incorporated into the CDSX system that uses central bank
money as its settlement asset later this year.
Coordination between policy on systems and policy on institutions
Institutions that are required to settle in central bank money as a result of their participation in a
system such as LVTS are permitted to open accounts at the Bank of Canada.
1.2 Policy on interbank payment systems: implementation of policy
The policy on LVTS and ACSS is set out in the relevant by-law of the Canadian Payments Association
(CPA). For CDS the requirement to settle in central bank money comes from the guidance provided by
the Bank of Canada in the course of the oversight process. (Designation as being of systemic
significance under the 1996 Payment, Clearing and Settlement Act does not explicitly require
settlement in central bank money.)
2.1 Policy on institutions: content of policy (“required to have an account”)
No institutions are required to have accounts. Banks do not face reserve or liquidity requirements. All
direct participants in LVTS become counterparties for certain types of monetary policy operations.
Securities dealers may be counterparties but the settlements involve LVTS transfers to or from their
bankers; they do not currently have settlement accounts at the central bank.
2.2 Policy on institutions: content of policy (“allowed to have an account”)
At present, banks, credit cooperatives and securities dealers are allowed accounts if they are direct
participants in the ACSS. All financial institutions that are eligible to be CPA members, which include
life insurance companies and money market mutual funds, are also eligible to participate directly in the
LVTS and obtain settlement accounts, as are central counterparties that serve designated systems
such as CDS and CLS. The expansion of the institutions eligible for membership in the CPA could in
future lead to wider direct participation in the ACSS by securities firms. Discussions are currently
under way concerning the criteria that would be applicable in these cases, including the legal ability to
pledge collateral, and the role of the relevant regulatory body in providing a solvency assessment. The
discussions involve the central bank, the Ministry of Finance and the CPA.
The federal government, certain other government entities, other central banks and international
financial institutions are allowed accounts as customers of the Bank of Canada (ie not as participants
in the systems mentioned above).
52 CPSS - The role of central bank money in payment systems - August 2003
2.3 Policy on institutions: implementation of policy
The relevant CPA by-laws are available on the CPA website. Proposed changes are published for
public comment for 60 days. The requirements for systems such as those of the CDS are worked out
case by case.
The policy has been implemented in a manner that reflects the provisions of the legislation in the case
of the LVTS and ACSS, and the decisions to designate certain other structures pursuant to the 1996
Act.
3.0 Policy on types of payments
Policies reflect the structures through which payments are moving, rather than particular types of
payments.
CPSS - The role of central bank money in payment systems - August 2003 53
Eurosystem (general)
(For the full text of the questions to which this information applies, see the introduction to this annex.)
1.1 Policy on interbank payment systems: content of policy
Settlement in central and commercial bank money
RTGS and large-value net systems are required to settle in central bank money (see Minimum
common features for domestic payment systems, November 1993 - available on the website of the
ECB, www.ecb.int). For additional information, see individual national central bank (NCB) replies.
Coordination between policy on systems and policy on institutions
For TARGET, rules on direct participation and account access are synonymous (since TARGET is
owned and operated by central banks). For EURO1, all its participants have access to TARGET. For
other systems, see individual NCB replies.
1.2 Policy on interbank payment systems: implementation of policy
It is general practice in the Eurosystem that payment systems settle in central bank money. The
Eurosystem discloses its policy through several documents and policy statements (eg Minimum
common features for domestic payment systems).
2.1 Policy on institutions: content of policy (“required to have an account”)
Credit institutions are required to hold minimum reserves. For this purpose they can either have their
own account with an NCB or maintain their reserves through an intermediary. Minimum reserves can
be used directly for payment purposes during the day. Minimum reserves are remunerated at the
ECB’s rate for the main refinancing operations.
See individual NCB replies as regards the obligation of a monetary policy counterparty to open an
account at the central bank. In practice, almost all monetary policy counterparties do open an own
account at the national central bank. However, no credit institution is obliged to be a counterparty for
monetary policy operations.
There is no requirement that certain institutions should be direct participants in certain systems that
settle in central bank money, but if one of the largest banks were not to be a direct participant in
TARGET this would raise some questions.
2.2 Policy on institutions: content of policy (“allowed to have an account”)
Access to accounts
NCBs can determine their own rules, except that insofar as TARGET is concerned they are bound by
common rules (TARGET Guideline) which say that:
(a) supervised credit institutions must be allowed to be direct participants in TARGET and given
an account;
(b) as an exception, certain government/public sector bodies, investment firms (as defined by
EU legislation) and clearing houses may (at the discretion of individual NCBs) be allowed to
be direct participants in TARGET and given an account.
In both cases this is subject to:
(c) the institution being established in the EEA;
54 CPSS - The role of central bank money in payment systems - August 2003
(d) other criteria which individual NCBs can set, if they choose to, concerning financial strength,
expected minimum number of transactions, payment of an entry fee, and legal, technical and
operational aspects.
Apart from TARGET, NCBs can set their own criteria for account access but cannot provide credit in
euros unless the entities concerned fall under the TARGET Guideline.
Access to intraday credit
NCBs provide intraday credit to supervised credit institutions if they are eligible counterparties for
Eurosystem monetary policy operations and have access to the marginal lending facility.
Provided that it is a clear condition that intraday credit shall remain limited to the day in question and
that no extension to overnight credit is possible, intraday credit may also be granted to:
(a) treasury departments/public sector bodies;
(b) investment firms, on condition that they submit satisfactory written evidence that they have
concluded a formal agreement with a Eurosystem monetary policy counterparty to cover any
residual debit position at the end of the day in question; otherwise access to intraday credit is
limited to investment firms which hold an account with a central securities depository, and
the investment firm in question is subject to a liquidity deadline or the amount of intraday
credit is subject to a ceiling;
(c) supervised credit institutions which are not eligible counterparties for Eurosystem monetary
policy operations and/or do not have access to the marginal lending facility;
(d) clearing houses, on condition that the arrangements for granting intraday credit to such
organisations are submitted in advance to the Governing Council of the ECB for approval.
Intraday credit must be based on adequate collateral. It is provided free of interest.
Intraday credit shall not be granted to any remote participant.
2.3 Policy on institutions: implementation of policy
The policy is set out in the TARGET Guideline, which is a public document.
Since the policy is expressed in terms of allowing accounts rather than encouraging or requiring them,
the question of how policy is implemented is not applicable.
3.0 Policy on types of payments
Large-value payments are encouraged to use RTGS settling in central bank money (see Minimum
common features for domestic payment systems). The Eurosystem does not influence the choice
between direct participation and non-participation.
CPSS - The role of central bank money in payment systems - August 2003 55
Bank of France
(For the full text of the questions to which this information applies, see the introduction to this annex.)
1.1 Policy on interbank payment systems: content of policy
Settlement in central and commercial bank money
All interbank systems currently settle in central bank money except international debit/credit card
arrangements for cross-border transactions (eg MasterCard).
Indeed, large-value interbank systems in euros have to settle in central bank money pursuant to the
report on Minimum common features for domestic payment systems adopted at the European level;
other systems are encouraged to do so. No systems are discouraged from settling in central bank
money or not allowed to do so.
Coordination between policy on systems and policy on institutions
In general, systems settling in central bank money have to conform to central bank rules on account
access.
The compliance of TBF with the access policy described below is fully implemented within the Bank of
France. The Bank of France is also consulted each time a credit institution applies to connect to the
PNS system (and in certain cases to the RGV securities settlement system) since cash positions in
central bank money are embedded in these systems.
Other systems apply their own rules regarding access policy within the framework provided by
Directive 98/26/EC on settlement finality in payment and securities settlement systems. This directive
contains provisions regarding the type of institutions that can become participants in payment and
securities settlement systems, ie basically credit institutions and investment firms. The Bank of France
may control access rules applied by the system in order to monitor that it continues to comply with the
above-mentioned directive. The Bank of France may also apply such controls pursuant to its oversight
function, especially if the system is systemically important and must therefore comply with the
Core Principles as regards its access policy.
The mechanism of end-of-day settlement in central bank money of a system does not mean that its
participants need to have direct access to central bank money: direct participants in such systems can
settle their end-of-day positions through an intermediary which is a direct participant in the RTGS
system.
1.2 Policy on interbank payment systems: implementation of policy
The policy is set out explicitly and is in conformity with jointly agreed EU policies, including the
TARGET Guideline. The policy is implemented through specific agreements and moral suasion.
2.1 Policy on institutions: content of policy (“required to have an account”)
Within the countries of the euro area, credit institutions are required to hold minimum reserves at the
central bank. For this purpose they can either have their own account with the Bank of France or
maintain their reserves through an intermediary. Minimum reserves can be used directly for payment
purposes during the day.
Institutions that choose to be the central bank’s counterparties for monetary policy operations need to
have an account. But no institution is obliged to be a counterparty.
There is no other requirement as such to hold an account at the central bank. But some institutions
may prefer to have their own account, to benefit from direct access to the system or to make banknote
and coin withdrawals and deposits directly, instead of having to go through an intermediary.
56 CPSS - The role of central bank money in payment systems - August 2003
2.2 Policy on institutions: content of policy (“allowed to have an account”)
RTGS accounts
The following institutions are authorised to have an RTGS account:
credit institutions as defined by Article L. 511-1 of the Monetary and Financial Code (formerly
Article 1 of Act 84-46 of 24 January 1984);
investment firms authorised to provide the services listed in Points 2, 3, 5 or 6 of Article
L. 321-1 of the Monetary and Financial Code (formerly paragraphs b, c, e and f of Article 4 of
Act 96-597 of 2 July 1996) and authorised as an Account Keeper-Custodian under the terms
of Articles 6.2.2 ff of the Conseil des Marchés Financiers General Regulations;
credit institutions having their head office in a country that is a party to the Agreement on the
European Economic Area and acting under the terms of Article L. 511-23 of the Monetary
and Financial Code (formerly Article 71-2 of Act 84-46);
investment firms having their head office in a country that is a party to the Agreement on the
European Economic Area that are authorised to provide the investment services mentioned
in paragraphs 1 (b), 2 or 4 of Section A of the Annex to Directive 93/22/CEE of 10 May 1993
and acting under the terms of Article L. 532-18 of the Monetary and Financial Code (formerly
Article 74 of Act 96-597 of 2 July 1996);
foreign credit institutions and investment firms authorised in France or another country in the
European Economic Area having their registered office in a country that is not a party to the
Agreement on the European Economic Area;
securities settlement systems;
the Caisse des Dépôts et Consignations;
public sector institutions entitled to manage accounts for their customers.
The opening of an RTGS account is also subject to other criteria such as technical ability and the
provision of a satisfactory legal opinion for foreign participants (branches and remote access).
Other accounts
“Ordinary” accounts can be opened with the Bank of France by any of the following institutions:
credit institutions as defined by Article L. 511-1 of the Monetary and Financial Code (formerly
Article 1 of Act 84-46 of 24 January 1984);
investment firms authorised to provide the services listed in Points 2, 3, 5 or 6 of Article
L. 321-1 of the Monetary and Financial Code (formerly paragraphs b, c, e and f of Article 4 of
Act 96-597 of 2 July 1996) and authorised as an Account Keeper-Custodian under the terms
of Articles 6.2.2 ff of the Conseil des Marchés Financiers General Regulations;
credit institutions or investment firms authorised in France, Andorra or Switzerland and
having their head office in a country that is not a party to the Agreement on the European
Economic Area;
cash carriers making banknote and coin withdrawals/deposits on behalf of credit institutions;
“state” institutions.
Such ordinary accounts do not involve participation in an interbank payment system because they are
mainly used for withdrawals and deposits of banknotes and coins with the central bank. However,
credit institutions can choose to include the balance maintained on such accounts in the scope of the
reserve requirements.
Various other institutions (see Table A1 in Annex 3) can be customers of the central bank.
Additionally, although as a general rule individuals and non-financial firms have not been allowed
since 1994 to open an account at the Bank of France, the Monetary and Financial Code states that the
General Council can authorise a legal entity or individual to open such an account.
CPSS - The role of central bank money in payment systems - August 2003 57
Other information
A large majority of banks, but a minority of non-bank financial institutions, have an account with the
Bank of France.
2.3 Policy on institutions: implementation of policy
The policies are transparent and in conformity with jointly agreed EU policies on participation in RTGS
and the BDF Regulation (Article L. 141-8 of the Monetary and Financial Code; this latter regulation
refers to the type of entities for which the Bank of France may open accounts).
Since the policy is expressed in terms of allowing accounts rather than encouraging or requiring them,
there is no need for specific “implementation” of policy.
3.0 Policy on types of payments
Large-value payments and payments requiring immediate funds availability, such as monetary policy
operations and end-of-day positions in other systems, should settle in RTGS using central bank
money. Direct participation in the system versus non-participation is not affected - the choice is left to
credit institutions to participate either directly or indirectly in the system (except as regards monetary
policy operations, because counterparties to these operations have to be direct participants in the
RTGS). For instance, a credit institution may participate directly in a system other than the RTGS
(eg in the SSS) and have its end-of-day positions in this system settled through a direct participant in
the RTGS.
58 CPSS - The role of central bank money in payment systems - August 2003
Deutsche Bundesbank
(For the full text of the questions to which this information applies, see the introduction to this annex.)
1.1 Policy on interbank payment systems: content of policy
Settlement in central and commercial bank money
The systems/arrangements in Germany and their settlement methods are described in Annex 3,
Table C. All these systems settle in central bank money. Debit card payments and credit card
payments settle as follows:
Debit card payments: there is no special system for the clearing and settlement of debit card
transactions. These payments are handled like direct debits. Thus they are settled partly in
central bank money and partly in commercial bank money.
Credit card payments: these only partially use central bank settlement services.
RTGS and large value net settlement systems and all systemically important payment systems
processing the euro (Eurosystem policy) are required to settle in central bank money (see Minimum
common features for domestic payment systems).
Coordination between policy on systems and policy on institutions
Not applicable either for systems operated by the Bundesbank or for other systems.
1.2 Policy on interbank payment systems: implementation of policy
The policy is self-imposed.
2.1 Policy on institutions: content of policy (“required to have an account”)
Generally credit institutions, which are subject to minimum reserve requirements and therefore have
access to the refinancing facilities of the central bank, have to hold an account at the central bank.
Credit institutions can hold operational accounts on a voluntary basis, if these institutions are subject
to reserve requirements and hold their minimum reserves indirectly through an intermediary which is
resident in the same member state. Generally an account is necessary for direct participation in the
Bundesbank’s payment systems. Funds on these accounts can be used for payment purposes.
2.2 Policy on institutions: content of policy (“allowed to have an account”)
Credit institutions. Additional criteria: none, except see 2.1 above. Proportion: most. Credit: intraday
credit and overnight credit is granted on a collateral basis provided the credit institution is an eligible
counterparty for Eurosystem monetary policy operations and has access to the marginal lending
facility (“eligible counterparty”). Direct participation in the payment systems/arrangements of the
Bundesbank (such as RTGSplus, ELS, RPS, AZV, simplified cheque and direct debit collection
procedure) is only possible for credit institutions.
Investment firms as defined in Council Directive 93/22/EEC of 10 May 1993 and organisations
providing clearing or settlement services subject to oversight by a competent authority can also
participate in RTGSplus. Additional criteria: none. Proportion: none. Credit: no.
Public authorities (eg federal government). In principle, accounts are on a voluntary basis, but federal
and Länder (state) governments are obliged to have an account with the Bundesbank due to their
internal regulations. Additional criteria: none. Proportion: most. Credit: according to the Bundesbank
Act, they may be granted intraday credit within the framework of Article 4 of Council Regulation (EC)
no 3603/93, but not overnight credit. Restrictions on use: direct participation in payment systems not
allowed.
CPSS - The role of central bank money in payment systems - August 2003 59
Business enterprises (non-banks) and private customers. Previously on a voluntary basis. (Additional
criteria: Bundesbank opened accounts for these customers only if busy payment transactions with a
large cashless turnover were expected. Proportion: a few. Credit: no. Restrictions on use: direct
participation in payment systems not allowed.) Change in the access policy of the Deutsche
Bundesbank: the accounts for these customers will now be closed for competition reasons by
31 December 2003.
Security carriers. Voluntary basis. Additional criteria: none. Proportion: a few (negligible). Credit: no.
Restrictions on use: only for handling and distribution of cash.
Bundesbank employees. Voluntary basis. Additional criteria: none. Proportion: all. Credit: limited
overdraft facilities are available. Restrictions on use: direct participation in payment systems not
allowed.
Other. Correspondent banking services offered in euros are provided according to the decisions of the
Governing Council of the ECB as follows:
Non-domestic credit institutions: neither intraday nor overnight credit is allowed. Additional
criteria: exceptional cases, grandfathering.
Non-EU central banks: neither intraday nor overnight credit is allowed.
International and European institutions: overnight credit is not allowed. Intraday credit is
granted on a collateral basis. Exemption from the collateralisation requirement is decided by
the Governing Council case by case.
Remote access by banks from the EEA. RTGSplus holds intraday accounts (a special feature of the
system) where remote access is possible: these accounts are not current accounts. Voluntary basis.
Proportion: a few (negligible). Credit: no. Restrictions on use: terms and conditions for using the
Deutsche Bundesbank’s liquidity saving RTGSplus system.
2.3 Policy on institutions: implementation of policy
The policy is made transparent in general and specific terms and conditions and additionally by (for
example) statements and speeches.
The Bundesbank Act, Section 3, gives the Bundesbank the mandate to provide for the execution of
payments. The Bundesbank Act also contains regulations concerning the scope of business and
determines what transactions the Bundesbank is entitled to conduct (Article 19 business with credit
institutions and other market participants, Article 20 business with public authorities, Article 22
business with the general public). The General Terms and Conditions of the Bundesbank set down for
whom the Bundesbank may open an account. This means in practice that accounts can only be
opened for those types of institutions. The Bundesbank Act can only be amended by Parliament. The
General Terms and Conditions are, if necessary, amended accordingly by the Deutsche Bundesbank.
3.0 Policy on types of payments
Minimum common features for domestic payment systems:
Principle 4 - RTGS systems: “As soon as feasible, every member state should have an
RTGS system into which as many large-value payments as possible should be channelled.
Such systems should settle across accounts at the central bank and have sound legal,
technical and prudential features, which are compatible across EC member states.”
Principle 5 - Large-value net settlement systems: “Provided they settle at the central bank,
large-value net settlement systems may continue to operate in parallel with RTGS systems
but, in the near future, they should (a) settle on the same day as the exchange of the
payment instruments, and (b) meet the Lamfalussy standards in full.”
TARGET Guideline: “All payments directly resulting from or made in connection with (i) monetary
policy operations; (ii) the settlement of the euro leg of foreign exchange operations involving the
Eurosystem; and (iii) the settlement of cross-border large-value netting systems handling euro
transfers shall be effected through TARGET. Other payments may also be effected through TARGET.”
60 CPSS - The role of central bank money in payment systems - August 2003
Hong Kong Monetary Authority
(For the full text of the questions to which this information applies, see the introduction to this annex.)
1.1 Policy on interbank payment systems: content of policy
Settlement in central and commercial bank money
The Hong Kong dollar RTGS system is a SIPS and is settled across the books of the HKMA.
The US dollar and euro RTGS systems in Hong Kong do not settle in central bank money as all
transactions are settled across the books of HSBC, the settlement institution of the US dollar RTGS
system, and Standard Chartered, the settlement institution of the euro RTGS system, respectively.
Credit cards and other retail payment means are settled between the banks in the Hong Kong dollar
RTGS system and are not separately identified from other payment types.
Coordination between policy on systems and policy on institutions
The Hong Kong dollar RTGS system is a single-tier system. The Exchange Fund Ordinance provides
that the Financial Secretary may require an authorised institution (see 2.2 below) to open a settlement
account with the HKMA and the Financial Secretary has delegated this power to the HKMA. In
practice, the HKMA operates a clearly stated policy of obliging all licensed banks to open settlement
accounts with the HKMA. The restricted licence banks can also apply for access provided they have
genuine business needs.
1.2 Policy on interbank payment systems: implementation of policy
The policy is set out explicitly. It is implemented mainly by regulation because the Exchange Fund
Ordinance empowers the HKMA to require banks (authorised institutions) to open an account and also
to specify the terms and conditions governing the operation of the account (a power which could be
used to require a specified system to settle in central bank money). This is supplemented by legal
contracts and operational guidelines.
2.1 Policy on institutions: content of policy (“required to have an account”)
The Hong Kong dollar RTGS system is a single-tier system and all participants are direct participants
of the system. However, there is no requirement to hold funds at the HKMA for reserve or liquidity
requirement purposes. Nor is there any requirement to hold an account relating to monetary policy
operations.
2.2 Policy on institutions: content of policy (“allowed to have an account”)
Hong Kong maintains a three-tier system of deposit-taking institutions (authorised institutions), namely
licensed banks, restricted licence banks (RLBs) and deposit-taking companies (DTCs). The licensed
banks may operate current and saving accounts, and accept deposits of any size and maturity from
the public and pay or collect cheques drawn by or paid in by customers. The RLBs are principally
engaged in merchant banking and capital market business. The DTCs are engaged in a range of
specialised activities, including consumer finance and securities business and may take deposits of
HKD 100,000 or above with an original maturity of at least three months.
Given that the nature of business is different for the three tiers, the HKMA requires only licensed
banks to open settlement accounts with the HKMA to settle their Hong Kong dollar transactions. For
RLBs and DTCs, given that the business need for accessing the system is not high, the HKMA does
not require them to open settlement accounts as the operating cost may not be justifiable.
Nonetheless, the policy of access is reviewed by the HKMA from time to time and in May 2000 the
HKMA relaxed the policy by allowing the RLBs to apply for access, providing the bank concerned
CPSS - The role of central bank money in payment systems - August 2003 61
demonstrates a business need to do so. So far only one RLB has applied (and the HKMA has granted
access).
Banks that have opened settlement accounts with the HKMA can sign a repo agreement with the
HKMA to obtain interest-free intraday repo liquidity.
2.3 Policy on institutions: implementation of policy
As well as the Exchange Fund Ordinance, the policy is set out explicitly in the legal contracts between
the HKMA, Hong Kong Interbank Clearing Limited (clearing operator of the Hong Kong dollar RTGS
system) and the participants of the payment systems; policy statements, circulars and guidelines are
issued to participants and most of them are available on the HKMA official website.
The policy is mainly implemented by regulation because, as noted above, the Exchange Fund
Ordinance empowers the HKMA to require authorised institutions to open an account and also to
specify how the account is used. This is supplemented by legal contracts and operational guidelines.
3.0 Policy on types of payments
No specific policy.
62 CPSS - The role of central bank money in payment systems - August 2003
Bank of Italy
(For the full text of the questions to which this information applies, see the introduction to this annex.)
1.1 Policy on interbank payment systems: content of policy
Settlement in central and commercial bank money
All systems currently in operation, except international debit/credit card systems, are promoted and/or
managed by the Bank of Italy and therefore they already settle in central bank money. Only
international debit/credit card systems settle in commercial bank money.
Coordination between policy on systems and policy on institutions
For BI-REL, the Italian component of TARGET, rules on direct participation and on account access are
synonymous. In other systems, direct participants do not have to have an account at the Bank of Italy
since they can settle their position through an intermediary which is a direct participant in BI-REL.
1.2 Policy on interbank payment systems: implementation of policy
Not applicable.
2.1 Policy on institutions: content of policy (“required to have an account”)
Banks hold deposits at the central bank both for payment purposes and to fulfil the compulsory
reserve requirements. The reserve balances can be used for payment purposes, both during the day
and within the “maintenance” period. In addition, banks can fulfil the reserve requirements indirectly
through an intermediary. There are no other reasons why banks or other financial institutions have to
hold an account.
2.2 Policy on institutions: content of policy (“allowed to have an account”)
Credit institutions, investment firms, clearing organisations, remotely located institutions in the EEA
and public sector bodies can have settlement accounts for use as direct participants in BI-REL.
Various other institutions (see Table A1 in Annex 3) can be customers of the central bank.
2.3 Policy on institutions: implementation of policy
The policies are set out explicitly in the rules and regulations governing the systems. In addition, they
are described in general terms in policy statements (eg the 1999 white paper on payment system
oversight).
The policy does not have to be “implemented” as such since it is expressed in terms of allowing
accounts rather than encouraging or requiring them.
3.0 Policy on types of payments
The Bank of Italy has always encouraged a widespread use of central bank money for the settlement
of payments. At the domestic level, the net balances stemming from the transactions carried out in the
national retail clearing system and the securities settlement systems must be settled in the RTGS
system. Generally speaking, this does not affect direct participation versus non-participation and so
since all systems settle in central bank money it affects how central bank money is used rather than
whether it is used.
CPSS - The role of central bank money in payment systems - August 2003 63
Bank of Japan
(For the full text of the questions to which this information applies, see the introduction to this annex.)
1.1 Policy on interbank payment systems: content of policy
Settlement in central and commercial bank money
The systems which settle in commercial bank money are the four clearing systems operated by the
four types of cooperative banks (namely shinkin banks, credit cooperatives, labour credit associations,
and agricultural and fishery cooperatives); the four CD/ATM systems operated by the cooperative
banks; and part of the credit card and debit card clearing systems. These arrangements all settle in
the central organisation of each type of cooperative bank.
Many of the local bill and cheque clearing systems also settle in commercial bank money, although
these are small in terms of value; more than 70% of the total value of bills and cheques exchanged in
clearing houses throughout Japan is cleared by the Tokyo Clearing House, which settles in central
bank money.
Part of the cash legs of stock transactions are settled in commercial bank money. Those of stocks
traded on stock exchanges and the JASDAQ market are settled either at the Bank of Japan or at one
of the settlement banks, according to participants’ choice. The cash legs of other stock transactions
are currently settled in commercial bank money (a DVP arrangement involving settlement in central
bank money is planned to be introduced in 2005).
SIPS are expected to settle in central bank money. No system is discouraged from settling in central
bank money. Clearing systems and CD/ATM systems operated by cooperative banks settle in
commercial bank money partly because most direct participants in those systems (cooperative banks)
are not allowed to have BOJ accounts.
Coordination between policy on systems and policy on institutions
In the case of the BOJ-NET Funds Transfer System, all institutions that hold current accounts at the
BOJ are automatically direct participants since it is a system for transferring funds to and from BOJ
accounts.
Regarding other systems, in order for a system to settle in central bank money, all its direct
participants must have accounts at the BOJ. This is set out as policy on institutional access, ie as one
of the criteria for the operator of the system to open an account at the BOJ.
1.2 Policy on interbank payment systems: implementation of policy
The BOJ’s policy is set out in a paper entitled “The role of the Bank of Japan in payment and
settlement systems” (Bank of Japan, November 2002), where it is stated that “net obligations of
participants in systemically important payment systems should preferably be settled through current
accounts with the Bank”.
The policy is implemented by moral suasion.
2.1 Policy on institutions: content of policy (“required to have an account”)
Domestically licensed banks, branches of foreign banks, large shinkin banks and Norinchukin Bank
(central organisation of agricultural and fishery cooperatives) are subject to reserve requirements and
have to have an account at the BOJ for this purpose. The funds can be used directly for payment
purposes.
Institutions that choose to be the BOJ’s counterparties for monetary policy operations do not need to
have an account.
There is no requirement that any institution be a direct participant in any system, but in practice all
large banks already hold accounts at the BOJ and are therefore direct participants of the BOJ-NET
64 CPSS - The role of central bank money in payment systems - August 2003
Funds Transfer System. Most large banks are also direct participants in private clearing systems that
settle in central bank money.
There are no other reasons why certain financial institutions have to hold an account at the BOJ.
2.2 Policy on institutions: content of policy (“allowed to have an account”)
Policy on who is allowed to have an account is expressed in terms of general criteria rather than
specific types of institutions. Institutions are allowed to have accounts if this contributes to achieving
the BOJ’s objectives as defined in Article 1 of the Bank of Japan Law (in addition to monetary stability,
“to ensure smooth settlement of funds among banks and other financial institutions, thereby
contributing to the maintenance of an orderly financial system”). This is further specified as “institutions
playing a key role in payments”, “institutions playing a key role in securities settlement” and
“institutions playing an intermediary role in the interbank market”. At the moment, types of institutions
holding BOJ accounts include domestically licensed banks, branches of foreign banks, shinkin banks,
central organisations of cooperative banks, securities firms, money market brokers, securities finance
companies, stock exchanges and bankers’ associations (operators of payment systems). In addition,
the institution must be financially and operationally sound and must agree to be subject to on-site
examination by the BOJ.
For securities firms and bankers’ associations, there are additional criteria. Securities firms must have
a certain standing in the securities market, which is measured by the value of corporate and public
sector bond transactions the applicant has conducted or is projected to conduct during a designated
period. For bankers’ associations, all direct participants of the system it operates must hold accounts
at the BOJ, and settlement of net positions via the BOJ account held by the bankers’ association
should contribute to the safety and efficiency of interbank payments.
The BOJ allows access to both intraday and overnight credit by all “financial institutions” (as defined in
Article 37 of the Bank of Japan Law) that have access to BOJ accounts, unless there are any
problems. With regard to other types of account holders, the BOJ allows access to credit case by
case. Where institutions other than the “financial institutions” above are not allowed access to credit,
they are not subject to on-site examination by the BOJ.
In addition, the central government, foreign central banks and international financial institutions are
allowed to hold accounts but without access to credit.
2.3 Policy on institutions: implementation of policy
The criteria set by the BOJ are publicly available.
Since the policy is expressed in terms of allowing accounts rather than encouraging or requiring them,
there is no need for specific “implementation” of the policy.
3.0 Policy on types of payments
“The role of the Bank of Japan in payment and settlement systems” states that net obligations arising
from SIPS should preferably be settled through current accounts with the BOJ. The paper also
recognises that it is generally believed that other large-value interbank payments, such as those for
call money transactions and the cash legs of securities trades, should be settled through BOJ
accounts, and they are in practice.
CPSS - The role of central bank money in payment systems - August 2003 65
The Netherlands Bank
(For the full text of the questions to which this information applies, see the introduction to this annex.)
1.1 Policy on interbank payment systems: content of policy
Settlement in central and commercial bank money
According to the Eurosystem’s Minimum Common Features, large-value RTGS and net systems are
required to settle in central bank money. In the Netherlands, there is only one large-value system, the
RTGS system TOP.
Other systems (the retail system Interpay and the securities clearing system Clearnet) are encouraged
to settle in central bank money. In fact, historically, market participants in securities clearing asked the
central bank to act as settlement bank for safety reasons, while for retail payments, the neutrality
aspect probably played a major role.
Only international card systems do not settle in central bank money. However, most domestic credit
cards do settle at the central bank via Interpay, the Dutch retail clearing house, which clears card
transactions together with other retail transactions. Interpay is a subcontractor in parts of the
MasterCard issuing and transaction authorisation process and also partly processes Visa transactions.
Coordination between policy on systems and policy on institutions
TOP is operated by the DNB and participation in the system has to be in conformity with central bank
rules on account access. Account holding is a prerequisite for participation in Interpay and as a
clearing member in Clearnet.
1.2 Policy on interbank payment systems: implementation of policy
The policy is transparent in a general way. ESCB rules are explicit. Further policies are mainly explicit
in terms of the policy objectives (oversight and risk reduction/efficiency/competitive neutrality).
ESCB requirements are implemented in national regulations. At the national level, regular contacts
with market participants, in order to be aware of their concerns and wishes, and moral suasion play an
important role.
Note that securities settlement took place in commercial bank money until March 1999 (and July 2000
for derivatives). Prior to these dates, the settlement function was performed by a relatively small
commercial bank. With the growth of securities transactions, the daily exposures of this bank attained,
during a few hours (the time span between payments to and from this bank), more than NLG 1 billion.
Market participants expressed the wish to see the DNB take over the role of settlement agent.
2.1 Policy on institutions: content of policy (“required to have an account”)
Supervised credit institutions are required to hold reserves at the central bank. The accounts can be
used for payment purposes. Holding reserves (and thus having an account) is one of the conditions for
becoming a monetary policy counterparty. Being such a counterparty is not compulsory.
There is no other requirement to hold an account. However, if one of the largest banks were not to be
a direct participant in TOP this would probably raise some questions. All banks are required to hold a
reserve/payment account; some banks probably do make use of correspondents for some types of
transactions, but as a general rule this is rather impractical compared to direct participation.
2.2 Policy on institutions: content of policy (“allowed to have an account”)
In accordance with the criteria of the TARGET Guideline, participation in the RTGS system is allowed
for credit institutions and securities firms (if supervised and in the EEA), clearing/settlement
66 CPSS - The role of central bank money in payment systems - August 2003
organisations and various government entities. In practice, most eligible institutions do have
settlement accounts at the Bank.
Besides that, the provision of central bank correspondent accounts is at the discretion of the Bank.
The provision of accounts to parties that do not have direct access to TOP is, however, only marginal,
as most of these accounts were closed before the start of TARGET. The account holders are mainly
IFIs and foreign central banks. The central bank’s correspondent services are not subject to specific
rules but they are not common practice, as the general policy line is not to compete with the private
sector.
Nevertheless, the discussion about access policy has regained some importance in the light of
conclusions arising from a research project on the tariff structure and infrastructure for retail payments,
conducted by order of the Ministry of Finance. One of the recommendations stated that: “the Bank will,
if asked for, offer an account to non-banks that are involved in the settlement of payments, provided
this contributes, according to its judgment, to the improvement of the efficiency of the financial
infrastructure”. As a follow-up, the Bank is now studying the implications of this recommendation for
itself and for the parties that could be concerned. If account access is granted to non-banks, these will
not have direct access to TOP but will use the central bank as a correspondent.
2.3 Policy on institutions: implementation of policy
The policy is transparent. The question of implementation does not directly arise since the policy is
expressed in terms of allowing accounts rather than encouraging or requiring them.
3.0 Policy on types of payments
The DNB would prefer to see large-value payments settled in central bank money through the RTGS
system. However, there is no formal requirement for direct participation or restriction on the use of
other systems.
CPSS - The role of central bank money in payment systems - August 2003 67
Monetary Authority of Singapore
(For the full text of the questions to which this information applies, see the introduction to this annex.)
1.1 Policy on interbank payment systems: content of policy
Settlement in central and commercial bank money
Systems which do not settle in central bank money include the US dollar cheque clearing system,
EFTPOS, cash dispensers and the ATM network, as well as the Central Depository Pte Ltd (CDP).
MEPS, the Singapore dollar cheque clearing system and the Interbank Giro systems settle in central
bank money. The MAS would also encourage the CDP to settle in central bank money. There are no
systems which are discouraged from settling in central bank money or which are not allowed to do so.
Coordination between policy on systems and policy on institutions
This is not an issue as MEPS is owned and operated by the MAS.
1.2 Policy on interbank payment systems: implementation of policy
MEPS is operated by the MAS and so the issue of implementation does not directly arise.
2.1 Policy on institutions: content of policy (“required to have an account”)
Up to mid-2002, only banks were allowed access to MEPS. However, not all banks choose to do so
nor does the MAS require them to use MEPS. From December 2002, the MAS Act was amended to
allow non-banks of systemic importance, with the approval of the MAS, to participate in MEPS.
All banks in Singapore are required to maintain minimum cash balances (MCB) with the MAS of not
less than 3% of total liabilities (averaged over a two-week maintenance period). Banks may on an
intraday basis use the full amount in their accounts, including the 3% MCB, to settle their payments
under MEPS. Banks must, however, restore their reserve account balance to at least 2% of the
liabilities base by the end of the day.
Institutions that choose to be the MAS’s counterparties for monetary policy operations do not need to
have an account. There are no other reasons why an account is required.
2.2 Policy on institutions: content of policy (“allowed to have an account”)
The MAS only accepts applications for accounts by banks, as well as non-banks of systemic
importance and the Singapore government. In addition, the MAS also acts as nostro agent for other
central banks/monetary authorities and international banks/international monetary authorities
established under governmental auspices.
As at 2000, about 67% of banks were direct participants in MEPS.
An end-of-day facility is provided to allow banks to borrow Singapore dollar funds from the MAS via
overnight Singapore Government Securities (SGS) repos. The MAS may, where necessary, extend
intraday credit through primary dealer banks to resolve systemic payment gridlocks. The intraday
credit from the MAS must be collateralised with SGSs.
The MEPS account is to be used for performing Singapore dollar interbank funds transfers and the
settlement of SGSs.
2.3 Policy on institutions: implementation of policy
The policies are set out in regulations. The MAS Act states “The Authority may establish and operate
one or more real-time gross settlement systems for the transfer of funds, the settlement of payment
68 CPSS - The role of central bank money in payment systems - August 2003
obligations and the transfer and settlement of book-entry securities and instruments between or
among participants approved by the Authority”. According to the Act a “participant” is “a person
approved by the Authority to be a participant of a settlement system and shall include the Authority
where it participates in the settlement system”.
3.0 Policy on types of payments
No policy.
CPSS - The role of central bank money in payment systems - August 2003 69
Sveriges Riksbank
(For the full text of the questions to which this information applies, see the introduction to this annex.)
1.1 Policy on Interbank payment systems: content of policy
Settlement in central and commercial bank money
The Riksbank does not have an explicit policy on what systems are required to settle in central bank
money. However, the Riksbank has endorsed the Core Principles and the SSS recommendations as
standards to be followed. According to the Core Principles, SIPS should preferably settle in central
bank money. The Riksbank considers the RIX system (the LVPS operated by the Riksbank), the VPC
system (the SSS/CSD) and the derivatives clearing system operated by Stockholmsbörsen (the
Stockholm Exchange) as SIPS. The Riksbank has also encouraged the Bank Giro system and
interbank systems operated by the BGC, such as Data Clearing, to settle in the RIX system, ie in
central bank money.
Only Visa does not settle in central bank money. (The Postgiro is an in-house system in a commercial
bank, and can be regarded as a “quasi-system.)
Coordination between policy on systems and policy on institutions
This is not applicable for RIX - since the Riksbank owns the system. For other systems, direct
participants in systems in practice have to meet Riksbank access criteria, or use a settlement bank
that does (eg clearing members in the SSS/CSD must use a settlement bank that meets the access
criteria and is a participant in the RIX system - could be the clearing member itself - according to the
rules of the SSS/CSD).
1.2 Policy on interbank payment systems: implementation of policy
The Riksbank has openly endorsed the Core Principles, and it is clear to all market participants that
the Riksbank expects SIPS to settle in central bank money. The policy is implemented by moral
suasion.
2.1 Policy on institutions: content of policy (“required to have an account”)
The Riksbank does not apply reserve requirements.
Not all monetary policy operations require an account with the Riksbank (an account is required for the
usage of standing facilities and fine-tuning operations). No institutions are obliged to be counterparties
to the central bank.
In order to avoid unnecessary concentration of payment flows in an already concentrated bank market,
institutions with larger payment flows are encouraged to become direct participants. Furthermore,
major banks must have accounts in the central bank if they want to offer a full range of services to
their securities customers.
2.2 Policy on institutions: content of policy (“allowed to have an account”)
The following may open a Swedish krona settlement account:
credit institutions (according to the EU definition, which includes a number of institutions that
are regarded as investment firms according to Swedish legislation);
other investment firms (but only if they are counterparties in the Riksbank’s money market
operations, in which case they have to have an account);
clearing organisations;
70 CPSS - The role of central bank money in payment systems - August 2003
government agencies (which are responsible for central government payments and cash
management);
remote access participants that fall into one of the above categories and central banks.
There is no such concept as an indirect account holder (participant in the interbank payment system).
Remote access is not restricted to the EEA. There is currently only one bank that is approved as a
remote participant.
Account holders are allowed both intraday and overnight credit, except clearing houses and
government agencies (intraday credit only). This applies to remote account holders as well.
For accounts in euros the same policy applies, with the exceptions that there is no overnight credit and
intraday credit is restricted to participants with a presence in Sweden. Remote access is only accepted
for EEA institutions.
IFIs and central banks may open a krona correspondent account. Correspondent account holders are
not allowed credit.
2.3 Policy on institutions: implementation of policy
The policy is set out in the regulations for the RIX system (and in the terms and conditions for
correspondent accounts).
The question of how the policy is implemented is not directly applicable since it is expressed in terms
of allowing accounts rather than encouraging or requiring them.
3.0 Policy on types of payments
Larger customer and interbank payments should settle in central bank money - but this does not affect
direct participation versus non-participation and can thus be thought of as a policy on how systems
should settle.
CPSS - The role of central bank money in payment systems - August 2003 71
Swiss National Bank
(For the full text of the questions to which this information applies, see the introduction to this annex.)
1.1 Policy on interbank payment systems: content of policy
Settlement in central and commercial bank money
SIPS are expected to settle in central bank money.
Provided that direct participation in a system is consistent with the SNB's access policy, any system or
its participants would be allowed to settle in central bank money. For instance, the SNB has
encouraged various retail payment systems to settle in central bank money, mainly for efficiency
(liquidity saving) reasons.
Only credit card systems settle in commercial bank money.
Coordination between policy on systems and policy on institutions
Direct participants in systems settling in central bank money have to meet the SNB's access criteria.
1.2 Policy on interbank payment systems: implementation of policy
No formal regulation exists. However, the basic principles of the SNB's policy are explained in a policy
paper which was published in the SNB's Quarterly Bulletin in spring 2003.
The policy is currently implemented via moral suasion. However, the new Law on the SNB, to be
enacted in 2004, will give the SNB a more formal legal basis to require SIPS to settle in central bank
money.
2.1 Policy on institutions: content of policy (“required to have an account”)
Banks are not required to hold an account with the SNB. Those that do have an account are not
required to hold reserves. Although liquidity requirements exist, these may be met by a combination of
cash held in vaults, balances at Postfinance and central bank balances. Banks could thus meet
liquidity requirements only by holding vault cash and/or balances at Postfinance. Funds that are held
at the SNB can be used directly for payment purposes.
There is no requirement to participate in monetary policy operations.
There are no other requirements to hold an account. However, if one of the larger banks were not a
direct participant in SIC, the SNB would be concerned and might address this issue with the Federal
Banking Commission.
2.2 Policy on institutions: content of policy (“allowed to have an account”)
Banks, securities dealers, clearing houses and banks located abroad may have accounts at the SNB
and are allowed, in principle, to directly participate in SIC. However, remote access to SIC is only
provided to international joint ventures and clearing organisations, as well as to the banks that are
direct participants in such arrangements, provided they make a sizeable contribution to the reduction
of systemic risk or are of major significance to the Swiss financial centre. In practice, almost all eligible
(domestic) banks do have accounts (ie there is virtually no tiering), whereas only a few securities
dealers have accounts.
In addition to direct participants in interbank payment systems, government entities, corporates (if
need is proved), central bank employees, international organisations based in Switzerland, other
central banks and IFIs are allowed to have accounts as ordinary customers of the SNB.
72 CPSS - The role of central bank money in payment systems - August 2003
2.3 Policy on institutions: implementation of policy
The policy is explicitly stated in the Law on the SNB and/or in SNB directives. The policy is
implemented by regulation.
3.0 Policy on types of payments
There is currently no specific policy in terms of types of payments. However, the types of payments a
system settles are taken into account in the SNB's assessment of the system's systemic importance,
and the new Law on the SNB will make provision for requiring SIPS to settle in either central bank
money or any other asset that is deemed to be sufficiently safe (eg settlement on the accounts of CLS
Bank).
CPSS - The role of central bank money in payment systems - August 2003 73
Bank of England
(For the full text of the questions to which this information applies, see the introduction to this annex.)
1.1 Policy on interbank payment systems: content of policy
Settlement in central and commercial bank money
Systems typically settle in central bank money. Exceptions are credit card schemes and one debit card
scheme (Visa Debit).
SIPS are required to settle in central bank money. Systems of “system-wide importance” (see main
text) are permitted to do so. Other systems are discouraged from settling in central bank money unless
they can make a good case (eg on efficiency or neutrality grounds).
Coordination between policy on systems and policy on institutions
Under the Bank’s policy (set out in the Bank’s recent policy statement), it is up to the system to decide
who can be a direct participant. The Bank would normally open a settlement account for all direct
participants in a system for which it acted as settlement agent. An element of discretion is retained,
however, to allow the Bank to refuse access to an account on risk or wider public policy grounds.
1.2 Policy on interbank payment systems: implementation of policy
The Bank’s policy is set out in a public statement, which can be found on the Bank’s website
(www.bankofengland.co.uk). It is implemented through bilateral discussion with applicants.
2.1 Policy on institutions: content of policy (“required to have an account”)
No institution is required to have a settlement or other account at the Bank. Nor are there any related
requirements which might imply the need for an account. For example, although banks with eligible
liabilities over GBP 400 million have to provide “cash ratio deposits” to the Bank (the interest on which
is one source of finance for the Bank’s official activities), CRDs need not be held in the depositing
institution’s account. Similarly, counterparties for open market operations may use a commercial bank
to make/receive payments relating to monetary policy operations.
2.2 Policy on institutions: content of policy (“allowed to have an account”)
Under the Bank’s policy, the presumption is that all members of a system for which the Bank acts as
settlement agent are eligible to maintain an account for use in the context of their activities in that
system. But applications would be considered case by case and the Bank retains the discretion to
refuse to open a settlement account where necessary to protect its position or in pursuit of public
policy goals. This policy applies to banks and non-banks, including, in some cases, non-financial
institutions. It also applies to both resident and non-resident institutions, although further conditions
might be applied to those accessing remotely, including the need to obtain a legal opinion addressing
possible conflicts of law and an assessment of the applicable supervisory regime.
Credit is generally limited to banks (resident and non-resident), but securities firms may be allowed
credit where it is clearly needed to support their participation in the relevant system and where there
are systemic benefits to providing credit (or conversely where its absence could generate risk of, for
example, illiquidity). Clearing houses would be dealt with case by case - for instance, the Bank
provides limited credit facilities to the London Clearing House in the context of its activities in CREST.
In practice, all direct participants in the high-value payment systems (and most participants in the other
systems) are banks. Currently, no securities houses are direct members of any significant interbank
payment systems. A small number of non-financial institutions maintain accounts (but without access
to credit) in the context of their LINK (ATM clearing) membership.
74 CPSS - The role of central bank money in payment systems - August 2003
In addition to direct participants in interbank payment systems, government bodies, central bank
employees, other central banks and international financial institutions are also allowed accounts as
ordinary customers of the Bank.
Different eligibility rules apply to the Bank’s monetary policy counterparties.
2.3 Policy on institutions: implementation of policy
The Bank’s policy is set out in a public statement, which can be found on the Bank’s website. It is
implemented through bilateral discussion with applicants.
3.0 Policy on types of payments
No discrete policy exists on payment methods.
CPSS - The role of central bank money in payment systems - August 2003 75
Federal Reserve System
(For the full text of the questions to which this information applies, see the introduction to this annex.)
1.1 Policy on interbank payment systems: content of policy
Settlement in central and commercial bank money
The Federal Reserve makes settlement services in central bank money available to private interbank
payment systems, but none of these systems is required to use these services. The systems
themselves must choose how best to conduct their settlements and whether the terms and conditions
of the Federal Reserve’s services meet their needs. Settlement arrangements for systemically
important and certain other systems are reviewed based on the design and risks of the particular
system.
Coordination between policy on systems and policy on institutions
Federal Reserve policies on account access and services determine who may be a direct participant in
systems operated by the Federal Reserve. Private systems determine their own participation structure,
subject to relevant laws and policy. If a private system uses the Federal Reserve’s settlement
services, then the Federal Reserve’s policies on access will influence who may settle directly on the
books of the Federal Reserve Banks.
1.2 Policy on interbank payment systems: implementation of policy
The Federal Reserve makes its policies on interbank payment systems publicly available. Policies
governing Federal Reserve operated payment systems and the use of intraday Federal Reserve credit
are included in Federal Reserve Board regulations, Federal Reserve Bank operating circulars (the
contractual agreements between the Reserve Banks and their customers), the Federal Reserve policy
statement on payments system risk and associated material that provides more detailed guidance,
and other policy statements. One key source for material is the Federal Reserve regulatory service,
which contains Board regulations as well as authorising statutes, policy statements, interpretations,
commentaries and opinions.
2.1 Policy on institutions: content of policy (“required to have an account”)
Banks and other depository institutions are not necessarily required to hold an account or to hold
funds at a Federal Reserve Bank. However, members of the Federal Reserve System, including both
national banks, which are required to be members, and state-licensed banks or other depository
institutions, which have chosen to be members, must hold an account in order to meet their reserve
requirements, unless they can meet them solely through cash in their vault.
Other than this policy relating to reserve requirements, the Federal Reserve does not require financial
institutions to hold an account at a Federal Reserve Bank. In particular, there is no requirement that
the central bank’s counterparties for monetary policy operations must have an account. However, the
internal rules of certain private systems may require that a direct participant or the operator have
access to an account at the Federal Reserve.
The policy is implemented through a variety of means, as appropriate, including regulation, operating
circulars, which represent contractual agreements between the Federal Reserve Banks and account
holders, and policy statements, as well as supervisory and payment system oversight activities.
2.2 Policy on institutions: content of policy (“allowed to have an account”)
Depository institutions, including both domestically chartered institutions and US branches and
agencies of foreign banks, are allowed to have an account at a Federal Reserve Bank. State-licensed
trust companies that are members of the Federal Reserve System, such as the Depository Trust
Company, and Edge Act corporations, such as CLS Bank, along with certain other institutions are
76 CPSS - The role of central bank money in payment systems - August 2003
allowed to have accounts. In addition, a limited selection of government entities, other central banks,
international financial institutions, such as the IMF, and certain government-sponsored institutions,
such as the Federal Home Loan Banks, are allowed to maintain accounts. The Federal Reserve also
maintains accounts operated by clearing houses, but only if those accounts are held either in the
name of a clearing house that has a banking or similar licence, as is the case for CLS Bank, or in the
name of the deposit-taking institutions that have such licences and are participants in the clearing
arrangement, as is the case for CHIPS.
Depository institutions with regular access to the discount window are generally eligible to access
intraday credit. The Federal Reserve may restrict a depository institution’s privilege to incur overdrafts
in its account, for example, if the institution is in weak financial condition or does not manage its
account according to the Federal Reserve’s overdraft policies. Institutions with an account at a Federal
Reserve Bank that do not have regular access to the discount window, typically institutions that are not
subject to reserve requirements, are generally expected to refrain from incurring daylight overdrafts in
their Federal Reserve accounts.
2.3 Policy on institutions: implementation of policy
Policies on membership in the Federal Reserve System and account access are established in the
Federal Reserve Act and various other statutes. The Federal Reserve Policy statement on payments
system risk explains the general methods used by the Federal Reserve to grant and control intraday
credit. The Federal Reserve has also prepared two other documents to assist depository institutions in
implementing the Board’s policies: first, an Overview of the Federal Reserve’s payments system risk
policy, which provides a summary of the Board’s policies; and second, a Guide to the Federal
Reserve’s payments system risk policy, which explains in detail how the Board’s policies apply to
different institutions and includes information on procedures and other aspects of the policy.
The policy is implemented through a variety of means, as appropriate, including regulation, operating
circulars, which represent contractual agreements between the Federal Reserve Banks and account
holders, and policy statements, as well as supervisory and payment system oversight activities.
3.0 Policy on types of payments
As a general matter, the Federal Reserve does not have a policy on how particular types of payments
should be made.
CPSS - The role of central bank money in payment systems - August 2003 77
Annex 2
Access policy - specific cases
The factors discussed in Section 4.1 that are relevant to any review of access may be illustrated by
considering the cases of particular types of institution which are not currently allowed access to
settlement accounts in all countries, but which could potentially seek access. The following is not
intended to be a complete exposition of the arguments in favour of or against allowing each type of
institution access to an account, but rather to illustrate the sort of factors the relevant central bank is
likely to take into account. It considers, in turn, non-resident banks, securities firms, insurance
companies, non-financial corporates and certain specialist payment service providers.
(i) Non-resident banks
Section 2 highlighted the implications of globalisation, and the associated increases in cross-border
payment flows, for the use of correspondent banking networks. It suggested that one reason for the
use of correspondent banks was non-resident banks’ inability, in many countries, to access the local
interbank payment system directly. It is not, however, certain that many would necessarily choose
remote access even if it were permitted. All CPSS central banks permit access by banks chartered
overseas but with a local branch presence and banks with large foreign currency activity might be
expected to maintain such a presence.
But it is still quite possible to imagine circumstances in which banks might make use of remote access
to foreign payment systems. This might be the case with, for example, nationally based banks without
global branch networks but with sizeable foreign exchange-related payment flows. It could also be the
case with banks seeking to manage global, or at least regional, payment flows centrally, from a single
location, despite having branches in the relevant countries. There are other examples. Overall,
therefore, it is not clear whether there would be significant demand for remote access to CPSS
payment systems from banks currently unable to obtain it.
In considering the possibility of remote access, it is clearly difficult to identify major functional
differences between resident banks and non-resident banks; other things being equal, commercial
banks perform broadly the same functions regardless of the centre in which they are located. Reasons
used to justify distinguishing between the two categories include burdens and privileges,
communication and risk.
Taking these in turn, as noted in Section 3.2.1 in some countries access to the central bank is seen as
part of a package of privileges and burdens. As an extension of that view, it may be argued that only
institutions which make some contribution to the local financial sector and economy should be granted
the privilege of access directly to central bank liabilities in that country.
Also relevant is the view that use of an interbank payment system requires a local operational
presence to facilitate communication with the payment system operator and overseer and with other
direct participants. Particularly where operational problems arise, face-to-face discussion - and a
common language - can be essential if a rapid solution is to be found.
But the primary argument usually deployed in favour of limiting access to resident institutions is based
on risk. Dealing with institutions resident in other jurisdictions is felt by many central banks to involve
unacceptable legal risks, and perhaps credit risks too where the institutions are based in a jurisdiction
in which, for example, prudential supervision and accounting standards are not felt to be rigorous, or
where sovereign risk is significant. And some central banks believe that credit risk can only be
acceptably addressed where regulation is carried out by the central bank itself - ie (in some countries)
for resident banks.
On the other hand, it is true that there may be ways of obtaining assurance over the extent of legal
risks, for example by seeking legal opinions on the degree of consistency between local and foreign
laws. Legal developments are beginning to address certain aspects of legal risk - with, for example in
the EU, the implementation of the Settlement Finality Directive and the prospective Collateral
Directive; and, on a broader geographic scale, the implementation of the Hague Convention on
78 CPSS - The role of central bank money in payment systems - August 2003
securities held with an intermediary.50 Moreover, standardisation of prudential supervisory (and
accounting) techniques is limiting the extent to which central banks need to distinguish between
resident and non-resident banks. Nevertheless, arguments in favour of limiting access to resident
institutions are perfectly coherent because such risks can never be eliminated and may be substantial
in many cases.
(ii) Securities firms
An important question for central banks is how far the differences between securities firms and
commercial banks justify different policy treatment; whether the payment-related exposures which
arise, perhaps partly in consequence of that treatment, are sufficiently large to be worrying; and
whether there is or might be any pressure from securities firms for more direct access to the payment
system.
Even in those CPSS countries where access is not already permitted, there is no widespread evidence
of securities firms seeking direct access to the payment system. That presumably reflects broad
satisfaction with the service available from the banks which currently provide securities firms with
correspondent and custody services. Were such evidence to emerge, however, a number of
arguments are likely to be deployed for and against allowing access.
Arguing against allowing access are the many differences between securities firms and commercial
banks. Securities firms are not payment service providers, except in the limited sense that payment-
related services are incidental to the service they give their customers. In most cases, their liabilities
do not function as money, and they are not integral to the functioning of the payment system in the
way that banks are. They are generally felt to be involved in higher-risk activities than commercial
banks and to present greater counterparty risk. Partly in consequence, regulatory capital requirements
in many countries are aimed at orderly liquidation of securities firms rather than at trying to ensure
firms can continue as a going concern.
On the other hand, arguing in favour of allowing access is the fact that securities firms account for a
very significant proportion of activity in, for example, the major securities markets, meaning that they
are responsible for making and receiving large values of payments, both on their own behalf and on
behalf of clients. In accessing the payment system, securities firms may incur very sizeable credit
exposures to their correspondent banks (in respect of the proceeds of trades), or vice versa (in relation
to credit provided to finance purchases). They may also hold significant amounts of money for clients
(albeit as client monies, rather than as deposits). They are, in some respects, functionally similar to
banks, with which - in certain markets - they are in direct competition. Prudential supervision of
securities firms has progressed in recent years and regulatory developments have, in some important
areas, reduced the differences of approach between the supervision of banks and that of securities
firms.
(iii) Insurance companies
Similar arguments might be deployed in relation to insurance companies, although the differences to
banks would probably be given greater prominence. Like securities firms, insurance companies
account for increasingly large values of payments. More so than securities firms, however, a
significant proportion will be managed by other institutions - primarily custodians - acting on insurance
companies’ behalf. Perhaps for this reason, there is, in most CPSS countries, little evidence of
demand from insurance companies for direct access to interbank payment systems.
Like securities firms, insurance companies are to some extent in direct competition with banks. This is,
however, in what most bankers would consider a niche area, and competition is not as broad as that
between banks and securities firms in the securities markets. Insurance companies are also regulated
but, again, in most countries regulation of insurance companies is at a relatively early stage of
development. And, like securities firms, insurance companies are typically not payment service
50 References: (a) Directive on settlement finality in payment and securities settlement systems, May 1998; (b) Proposal for a
directive of the European Parliament and of the Council on financial collateral arrangements, March 2001; and (c) the
Hague convention on the law applicable to certain rights in respect of securities held with an intermediary, December 2002.
CPSS - The role of central bank money in payment systems - August 2003 79
providers (even in a very limited sense), do not take deposits and would consequently, in many
countries, be unlikely candidates for direct access to the payment system.
(iv) Non-financial corporations
There is also little evidence of non-financial corporations seeking direct access to high-value payment
systems, and the arguments in favour of granting it would in any event be weak. Such corporations are
payment service users, not providers; they do not create “money”; they do not, as a consequence of
their payment activities, generate or incur financial risk of a scale likely to be systemic if it materialised;
and they do not compete with banks directly. They tend to rely heavily on banks to manage flows of
funds - an area in which corporates generally have less expertise. On the face of it, there is little
reason for them either wanting, or being granted, access to settlement accounts in that context.
However, there might possibly be a higher level of demand for direct access to lower-value systems in
certain countries, given that technology has reduced the cost for corporations of managing (for
example) their staff salary payments and invoicing processes. In that event, the factors the central
bank would need to take into account would relate mainly to cost, efficiency, consistency of treatment
and the risk to its own balance sheet; it is highly unlikely that systemic risk issues would arise.
On the one hand, it might be argued that requiring such institutions to settle via a financial institution
imposes an essentially arbitrary distinction between users of payment systems and imposes avoidable
costs on corporations. If corporations have the technical ability to input their own payment instructions
and access to the necessary liquidity, they should perhaps be allowed to assume responsibility for the
process of settlement.
On the other hand, however, it is arguable that such an argument ignores moral hazard issues which
would arise (as elsewhere) through such a marked broadening of the central bank’s (intraday)
counterparties. It also ignores the screening role which banks play in relation to non-financial users of
the financial system. Commercial banks may be better placed than central banks to manage financial
risk. They have access to a broader set of data, probably greater expertise and are able to achieve
economies of scale in risk management which would be unavailable to many central banks. Allowing
their traditional customers direct access to the payment system might result in central banks
performing a task better carried out by the commercial sector.
Central banks could, moreover, legitimately explore whether corporations had a sound business case
for direct access to a settlement account. In the event that central banks were unwilling to incur credit
exposure to a non-financial company, corporations would need to source liquidity from a bank
(probably the bank they use in other contexts), and accounts would need to be prefunded. This would
impose costs on the corporate, and risks on the system were it unable to meet this need consistently.
Corporations’ most natural relationship is with a commercial bank, not a central bank. Moreover, by
dealing directly with them, central banks could significantly influence the degree of competition in what
may already be a very low margin business for banks. In the absence of any indication of market
failure or a failure of competition, it is difficult to see a conclusive policy or business case for providing
settlement accounts to such entities.
(v) Specialist payment service providers
Finally, there is the particular case of specialist service providers such as clearing houses (including
securities settlement system operators) or ATM operators, at least some of which have already sought
(and been granted) access to settlement accounts in many countries.
Clearing houses generally need some form of access to banking facilities to enable direct participants
to fund and defund accounts, typically at the end of the business day before and after net settlement.
But access to a central bank account is not a necessary condition of providing such a service. Clearing
houses might choose to use a commercial bank account without affecting the day to day effectiveness
of the clearing. Or they might simply be responsible for operating an account legally owned by their
direct participants.
The case for clearing houses having access to settlement accounts generally rests on the need to
eliminate financial and operational risks that would otherwise arise, and/or (for the retail clearings) on
the integral role the clearing house plays in the operation of the clearing, where its central role in the
provision of payment services, and its very uniqueness, argue for “special” treatment. Even where that
is so, however, central banks are rarely willing to incur direct financial exposure to such account
holders, and credit is rarely provided.
80 CPSS - The role of central bank money in payment systems - August 2003
Similar arguments apply in the case of specialist service providers such as ATM operators. These
providers’ business tends to relate to the provision and settlement of retail rather than wholesale
payment instruments, so the values involved are typically low, although the volumes may be very high.
For such entities, cost and efficiency considerations, rather than risk issues, are generally the primary
concern, both for the provider and for the central bank.
Again, therefore, the case for allowing such entities access to settlement accounts is not
straightforward. The service they provide is not reliant on access to a central bank account; the
requisite services would be available from commercial banks. Again, the case for access to a
settlement account may rest on the proposition that the service provided is so integral to the
settlement of a payment instrument (as operation of ATMs clearly is for cash withdrawal services) as
to merit treatment comparable to other direct participants in the relevant interbank payment system.
The arguments are not conclusive, but have been sufficient to persuade at least one central bank (the
Bank of England) to allow such entities access to account facilities (but not credit) in the context of
their membership of an ATM clearing.
CPSS - The role of central bank money in payment systems - August 2003 81
Annex 3
Detailed tables
Table A1 Accounts held at the central bank: which institutions have accounts?
Table A2 Accounts held at the central bank: is credit available on the account?
Table A3 Accounts held at the central bank: number and value
Table B Overnight and intraday use of central bank money
Table C Interbank payment systems and arrangements: settlement method, tiering and
concentration
82 CPSS - The role of central bank money in payment systems - August 2003
Table A1
Accounts held at the central bank: which institutions have accounts?
Position at end-2002
Financial institutions located in the country1,2 Other account holders2
Banks Non-bank
clearing
houses
Non-bank
securities
firms
Other non-
bank Fls
Remote
access
banks2 Central
government Other
government
Central
bank
employees Corporates General
public
Other
central
banks3 IFIs
Belgium v v v a v4 v v v5/– – v v
Canada v v a a 6 v v v
France v v v 7 v v v/(gf)8 (gf) v v
Germany v v v v9 v
10 v v v (gf)11 v v
Hong Kong SAR c v12
Italy v v v 7 v v v v
Japan v/–13 v v14/– v15/– –6 v v v
Netherlands v v v 7 v
16 (gf)17 v v
Singapore c v – – v v v
Sweden v v a18/– – v19 v v v
Switzerland v v v v20 v
6 v v v v v
United Kingdom v v a21 a
21 v
6,22 v v v (gf)/v21 v v
United States c23/v –24 25 v –/v26 v v
Note: Domestic currency payment accounts. Subject to relevant criteria being met, applies to all institutions in the relevant category unless indicated. For an explanation of the footnotes, refer to the
end of the table.
CPSS - The role of central bank money in payment systems -August 2003 83
Table A1 (cont)
Accounts held at the central bank: which institutions have accounts?
Position at end-2002
Key:
c compulsory
v voluntary
a allowed in principle but in practice no accounts
(gf) some grandfathered accounts only
– not allowed
Where two symbols are shown (eg c/v), see relevant footnote for explanation of which institutions each symbol applies to.
General notes:
1 c (rather than v) is shown only in cases where an account is compulsory for other reasons than (a) reserve requirements (unless the account on which reserves are held can also be used for
payment purposes, in which case c is shown) or (b) for institutions that choose to be central bank counterparties for monetary policy operations or (c) for institutions that choose to be direct
participants in interbank payment systems that settle in central bank funds. 2 Unless otherwise indicated, financial institutions located in the country and remote access banks have settlement
accounts, while other account holders have customer accounts. 3 For EU central banks, the special accounts used in connection with TARGET are not referred to here.
Country-specific notes:
4 Currently, only one bank from outside the EEA has a remote account (and this is a correspondent rather than a settlement account - ie the bank is not a direct participant in an interbank payment
system). 5 Some accountancy firms have accounts at the NBB for purposes of payment to the Central Balance Sheet Office. 6 CLS Bank has remote access to accounts at the Bank of Canada
and the Bank of Japan even though remote access is not normally allowed. It is also one of the institutions with remote access to the Swiss National Bank and the Bank of England. (CLS also has
remote access to the ECB and the Reserve Bank of Australia.) 7 Only banks located elsewhere in the European Economic Area are allowed remote access (see footnote 31 in main text). 8 Cash
carriers on a voluntary basis, grandfathering for other firms. 9 Refers to security carriers. 10 Non-resident credit institutions maintain settlement and correspondent accounts at the Bundesbank.
However, settlement accounts are held only by EEA credit institutions, which therefore participate directly in RTGSplus. 11 Remaining accounts will be closed by end-2003. 12 Restricted licence
banks may apply to open an account (the HKMA has recently granted approval to a restricted licence bank to access the Hong Kong dollar RTGS system). 13 Most cooperative banks are not
allowed accounts. 14 Depends on the scale of payment activity of the securities firm (see Annex 1, section on Japan). 15 Money market brokers, securities finance companies and specialised
public sector financial institutions.
16 The central government’s account is a settlement account not a customer account.
17 Local government is not allowed, but a few semi-governmental
organisations (public pension and social security funds) do have (grandfathered) accounts. 18 Relates to securities firms (according to Swedish domestic legislation) that are regarded as credit
institutions according to EU legislation. 19 Close to an “a”, since only one foreign bank is a remote participant in the RTGS system. 20 Currently only Postfinance. 21 The Bank of England will
normally be prepared to grant accounts to all members of interbank payment systems for which it acts as settlement agent, although applications will be considered case by case and the Bank has
discretion to refuse access on risk or other policy grounds. In practice, account holders are currently mainly banks, and a small number of non-financial institutions in the context of LINK (ATM)
settlement. The Bank has not yet been asked to consider an application from either a securities house or any other form of non-bank financial institution. 22 Non-resident account holders may face
additional requirements, eg to obtain a legal opinion addressing possible conflicts of law. 23 Members of the Federal Reserve System, including both national banks, which are required to be
members, and state-licensed banks or other depository institutions, which have chosen to be members, must hold an account in order to meet their reserve requirements unless they can meet them
solely through cash in their vault. These accounts may be used for payment-related activity. 24 A clearing house may have access to an account at a Federal Reserve Bank if the clearing house
has a banking or similar licence or if the account would be maintained in the name of participants in the clearing arrangement that have such licences. 25 Government-sponsored enterprises, such
as the Federal Home Loan Banks, have been granted access to an account through statutory authority. 26 At the request of the Treasury, state-owned limited purpose trust companies may be
granted access to facilitate their purchase of US government securities.
84 CPSS - The role of central bank money in payment systems - August 2003
Table A2
Accounts held at the central bank: is credit available on the account?
Position at end-2002
Financial institutions located in the country Other account holders
Banks Non-bank
clearing
houses
Non-bank
securities
firms
Other
non-bank
Fls
Remote
access
banks Central
govern-
ment
Other
govern-
ment
Central
bank
employees Corporates General
public
Other
central
banks IFIs
Belgium I/O IB1 I
B1 No No IB1 No No No No
Canada IC1/O No IC1/O IC1/O –C2 O
C3 O
C3 No No
France I/O No I/O F1 No I/O I/O I/O I/OF2 No
Germany I/OG1 No No No No I I O No – I/OF2 I
Hong Kong SAR I/O I/O
Italy I/O II1 I
I1F1 No No No No
Japan I/O NoJ1 I/O I/O C2 No – – – No No
Netherlands I/O IN1 I F1 I I No No
Singapore IS1/O No No – – – No No
Sweden I/O No I/O I/O I – I No
Switzerland I/O I I/O I/O I/OC2 No I/O No No I/O
United Kingdom I/OU1,U2 I
U1,U2 I/OU1,U2 NoU2 I/OU1,C2 No No No No No No
United States I/OU3 No No No No
Note: Availability of intraday and overnight credit in domestic currency to institutions with accounts as shown in Table A1, subject to relevant criteria being met. Unless otherwise indicated, applies to
all institutions in that category that have an account and refers to some form of standing facility available at the request of the account holder. Excludes any kind of emergency support or facility.
Note that in some cases institutions without accounts may also be given credit; such cases are not shown here. For an explanation of the footnotes, refer to the end of the table.
CPSS - The role of central bank money in payment systems -August 2003 85
Table A2 (cont)
Accounts held at the central bank: is credit available on the account?
Position at end-2002
Key:
I Intraday credit only
O Overnight credit only
I/O Intraday and overnight credit
No No credit
Not applicable (as shown in Table A1, this type of institution is not allowed to hold an account)
B1 Specific authorisation by the NBB is required. C1 The Bank of Canada provides intraday credit in the form of a fully collateralised guarantee against net debit positions arising in Tranche 1 of the
LVTS system. C2 CLS Bank does not have access to credit. C3 On very rare occasions. F1 “Not applicable” for banks located outside the European Economic Area (accounts not allowed). For
banks inside the EEA, accounts are allowed (see Table A1) but no credit is given. F2 If located in the European Union. Credit not available for other central banks. G1 For credit institutions that are
eligible counterparties for Eurosystem monetary policy operations. I1 All RTGS system participants are eligible for intraday credit; currently only banks use intraday credit. J1 Except that the Tokyo
Stock Exchange has access to intraday credit. N1 Under exceptional circumstances (based on collateral provided by the clearing members). S1 The MAS may, where necessary, extend intraday
credit through primary dealer banks to resolve systemic payment gridlock.
U1 Within each category, only certain institutions are eligible to receive intraday/overnight credit from the Bank of
England. In the case of clearing houses, only LCH is currently eligible for intraday credit (by virtue of the Bank acting as its CREST settlement bank). U2 In principle, any “regulated institution” may
have access to intraday credit where the scale of their own payment activities would make them significant direct participants in a SIPS and when doing so would reduce risk for the financial system.
In practice, it is highly unlikely that any FI other than a bank and, perhaps, a large securities firm would qualify. U3 Institutions that do not have access to the discount window, such as Edge Act
corporations, and accounts that are held for settlement purposes, such as those held in the name of a clearing house, are not provided with overnight or intraday credit.
86 CPSS - The role of central bank money in payment systems - August 2003
Table A3
Accounts held at the central bank: number and value
Position at end-2000
Number of payment accounts (thousands) Value of overnight balances on payment accounts (USD billions)
Total Held by
banks
locally
Held by
banks
remotely# Other Total
Held by
banks
locally
Of which:
(a) required
reserves
Of which:
(b) free
reserves
Held by
banks
remotely# Other
Belgium 0.45 0.33 0.07 0.05 6.63 nav nav nav nav nav
Canada 0.014 0.013 napC1 0.001 0.349 0.349 0 0.349 0 0
France 75 2 neg 73 35 (e) 26.0 19.1
F1 0.2
F1 nav nav
Germany 41 5 neg 36G1 38.7 38.2 37.9 0.2 neg 0.5
Hong Kong SAR 0.151 0.151 nap nap 0.1 0.1 nap 0.1 nap nap
Italy 0.698 0.686 0.001 0.011 11.4 11.4 11.3 0.1 neg neg
Japan 1.5
J1 1.4 napC1 0.1 46.6
J2 39.7
J2 36.1 3.6 nap 6.9
J2
Netherlands 0.35 0.12N1 0.005 0.22 16.09 11.09N2 11.12 0.05 0.001 5.0
Singapore 0.151 0.137 nap 0.014 35.84 3.28 nav nav nap 32.56S1
Sweden 0.022 0.017 0 0.005 negS2 negS2 nap neg neg neg
Switzerland 0.306 0.225 0.064 0.017 4.6 3.7 napS3 napS3 0.1 0.8
United Kingdom 0.097 (e) 0.077 (e) 0.002 0.018 2.33 2.33U1 2.15U2 0.18 neg neg
United States 8.6U3 8.5 nap 0.1 13.7U4 13.6U4 12.1U5 1.5 nap 0.1
Note: Domestic currency payment accounts. For an explanation of the footnotes, refer to the end of the table.
CPSS - The role of central bank money in payment systems -August 2003 87
Table A3 (cont)
Accounts held at the central bank: number and value
Position at end-2000
Key:
nap not applicable
nav not available
neg negligible
(e) estimate
General notes:
# Includes intra-European Union remote access. Excludes central banks and IFIs.
Country-specific notes:
C1 Apart from CLS Bank, which has an account F1 Reserve period December 2000 to January 2001 (hence the sum is different from the end-year total figure of 26.0). G1 Includes employees
30.5, public authorities 2.1, others 3.4. J1 An institution can hold a number of accounts at the BOJ; branches of a financial institution can hold accounts at each of the BOJ branches. J2 Average
outstanding for March 2000. Figures for ‘held by banks locally’ are for financial institutions subject to reserve requirements (ie banks except certain cooperative banks). The figure for “other” is for
institutions not subject to reserve requirements (which includes certain cooperative banks).
N1 Sum of settlement and reserve accounts, as for banks reserve accounts perform both
functions. N2 Different from the sum of required and free reserves because calculated as the average over the reserve period 24 December 2000 to 23 January 2001, instead of being an end-of-
year figure. S1 The government holds two accounts with the MAS for settlement purposes. S2 The accounts are levelled out or close to zero at the end of the day. (Actual figures were SEK 108
million for banks and SEK 159 million for others - hence the figure of 40% shown in Table 2 in the main text.) S3 Banks have to meet liquidity requirements, but this can be held in the form of vault
cash, balances at the Postfinance or balances at the central bank. Therefore the distinction between required reserves and free reserves is not meaningful. U1 This figure refers to the total value of
funds held by banks in accounts at the Bank of England, including payment accounts and “cash ratio deposits” (see next footnote) U2 Refers to “cash ratio deposits” (equivalent to USD 2.15 billion
at end-2000), which are not held in settlement accounts but are nonetheless eligible as collateral to obtain credit on settlement accounts. U3 The total number of settlement accounts with the
capability of initiating a transfer. U4 Balances of depository institutions held at Federal Reserve Banks, calculated as the 14-day average of daily required reserves and excess reserves less applied
vault cash, plus weekly average required clearing balances. Reported for the last biweekly period of each year. U5 Includes required clearing balances as well as required reserve balances.
88 CPSS - The role of central bank money in payment systems - July 2003
Table B
Overnight and intraday use of central bank money
In billions of USD, daily averages for 2000
Overnight balance Peak value of intraday credit
Belgium 0.47
1 3.47
Canada 0.520 nap2
France 35 (e)
3 26.24
Germany 38.7
3 nav
Hong Kong SAR 0.1 5
Italy 11.4 6.1
Japan 52.3
4 112.74
Netherlands 14.63 10.12
Singapore 43.49 nap5
Sweden neg 7
Switzerland 2.0 1.2
United Kingdom 2.19
6 487
United States 13.7 86.9
Key:
nap not applicable
nav not available
neg negligible
(e) estimate
1 Average for January to June 2002. 2 The Bank of Canada provides intraday credit in the form of a fully collateralised
guarantee against net debit positions arising in Tranche 1 of the LVTS system. 3 End-2000. 4 Average for 2001. 5 See
footnote S1 to Table A2.
6 Payment accounts and cash ratio deposits (see Table A3).
7 Average for September to
November 2002.
CPSS - The role of central bank money in payment systems - August 2003 89
Table C
Interbank payment systems and arrangements: settlement method, tiering and concentration
Situation at end-2002 (except where indicated)
Degree of tiering Concentration4
Country and system Main type of
transactions
handled
Volume in
2000
(thousands)
Value in
2000
(USD
billions)
Does
central
bank
operate
the
system?
Settlement
method1
Number of
direct
participants By number of
institutions2 By value of
transactions3 By
volume By
value
Belgium
ELLIPS large-value 2,360 19,775 yes C1 17B1 highB1 low (e) 82% 86%
CEC retail 885,220 451 yes C1 33B1 highB1 low (e) 74% 73%
CH of Belgium retail 4,190 97 yes C1 39B1 highB1 low (e) 72% 72%
Euroclear Bank securities > 15,000 80,857 no P6/C2 1,750 napB2 napB2 nav nav
NBB SSS securities 115 2,207 yes C1 151 nav nav nav 68%
BXS-CIKB3 securities 248 71 no C1 113 nav nav 64% 70%
Canada
LVTS large-value 3,500 17,532 no C1 13 high nav 84% 82%
ACSS retail 4,152,000 3,599 no C1 11 high nav 81% 84%
CDS debt clearing securities 1,560 14,408 no C2 9 high nav 90% (e) 90% (e)
CDS securities securities 41,500 1,697 no P5C1 9 high nav 90% (e) 90% (e)
Eurosystem
TARGETE1 large-value 47,980 263,415 yes C1 1,560 high mixed (g) nav 30% (e)
EURO1 large-value 24,692 46,107 no C2 73 strong mixed (g) nav nav
France
TBF large-value 3,000 63,420 yes C1 170 mixed mixed (g) 46% 56%
PNS large-value 5,500 20,327 no C1 21 strong mixed (g) 60% 56%
SIT retail 6,485,300 2,228 no C1 17 strong mixed (g) nav nav
Clearing houses cheques 3,453,900 1,758 partlyF1 C1 200 mixed mixed (g) nav nav
RGV/Relit securities 41,000 33,856 no C1 335 mixed mixed (g) nav nav
Clearnet securities 89,000 1,121 no C1 59 high nav nav nav
Note: Selected payment systems and arrangements (including payment arrangements associated with securities settlement - in these cases, the volume/value figures are for the related payments
not the securities transfers). For an explanation of the footnotes, refer to the end of the table.
90 CPSS - The role of central bank money in payment systems - August 2003
Table C (cont)
Interbank payment systems: settlement method, tiering and concentration
Situation at end-2002 (except where indicated)
Degree of tiering Concentration4
Country and system Main type of
transactions
handled
Volume in
2000
(thousands)
Value in
2000
(USD
billions)
Does
central
bank
operate
the
system?
Settlement
method1
Number of
direct
participants By number of
institutions2 By value of
transactions3 By
volume By
value
Germany
RTGSplus G1 large-value napG1 napG1 yes C1 74 strongG2 nav nav nav
ELSG3 large-value 18,840 25,794 yes C1 2,486 low nav nav nav
RPS retail 2,226,600 2,413 yes C1 2,486 low nav nav nav
AZV cross-border 185 134 yes C1 303 strong nav nav nav
MASSE cross-border 4944 2 yes C1 136G4 strong nav nav nav
Bilateral InterbankG5 retail nav nav no C1 nav nav nav nav nav
Giro networksG6 retail nav nav no C1G7 nav nav nav nav nav
Clearstream Frankfurt securities nav nav yes C1 circa 320 high nav nav nav
Derivatives Clearing margin payments nav nav yes C1 nav nav nav nav nav
Hong Kong SAR
HKD RTGS large-value (HKD) 199,114 13,556 no C1 130H1 none none nav 48%
USD RTGS large-value (USD) 186 246 no P5H2 64 mixed nav nav 69%
Euro RTGS large-value (EUR) napH3 napH3 no P5H4 21 mixed navH3 navH3 navH3
Italy
BI-REL large-value 11,600 39,654 yes C1 698 low low (e) 36% 39%
BI-COMP local clrng paper-based 109,400 779 yes C2 140 high high (e) 28% 23%
BI-COMP retail paperless 1,005,400 1,664 noI1 C2 211 high high (e) 26% 26%
LDT securities 44,210 28,768 yes C2 284 mixed mixed nav nav
Express securities neg 77 no C1 71 low low 91% 78%
Note: Selected payments systems and arrangements (including payment arrangements associated with securities settlement - in these cases, the volume/value figures are for the related payments
not the securities transfers). For an explanation of the footnotes, refer to the end of the table.
CPSS - The role of central bank money in payment systems - August 2003 91
Table C (cont)
Interbank payment systems: settlement method, tiering and concentration
Situation at end-2002 (except where indicated)
Degree of tiering Concentration4
Country and system Main type of
transactions
handled
Volume in
2000
(thousands)
Value in
2000
(USD
billions)
Does
central
bank
operate
the
system?
Settlement
method1
Number of
direct
participants By number of
institutions2 By value of
transactions3 By
volume By
value
JapanJ1
BOJ-NET, of which: large-value 5,046 156,640 yes C1 383J2 highJ3 none (g) 18%J4 33%J4
DVP - JGBs securities 1,993 33,929
J5
DVP - other bonds securities 51 257 J6
FXYCS fx transactions 9,564 56,587 no C2 40 strong low (g) 65%J4 61%J4
Zengin system retail 1,220,032 20,113 no C2 154 high low (g) 40%J4 56%J4
TCH - BCCS bills and
cheques 71,559 5,247 no C2 121 high nav 47%J4 69%J4
CD/ATMsJ7 ATM cash 404,569 191 no C2/P5J8 1,914J9 mixed none (g) nav nav
Netherlands
TOP large-value 4,000 17,974 yes C1 105 low low 73% 72%
Interpay retail 2,328,400 1,457 no C1 71 none none 93% 92%
ClearnetAmsterdam securities 12,279 560 no C1 25 high nav nav nav
ClearnetAmsterdam derivatives 55,540 66 no C1 12 high nav nav nav
Necigef securities 3,760 984 no C1 44 high nav nav nav
Singapore
MEPS large-valueS1 1,908 5,535 yes C1 72 mixed nav 55%S2 49%S3
SGD cheque clearing large-value/retail 91,259 261 no C1 33 mixed nav nav nav
USD cheque clearing large-value 390 12 no P6S4 28 high nav nav nav
Interbank GIRO retail 29,980 42 no C1 23 high nav nav nav
EFTPOS EFTPOS 76,932 3 no P6S5 3 nav nav nav nav
Cash machines/ATMs cash withdrawals 8,540 1 no P6S5 2 nav nav nav nav
Central depository
(CDP) securities 13,599 99 no P6S6 over 500 nav nav nav nav
Note: Selected payments systems and arrangements (including payment arrangements associated with securities settlement - in these cases, the volume/value figures are for the related payments
not the securities transfers). For an explanation of the footnotes, refer to the end of the table.
92 CPSS - The role of central bank money in payment systems - August 2003
Table C (cont)
Interbank payment systems: settlement method, tiering and concentration
Situation at end-2002 (except where indicated)
Degree of tiering Concentration4
Country and system Main type of
transactions
handled
Volume in
2000
(thousands)
Value in
2000
(USD
billions)
Does
central
bank
operate
the
system?
Settlement
method1
Number of
direct
participants By number
of
institutions2
By value of
transactions3 By
volume By
value
Sweden
K-RIX large-value (SEK) 510 11,689 yes C1 22 high low 90% 90%
E-RIX large-value (EUR) 62 1,582 yes C1 18 high none 99% 99%
VPC securities 7,700 8,263 no C2 55 high mixed high (g) high (g)
OM derivatives 71,700 486 no C2 63 high mixed high (g) high (g)
BGC retail 351,410 407 no C2 20 high low 85% (e) 90% (e)
Switzerland
SIC large-value 149,503 26,444 noS7 C1 306 low low 55% 68%
Secom securities 14,591 1,564 no C1 383 low low nav nav
Repo repos 53 1,849 no C1 88 noneS8 none nav nav
DTA credit transfers 389S9 134 no C1 150 low low nav nav
LSV recurring debits 142S9 29 no C1 150 low low nav nav
ec-Bancomat cash withdrawals 271S9 6 no C1 133 low low nav nav
ec-DIRECT-EFTPOS EFTPOS 24S9 3 no C1 134 low low nav nav
ec-DIRECT-Tanken EFTPOS 16S9 neg no C1 134 low low nav nav
CASH e-money 94S9 neg no C1 132 low low nav nav
ECV cheques 154S9 5 no C1 153 low low nav nav
United Kingdom
CHAPS Sterling large-value (GBP) 21,705 74,464 yes C1 13 strong mixed (e) 82% 79%
CHAPS Euro large-value (EUR) 3,250 38,357 yes C1 20 high mixed (e) 72% 84%
BACS retail electronic 3,316,213 2,912 no C1 15 strong mixed (e) 76% nav
Cheque/Credit
clearing retail paper 2,033,000 (e) 2,202 no C1 12 strong mixed (e) 79% 82%
Note: Selected payments systems and arrangements (including payment arrangements associated with securities settlement - in these cases, the volume/value figures are for the related payments
not the securities transfers). For an explanation of the footnotes refer to the end of the table.
CPSS - The role of central bank money in payment systems - August 2003 93
Table C (cont)
Interbank payment systems: settlement method, tiering and concentration
Situation at end-2002 (except where indicated)
Degree of tiering Concentration4
Country and system Main type of
transactions
handled
Volume in
2000
(thousands)
Value in
2000
(USD
billions)
Does
central
bank
operate
the
system?
Settlement
method1
Number of
direct
participants By number of
institutions2 By value of
transactions3 By
volume By
value
United States
Fedwire large-value 108,300 379,756 yes C1 8,592U1 mixed mixed 32% 44%
Fedwire securities 13,600 188,100 yes C1 1,249U1 mixed mixed 79% 82%
CHIPS large-value 59,800 292,147 no P4 63 strong mixed 54% 60%
International
CLS fx nap nap no P4 49 nav nav nav nav
Note: Selected payments systems and arrangements (including payment arrangements associated with securities settlement - in these cases, the volume/value figures are for the related payments
not the securities transfers). For an explanation of the footnotes refer to the end of the table.
94 CPSS - The role of central bank money in payment systems - August 2003
Table C (cont)
Interbank payment systems: settlement method, tiering and concentration
Situation at end-2002 (except where indicated)
Key:
nap not applicable
nav not available
neg negligible
(e) estimate
(g) guess
General notes:
1 Settlement method
C1 = settles in central bank money by the central bank simultaneously debiting/crediting the settlement accounts of the debtors/creditors (either individual payments in real-time in an RTGS system
or the net positions periodically in net and other systems).
C2 = settles in central bank money by debtors first paying funds (eg by making an RTGS payment) to a special account at the central bank used solely for this purpose (eg in the name of the
settlement agent for the system) and then the settlement agent paying funds from that account to the creditors. (NB Contrast this to P4. In C2, the settlement agent is NOT the settlement institution -
the settlement agent does not provide accounts.)
P4 = settles on accounts held by direct participants at a (private sector) settlement institution - but, as a routine part of the normal settlement procedures, the settlement institution defunds those
accounts (on the same day) to those with creditor positions using central bank money (eg CLS).
P5 = settles on accounts held by direct participants at the (private sector) settlement institution - and early enough in the RTGS operating day for those with positive balances to defund their
accounts on the same day if they want (ie any overnight balances with the settlement institution are voluntary).
P6 = settles on accounts held by direct participants at the (private sector) settlement institution - but sufficiently late in the operating day to prevent those with positive balances at the settlement
institution from defunding their accounts on the same day (ie overnight balances with the settlement institution are unavoidable).
2 Tiering (number of institutions)
None = all or virtually all domestically located banks are direct participants in the system (or exceptions to this are not significant).
Low = at least 75% are direct participants.
Mixed = between 25% and 75% are direct participants.
High = between 5% and 25% are direct participants.
Strong = less than 5% are direct participants.
3 Tiering (value of payments)
None = all or virtually all payments by value are accounted for by direct participants themselves (rather than by other domestically located banks using these direct participants).
Low = at least 90% of payments by value are accounted for by direct participants.
Mixed = direct participants account for 25-90%.
High = direct participants account for 10-25%.
Strong = less than 10% of payments by value are accounted for by direct participants.
4 Concentration: percentage of volume/value of payments accounted for by the five largest direct participants in the system.
CPSS - The role of central bank money in payment systems - August 2003 95
Table C (cont)
Interbank payment systems: settlement method, tiering and concentration
Situation at end-2002 (except where indicated)
Country-specific notes:
B1 End-2001. B2 Not applicable because Euroclear has international membership and the measures of tiering used here are domestically based. B3 Now Euronext Brussels.
C1 Settlement
institution is Bank of Montreal. E1 Data here refer to the whole TARGET system. (The components of TARGET in CPSS countries are also shown under the relevant country heading.) F1 Paris
clearing house owned and operated by a consortium of banks; other clearing houses owned and operated by the Bank of France. G1 RTGSplus was launched on 5 November 2001, integrating ELS
and EAF into a new system. Hence there are no volume/value figures for 2000. G2 Strong tiering due to ELS still exists. G3 ELS is still in operation. Now it is the entry point for banks in RTGSplus
as indirect participants via the Bundesbank or other direct participants during a transitional period which will last no longer than three years. G4 118 banks and 18 public authorities (Öffentliche
Kassen). G5 Bilateral Interbank Clearing. G6 Giro networks of the German banking groups. G7 Intraday settlement is in commercial bank money, but end-of-day balances are generally settled in
central bank money. H1 The direct participants consist of all 129 banks and 1 restricted licence bank (note that due to mergers and acquisitions the number of banks fell from 151 at the end of
2000, shown in Table A3).
H2 Settlement institution is HSBC.
H3 System started operation in April 2003.
H4 Settlement institution is Standard Chartered Bank.
I1 The retail subsystem is
managed by the Interbank Company for Automation (SIA) on behalf of the Bank of Italy.
J1 Figures for 2001, except as noted.
J2 Number of online participants.
J3 “High” tiering is due to
cooperative banks not having access to accounts at the Bank of Japan.
J4 Figures for concentration are proxies based on data from 2-20 September 2002 (BOJ-NET) and November 2002
(FXYCS, Zengin, TCH-BCCS). J5 357 BOJ-NET participants use the DVP facility for JGBs. J6 224 BOJ-NET participants use the DVP facility for transactions for corporate bonds and other
bonds. J7 Figures for 10 systems, namely nine systems linking the CD/ATMs of the same type of banking institutions and one system linking these nine systems. J8 Six systems settle indirectly
over BOJ accounts; their net positions are cleared with other payments through the Zengin systems before settlement through BOJ-NET. Four systems settle in their central organisations, and most
participants are not able to defund their accounts on the same day. J9 At end-March 2002. S1 Also government securities. S2 Figure is a proxy based on January 2002 data as the payment value
for each bank cannot be obtained for 2000. If based on 2000 volume, it should be 52.26%. S3 Figure is a proxy based on January 2002 data as the payment value for each bank cannot be
obtained for 2000. S4 Settlement institution is Citibank. S5 Settlement institution is DBS. S6 Settlement institutions are banks selected by the Singapore Exchange. S7 SIC AG provides operation
on behalf of the SNB. S8 “None” is shown because only the 88 direct participants take part in the repo market (other banks in Switzerland do not take part). S9 Only interbank payments (settled on
gross bilateral basis). U1 Number of depository institutions that used Fedwire in 2000. Other Fedwire participants, not included in this figure, are: the US Treasury and any entity specifically
authorised by federal statute to use the Reserve Banks as fiscal agents or depositories; entities designated by the Secretary of the Treasury; foreign central banks, foreign monetary authorities,
foreign governments and certain international organisations.
96 CPSS - The role of central bank money in payment systems - August 2003
Annex 4
Banknotes
Issue of banknotes
Although historically not the case, these days banknotes are usually issued only by the central bank.
This is broadly the case in all CPSS economies, except Hong Kong SAR, where banknotes are issued
by three commercial banks.51 Singapore and the United Kingdom are more limited exceptions.
Singapore dollar banknotes have been issued by the Board of Currency Commissioners, a
government agency, although following the merger of the Board into the MAS in October 2002 this is
no longer the case. In the United Kingdom, Scottish banks retain the right to issue banknotes
alongside those of the Bank of England and three banks currently still do so.52
In this annex we look at banknotes but not at the other form of cash, namely coins. In CPSS countries,
coins are not issued by the central bank except in Sweden and, since October 2002, in Singapore
following the MAS-BCCS merger just mentioned. Coins are therefore usually not central bank money,
and thus for simplicity of exposition are not explicitly covered here. However, because coins share so
many features of banknotes - being physical, bearer instruments issued by a public body, having legal
tender status, and being universally available for making small value payments - they raise many of
the same issues.
Key features of banknotes
Banknotes have a number of features that are relevant in a comparison with central bank deposit
money. In certain conditions, safety can be an important consideration. In terms of credit risk,
banknotes are effectively a risk-free asset, just like central bank deposit money. Although in normal
circumstances this may not be a critical factor - not least because deposit insurance typically covers a
large portion of the deposit money balances that consumers hold - it can rapidly become important in
times of banking instability.
But unlike central bank deposit money (with the limited exception of Switzerland), banknotes have the
added feature of legal tender status. Although legal tender status is of limited direct relevance in the
majority of transactions, it nevertheless helps to build the reputation of banknotes as being safe and
unique assets that perhaps underpin other forms of money. (See Table D, at the end of this annex, for
information on legal tender status in CPSS countries.)
However, in another sense, banknotes are less safe than deposit money - because of the risk of
physical loss or theft. This can be an important consideration in areas where the crime rate is high.
Counterfeiting of notes can also be a problem. On the other hand, certain non-cash payment
instruments - particularly credit cards - are also subject to fraudulent use.
Risk of theft adds to the cost of distribution and storage of banknotes, which is also influenced by
the need to move the notes physically around the country, to make sure sufficient notes are available
when required, and to store notes safely when they are not being used. These costs affect not just the
central banks but also the commercial banks that are increasingly used in many countries to distribute
banknotes, as well as retailers, which have to store banknotes securely in their premises and make
arrangements for them to be deposited safely at a bank. The increasingly sophisticated measures
needed to minimise the risk of counterfeiting also add to the cost of production of banknotes.
For consumers, the financial transaction costs of banknotes are typically less than or equal to those
of deposit money. Sometimes banks charge for use of ATMs to obtain notes - but even where this is
the case it is typically only if a customer uses another bank’s machine, or where foreign currency is
51 The Hongkong and Shanghai Banking Corporation, Bank of China (Hong Kong) and Standard Chartered Bank. These three
note-issuing banks are required to provide to the HKMA exact backing for their note issuance. Under the currency board
arrangements in place since 1983, this backing is in US dollars at the fixed rate of HKD 7.80 per US dollar.
52 These private notes, which in practice circulate freely only in Scotland, are backed one-to-one by special deposits held at
the Bank of England.
CPSS - The role of central bank money in payment systems - August 2003 97
obtained. (Indeed, the terms on which foreign currency notes are obtained mean that using cash
abroad can be relatively expensive - although it is easier now than it used to be because of cross-
border card arrangements.) However, in most cases cash is obtained free either from banks or in
wage packets (although the latter is now substantially less common than it once was). Of course,
where cash is obtained from a bank or other financial institution rather than an employer, a customer
typically has to have some kind of account, which may incur charges, but that is true also for deposit
money. And although custom varies from country to country about whether customers have to pay for
non-cash instruments (eg owning a credit card) and for transactions using those instruments,
banknotes are always free in this respect.
Banknotes can be convenient in the sense that they enable a transaction to be completed with finality
in a quick and easy manner. In particular, compared to the use of deposit money there is the
advantage of not having to seek authorisation. On the other hand, there is the risk of accepting a
counterfeit, plus the nuisance of handling change. For consumers it can also be burdensome to obtain
cash if the ATM network is not extensive or a visit to a bank teller is required. However, the “cash-
back” schemes which operate in some countries have made it easier to obtain cash. (In cash-back
schemes, consumers use, for example, a debit card in a shop both to pay for their purchases and at
the same time receive cash from the retailer; this saves the consumer from making a separate
transaction at an ATM to obtain cash and reduces the amount of cash the retailer has to hold and
deposit at the bank.)
In some cases immediate finality can be a disadvantage for the consumer. Although the practice is
frowned upon by banks, and indeed is illegal in some countries, consumers sometimes take
advantage of the time taken to process instruments such as cheques to spend funds they have not yet
received - in effect obtaining informal short-term credit, a tactic which cannot be used with cash.
Against that, it might at first sight seem to be a disadvantage that banknotes cannot be tied to a formal
line of credit in the same way that, say, a credit card can. But provided a customer is given an
overdraft on his/her account, this can be used as easily to draw cash as to make a non-cash payment.
Overall, then, credit is probably not a significant factor.
The use of banknotes is also anonymous, which can be a legitimate advantage in terms of greater
privacy, while of course from a public policy point of view also being a disadvantage by making it
easier to conceal illegal trading, tax evasion and money laundering.
Developments in use of banknotes and coins
Banknotes and coins are primarily used for making relatively small-value face-to-face payments. For
the very smallest payments, cash is virtually the only payment method used (e-money, although a
potential competitor, so far plays only a minor role).53 But as the amounts get larger, cash (and
particularly banknotes, with their larger denominations) competes with other instruments such as debit
and credit cards and cheques.
The charts below measure the stock of cash in CPSS countries as a percentage of GDP and of narrow
money respectively.54
In most countries the stock of cash is equivalent to between about 3% of GDP (for Canada,
France and the United Kingdom) and 8% of GDP (for Switzerland). Japan has become
something of an outlier, with the stock climbing from around 10% to 12% in recent years
(mostly due to a significant increase in cash, rather than the decline in GDP).
Measured as a percentage of narrow money, there is more variation between countries.
Cash accounts for between about 5% of narrow money (in the United Kingdom) and almost
50% (in the United States).
53 The development of e-money schemes is described in the latest Survey of electronic money developments, BIS, November
2001.
54 Data are taken from the “red book statistics” (Statistics on payment systems in the Group of Ten countries, BIS, 1993 to
2000, and Statistics on payment and settlement systems in selected countries, BIS, 2001) and, for data for Hong Kong SAR
and Singapore before 1996, from the websites of the HKMA, the Hong Kong SAR Census and Statistics Department, the
MAS and the Singapore Department of Statistics.
98 CPSS - The role of central bank money in payment systems - August 2003
4
5
6
7
8
15
20
25
30
35
2
3
4
5
6
5
10
15
20
25
2
3
4
5
6
5
10
15
20
25
4
5
6
7
8
15
20
25
30
35
4
5
6
7
8
1988 1990 1992 1994 1996 1998 2000 30
35
40
45
50
1988 1990 1992 1994 1996 1998 2000
Belgium
Canada
France
Germany
Hong Kong SAR
Cash in circulation
As a percentage of GDP As a percentage of narrow money
CPSS - The role of central bank money in payment systems - August 2003 99
4
5
6
7
8
5
10
15
20
25
8
9
10
11
12
15
20
25
30
35
4
5
6
7
8
10
15
20
25
30
7
8
9
10
11
30
35
40
45
50
2
3
4
5
6
1988 1990 1992 1994 1996 1998 2000 0
5
10
15
20
1988 1990 1992 1994 1996 1998 2000
Italy
Japan
Netherlands
Singapore
Sweden
Cash in circulation
As a percentage of GDP As a percentage of narrow money
100 CPSS - The role of central bank money in payment systems - August 2003
A shift from cash to alternative instruments such as debit and credit cards has long been forecast. The
more recent introduction of e-money, which has features specifically designed to make it a direct
alternative to cash for small payments, has strengthened some people’s belief in such forecasts.
It can be argued that, between them, these alternatives to cash have enough of the advantages of
cash, with fewer of the disadvantages, to become a practical substitute. Thus credit and debit cards do
not require prepayment, are relatively safe from loss or misuse (from the consumer’s point of view,
albeit not the issuer’s), easy to carry and relatively easy to use. E-money does require prepayment
and is less safe but is easier than other cards to use (no need for a personal identification number or
to wait for authorisation), is practical for small amounts, and in principle can also be used
anonymously and for person-to-person payments.
On the other hand, while debit and credit card use has increased, this has been a slow development in
many cases and the growth of e-money has been even slower. At the same time, evidence for a
decline in the use of cash is mixed.
6
7
8
9
10
5
10
15
20
25
2
3
4
5
6
0
5
10
15
20
4
5
6
7
8
1988 1990 1992 1994 1996 1998 2000 27
32
37
42
47
1988 1990 1992 1994 1996 1998 2000
Switzerland
United Kingdom
United States
Cash in circulation
As a percentage of GDP As a percentage of narrow money
CPSS - The role of central bank money in payment systems - August 2003 101
In terms of stocks, the charts above show a generally clear if usually modest downward trend for cash
in seven of the 13 CPSS countries (Belgium, France, Germany, the Netherlands, Singapore, Sweden
and Switzerland). In contrast, there is a clear upward trend in only one country, the United States,
where the increase is particularly marked in terms of narrow money (from less than 30% to almost
50% over 12 years). This reflects both an absolute increase in the stock of cash, partly driven by
non-domestic demand, and an absolute decline in transferable deposits, driven in particular by the use
of retail sweep accounts, which distort the data.55 Against broader measures of the money stock,
which are not distorted by the sweep accounts, the share of cash has increased only slightly. In the
remaining five countries, the trend is less clear cut. However, looking at the absolute stocks of cash in
these five countries, in four of them (Hong Kong SAR, Italy, Japan and the United Kingdom) there has
been a steady increase, at least in most years, while in Canada there have been decreases as well as
increases.
In terms of number of transactions, what little evidence there is shows a decline in cash usage.
In the United Kingdom, surveys suggest that cash payment volumes fell from around 86% of
all transactions in 1984 to 74% in 1999 (a downward trend that is forecast to continue,
largely as a result of the full automation of state benefit payments from 2005, with cash
payments expected to account for only 62% of the total by 2010).
In Germany the cash ratio of all retail payments decreased from 79% in 1995 to 69% in
2001.
Of course, as with all payment methods there tends to be substantial inertia - in the absence of a
significant shock such as a banking crisis or of substantial cost differences, consumers are typically
slow to adopt different methods. Thus, even though other payment instruments can hardly be said to
have replaced cash so far, this does not mean that in due course they will not become dominant.
The central bank as issuer of e-money
As suggested above, e-money is a possible substitute for cash. This is particularly true of so-called
“open loop” schemes that allow transfers of electronic balances directly from one consumer to another
without any involvement of a third party such as the issuer of the balance. (Most existing schemes, in
contrast, only allow payments from consumers to merchants and are in this sense less flexible than
cash.56) The potential substitutability of e-money for cash might lead central banks to consider issuing
e-money themselves. This would raise various issues. In particular, central banks would want to
consider carefully the possible implications for competition, innovation and privacy. At the moment, no
CPSS central bank intends to issue e-money to the general public, although some have explicitly left
this option open for the future.
55 In a retail sweep programme, a depository institution sweeps amounts above a predetermined maximum level from a
depositor’s checking account into a special purpose money market deposit account (MMDA) created for the depositor. If the
balance in the checking account falls below some minimum level, funds are moved from the MMDA back into the checking
account to bring the checking account balance to the specified minimum level.
56 For more information on types of e-money schemes, see Implications for central banks of the development of electronic
money, BIS, 1996.
102 CPSS - The role of central bank money in payment systems - August 2003
Table D
Legal tender status in CPSS countries
Belgium (euro area)
Status There is no explicit statutory or case law definition. Belgian doctrine is that legal tender is
money that has the capacity to legally and therefore validly discharge pecuniary debts. Unless
a valid agreement exists between parties on the acceptance of certain means of payment, legal
tender constitutes a valid payment means. (The validity of such an agreement is to be
assessed within the framework of general contract law.)
Applies to (See euro area below.) Banknotes issued by Eurosystem central banks. Coins issued by euro
area governments.
Limits (See euro area below.) Banknotes: unrestricted. Coins: restricted to 50 coins per transaction.
(However, the National Bank of Belgium and the Post Office are bound to accept coins without
limitation.)
Other Limits and regulations in specific legislation: (a) merchants are obliged to accept payment by
cheque or credit transfer for amounts exceeding EUR 248; (b) employees must accept salaries
paid by deposit money if a collective agreement allows for this; and (c) the King has the power
to decide conditions for paying the state income (taxes, remuneration, etc) by means of credit
transfer.
Penalties: refusal to accept genuine and undamaged coins at their face value can be punished
with a fine of EUR 25 to EUR 75.
Canada
Status According to the Currency Act, a tender of payment of money to discharge a debt is valid if it is
made in legal tender (as indicated below). However, the form of a payment can be whatever is
mutually acceptable to the parties in a transaction, and this is a matter of private agreement
between those parties. No one is legally obliged to accept cash in payments.
Applies to Banknotes issued by the Bank of Canada. Coins issued by the government.
Limits Banknotes: unrestricted.
Coins have limits:
CAD 40 if the denomination of the coins used is between CAD 2 and CAD 10 (inclusive).
(However, note that currently the CAD 2 coin is the highest existing denomination.)
CAD 25 if the denomination is CAD 1.
CAD 10 if the denomination is 10 cents or greater but less than CAD 1.
CAD 5 if the denomination is 5 cents.
25 cents if the denomination is 1 cent.
Other –
Euro area - general
Status EU law does not contain an explicit definition of legal tender but a common aspect in all euro
area countries is that it has the legal effect that it is incumbent on the creditor to accept legal
tender banknotes and coins as valid discharge of pecuniary debts unless the parties have
agreed to use an alternative means of payment.
Applies to Banknotes issued by the ECB and the national central banks of the participating member states.
Coins issued by participating member states.
Limits Banknotes: unrestricted.
Coins: restricted to no more than 50 coins for a payment, except for the issuing authorities and
other designated persons.
Other
CPSS - The role of central bank money in payment systems - August 2003 103
Table D (cont)
Legal tender status in CPSS countries
France (euro area)
Status Under French law legal tender is defined as the obligation of economic agents, in particular
retailers, to accept banknotes and coins designated as legal tender according to their recognised
value.
Applies to (See euro area above.) Banknotes issued by Eurosystem central banks. Coins issued by euro
area member states.
Limits (See euro area above.) Banknotes: unrestricted. Coins: it is not compulsory to accept a payment
composed of more than 50 coins. (This does not apply to payments to the French treasury.) But
see also “other” below.
Other Specific legislation: when the value of a payment exceeds a certain level for specific transactions
which are defined in law (in order to prevent tax evasion), the use of banknotes and coins to
make a payment is prohibited (which means that the beneficiary should not accept payment by
that means). For example: cash payments by merchants cannot exceed EUR 750 and those by
individuals cannot exceed EUR 3,000.
Penalties: refusal to accept banknotes or coins having legal tender status is subject to penal
fines.
Germany (euro area)
Status No explicit definition. Parties are free to agree to accept other means of payment. Unless other
means of payment were agreed explicitly, refusal to accept legal tender could be seen as an
(unjustified) delay in accepting payment.
Applies to (See euro area above.) Banknotes issued by Eurosystem central banks. Coins issued by euro
area member states.
Limits (See euro area above.) Banknotes are legal tender for any amount.
Coins: no one is obliged to accept German euro commemorative coins of an amount more than
EUR 100 in a single payment. If a single payment is made in euro coins (or in a mixture of euro
coins and German commemorative coins), no one is obliged to accept more than 50 coins even
if this is less than EUR 100. But there is unrestricted acceptance by federal government cash
offices and the Deutsche Bundesbank.
Other In practice, there are some fields where cash is replaced by deposit money by law (eg citizens
are usually required to make their payments to the competent tax authority by cashless
payment).
Cashless payments obliged by law can also increasingly be found in other fields
(eg contributions to the capital of a public limited company, payments of salary or pension of civil
servants, some other payments from public authorities).
Refusal to accept legal tender could be seen as an (unjustified) delay in accepting payment.
Hong Kong SAR
Status The parties to a transaction are free to set the terms of payment. However, where they have not
contracted to pay in a specific form, payment by legal tender will validly discharge the debt.
Applies to Banknotes issued by the Hongkong and Shanghai Banking Corporation, Standard Chartered
Bank, and Bank of China (Hong Kong). Coins and the new HKD 10 notes issued by the
Hong Kong SAR government.
Limits Banknotes: legal tender for any amount.
Coins: denominations of not less than HKD 1 for payment of an amount not exceeding HKD 100.
Denominations of less than HKD 1 only for an amount not exceeding HKD 2.
Other
104 CPSS - The role of central bank money in payment systems - August 2003
Table D (cont)
Legal tender status in CPSS countries
Italy (euro area)
Status Unless a valid contract exists between parties specifying an alternative means of payment, legal
tender constitutes a valid means of discharging a debt.
Applies to (See euro area above.) Banknotes issued by Eurosystem central banks. Coins issued by euro
area member states.
Limits (See euro area above.) Banknotes: unrestricted.
Coins: restricted to no more than 50 coins for a payment (but unrestricted acceptance by issuing
authorities).
except that anti-money laundering law prohibits any direct cash transfer above EUR 12,500,
except in the case of transfers between authorised intermediaries (eg banks).
Other A creditor who refuses to accept banknotes and coins with legal tender status can be punished if
the refusal is unjustified.
Japan
Status Legal tender is lawfully acceptable for payment of pecuniary debts, public charges and taxes. It
applies to all pecuniary debts except where an alternative means of payment is specified in the
contract.
Applies to Banknotes issued by the Bank of Japan. Coins issued by the government.
Limits Banknotes: no limit.
Coins: maximum of 20 coins of the same denomination can be used as legal tender.
Other
Netherlands (euro area)
Status There is no explicit definition. According to Dutch law, money used to settle a claim should be
“passable or accepted currency”. In practice, the status of legal tender does not mean that
acceptance by the creditor is compulsory, as the creditor can contractually agree to accept other
means of payment. Exceptions can also ensue from law, custom or reasonableness and
fairness. (For example, the law specifies that payment through a banking system is a valid
means of discharge of a monetary debt unless the creditor has validly excluded this method of
payment.)
Applies to (See euro area above.) Banknotes issued by Eurosystem central banks. Coins issued by euro
area member states. “Relief money” (hulpgeld) like tokens, stamps and coins under exceptional
circumstances.
Limits (See euro area above.) Banknotes are legal tender up to any amount.
Coins: restricted to no more than 50 coins for a payment, except for the issuing authorities.
Other Ministries are required by law to promote payments to the state by way of bank transfers, and
they have to discourage the use of credit cards, cash payments and cheques for the discharge
of these debts.
Singapore
Status The parties to a transaction are free to choose the form of payment. However, the Currency Act
makes it clear that in the absence of any agreed terms between the contracting parties, legal
tender will be accepted as the means to fulfil a payment obligation or debt. Parties cannot rely on
implied terms or established customs to contract out; written notice (eg the putting-up of signs by
a shopkeeper requiring non-cash payment) is required. Nevertheless, there is nothing to stop
contracting parties, even in the absence of any written notice, to subsequently agree on other
forms of payment.
CPSS - The role of central bank money in payment systems - August 2003 105
Table D (cont)
Legal tender status in CPSS countries
Singapore (cont)
Applies to Banknotes and coins issued by the MAS. (Notes and coins were previously issued by the Board
of Commissioners of Currency, Singapore (BCCS) but the BCCS merged with the MAS in
October 2002.)
Limits Banknotes: unlimited.
Coins: In the case of coins of a denomination exceeding 50 cents: for the payment of any
amount. In the case of coins of a denomination of 50 cents: for the payment of an amount not
exceeding SGD 10. In the case of coins of a denomination lower than 50 cents: for the payment
of an amount not exceeding SGD 2.
Other
Sweden
Status Unless a valid contract exists between parties specifying an alternative means of payment, legal
tender constitutes a valid means of discharging a debt.
Applies to Banknotes and coins issued by the Riksbank.
Limits Banknotes and coins can always be used for payment; but it is likely that this right can be waived
in a contract.
Other There is no known example of a court case in which the issue of legal tender has been tested.
The Riksbank’s legal experts presume that a refusal to accept notes and coins as payment
would be upheld by the court if the payer, in a contract, has waived his right to use notes and
coins as a means of payment.
Switzerland
Status The definition of legal tender is governed by the Federal Law on Currency and Payment
Instruments of 22 December 1999. Moreover, Article 84 of the Code of Obligations states that
monetary obligations have to be paid by legal tender. However, this applies only if the parties to
an agreement have not explicitly agreed on any other means of payment.
Applies to Coins issued by the Confederation. Banknotes issued by the Swiss National Bank. Swiss franc
sight deposits at the Swiss National Bank.
Limits Coins: limited to 100 coins in circulation, except for Swiss National Bank and the public cash
offices of the Confederation (unlimited acceptance of coins).
Banknotes without limitation.
Swiss franc sight deposits at the Swiss National Bank must be accepted without any limits by
any person holding an account there.
Other
United Kingdom
Status Parties to a transaction can explicitly or implicitly agree that payment should be made in a
specified manner. However, a creditor who refuses to accept legal tender notes (in
circumstances where payment by legal tender notes has not been excluded by the parties) will
not be able to sue for recovery provided that the debtor has deposited the sum claimed into
court.
Applies to Banknotes issued by the Bank of England. Coins issued by the government.
Limits Banknotes: unrestricted.
Coins are limited to a specified amount: coins of cupro-nickel or silver of denominations of not
more than 10 pence are legal tender for payment of any amount not exceeding GBP 5.
106 CPSS - The role of central bank money in payment systems - August 2003
Table D (cont)
Legal tender status in CPSS countries
United Kingdom (cont)
Other The above is applicable in the United Kingdom except in Scotland (the concept of legal tender
does not exist in Scottish law).
United States
Status Under federal statutory law, “United States coins and currency ... are legal tender for all debts,
public charges, taxes, and dues.” Legal tender applies to all debts, whether or not a contract
provides that the debt is to be paid by some other means.
Applies to Coins and currency issued by the United States.
Limits None.
Other Although what constitutes “legal tender” is defined by federal statute, the consequences of such
a designation (eg the consequences of tendering legal tender) are not specified by statute, nor is
any remedy or penalty for failure to accept legal tender specified by statute.
CPSS - The role of central bank money in payment systems - August 2003 107
Annex 5
Members of the CPSS
This report was produced by the Committee on Payment and Settlement Systems, whose members
are listed below.
Chairman
(European Central Bank) Tommaso Padoa-Schioppa
National Bank of Belgium Johan Pissens
Simone Maskens
Bank of Canada Clyde Goodlet
Sean O'Connor
European Central Bank Jean-Michel Godeffroy
Ignacio Terol
Bank of France Yvon Lucas
Denis Beau
Jacqueline Lacoste
Deutsche Bundesbank Hans-Jürgen Friederich
Wolfgang Michalik
Hong Kong Monetary Authority Tony Latter (until December 2002)
Norman T L Chan (from January 2003)
James H Lau Jr
Esmond K Y Lee
Bank of Italy Carlo Tresoldi
Stefano Carcascio
Bank of Japan Tadashi Nunami
Shuhei Aoki
Netherlands Bank Jaap Koning
Hans Brits
Monetary Authority of Singapore Enoch Ch’ng
Terry Goh
Sveriges Riksbank Martin Andersson
Jan Schüllerqvist
Swiss National Bank Daniel Heller
Andy Sturm
Bank of England John Trundle
Alastair Wilson
Board of Governors of the
Federal Reserve System Louise L Roseman
Patrick Parkinson
Jeffrey C Marquardt
Federal Reserve Bank of New York Lawrence M Sweet
Lawrence J Radecki
Secretariat (Bank for International Settlements) Marc Hollanders
Robert Lindley
108 CPSS - The role of central bank money in payment systems - August 2003
Annex 6
Members of the Working Group
In producing this report, the Committee on Payment and Settlement Systems was greatly assisted by
its subgroup, the Working Group on the Role of Central Bank Money in Payment Systems, whose
members are listed below.
Chairman
(Bank of Japan) Shuhei Aoki
National Bank of Belgium Pierre Gourdin
Bank of Canada James Dingle
European Central Bank Koenraad De Geest
Ignacio Terol
Bank of France Denis Beau
Deutsche Bundesbank Wolfgang Michalik
Hans Bauer (from April 2002)
Sylvia Tyroler
Hong Kong Monetary Authority Tony Latter
Bank of Italy Curzio Giannini
Fabrizio Palmisani
Bank of Japan Masayuki Mizuno
Netherlands Bank Hans Brits
Elisabeth Ledrut
The Monetary Authority of Singapore Leslie Teo
Sveriges Riksbank Jan Schüllerqvist
Swiss National Bank Andy Sturm
Bank of England Alastair Wilson
Federal Reserve Bank of New York Lawrence M Sweet
Board of Governors of the
Federal Reserve System Jeffrey Marquardt
Travis Nesmith
Secretariat (Bank for International Settlements) Robert Lindley
Significant contributions were also made by Haster Tang and Stephen Pang (Hong Kong Monetary
Authority), Lim Gim Hoe (Monetary Authority of Singapore), Felice Marlor (Sveriges Riksbank) and
Tobias Thygesen (Bank of England). And special thanks go to Akiko Kobayashi (Bank of Japan) for
her invaluable support during the preparation of the report.

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