Central Bank Money
Central bank money is money that is a direct liability of the central bank: banknotes and coins, and the balances that commercial banks hold in their accounts at the central bank. It carries no credit risk and is the safest settlement asset.
Also called: central-bank money · base money · reserve balances · outside money
Most money people use is not this. A bank deposit is a claim on a commercial bank, which is commercial bank money. The two trade at par in normal times, but only central bank money cannot fail, because its issuer can always create more of its own currency.
That is why systemically important payment systems settle in it. In an RTGS system such as Fedwire or TARGET, a payment is complete when reserves move from one bank's account at the central bank to another's. International standards for market infrastructure say settlement should take place in central bank money wherever practical, since finality reached in an asset that could itself default is weaker.
Who may hold central bank money is a live policy question. Access to settlement accounts has traditionally been limited to banks; some central banks now admit licensed non-bank payment firms. A retail central bank digital currency would extend a digital form of it to the public.
Commonly confused with
| Term | How it differs |
|---|---|
| Commercial bank money | Central bank money is a claim on the central bank. Commercial bank money is a claim on a private bank, redeemable for central bank money on demand if the bank is sound. |
See also
- Commercial Bank MoneyCommercial bank money is the money that exists as deposits at commercial banks. It is a private bank's promise to pay, created when banks lend, and makes up the large majority of the money that households and businesses actually use.
- Central BankA central bank is the public institution that issues a country's currency, sets monetary policy, holds its foreign exchange reserves and acts as banker to commercial banks and the government. Most also run the core payment system and lend in emergencies.
- Payment FinalityPayment finality is the point at which a transfer of funds becomes irrevocable and unconditional: it cannot be recalled by the sender, reversed by the system or unwound if a participant becomes insolvent. Before that point a payment is still a promise.
- RTGSRTGS stands for real-time gross settlement: a system that settles each payment individually and finally in central bank money, rather than offsetting many payments against each other and settling only the difference at the end of a cycle.
- CBDCA CBDC, or central bank digital currency, is digital money issued by a central bank and held as a claim on that central bank. It is not a privately issued stablecoin, and it is not the commercial bank money already moving through payment systems.
- Master AccountA master account is an account held directly at a Federal Reserve Bank. It gives its holder settlement in central bank money and direct access to US payment systems, instead of reaching them through a commercial bank that holds an account on its behalf.