Central Bank Money
Central bank money is a direct liability of the central bank: banknotes held by the public, and the reserve or settlement balances that banks and other eligible institutions hold at the central bank. Carrying no private credit risk, it is the asset in which interbank payments finally settle and the anchor that keeps bank deposits worth par.
- Also known as
- Central bank reserves, Base money, Outside money, Monetary base
- Forms
- physical cash for the public; digital reserves and settlement-account balances for eligible institutions; a central bank digital currency would add a new form
- Where used
- settlement of interbank and large-value payments in real-time gross settlement systems — the Bank of England's RTGS, in which CHAPS, Faster Payments, Bacs and other sterling systems settle; the Eurosystem's T2, which replaced TARGET2; and the Federal Reserve Banks' Fedwire
- International standard
- the 2012 Principles for Financial Market Infrastructures, set by the BIS payments committee and IOSCO, say an FMI should settle in central bank money where practical and available, and otherwise minimise and strictly control the risks of commercial bank money
- Access for fintechs
- the Bank of England opened RTGS settlement accounts to non-bank payment service providers in July 2017; the EU Instant Payments Regulation (2024) lets payment and e-money institutions participate in designated payment systems, and the Eurosystem opened TARGET Services to eligible non-bank PSPs from October 2025
- Contrast
- commercial bank money (deposits) and stablecoins are claims on private firms; tokenised deposits keep the claim on a bank but move it to a new ledger
How central bank money works in practice
Most money people hold is not central bank money. A deposit is a claim on a commercial bank; when a customer pays someone at another bank, the two banks settle by moving reserves between their accounts at the central bank. That final step removes credit risk from the payment: once reserves move in the RTGS system, the receiving bank holds a claim on the central bank, not on a counterparty that could fail. Central banks provide intraday liquidity against collateral so that large payments do not jam.
For payments firms, access is the strategic question. A firm without its own settlement account settles through a sponsor bank, which holds the central bank money on its behalf, charges for the service, sees the flows and can withdraw the service. A direct account lets an e-money or payment institution join payment schemes in its own name and remove that dependency. The Bank of England began offering such accounts to non-bank PSPs in 2017; the euro area followed through the Instant Payments Regulation and the Eurosystem's 2025 access policy.
Tokenisation is the current frontier. Stablecoins and tokenised deposits settle on new ledgers, and central banks, including the Eurosystem and the Swiss National Bank, are testing ways to make central bank money usable on such platforms so that wholesale settlement does not drift to private assets.
For a buyer of a payments business, direct access is a licence-like asset: it lowers costs and sponsor risk, and brings supervisory obligations the buyer inherits.
Example
A UK e-money institution sends 60 million payments a year through Faster Payments via a sponsor bank, paying about 3p per payment and keeping £40m pre-funded at the sponsor to cover outgoing flows. It applies for a Bank of England settlement account and direct scheme membership. The project takes 18 months and costs £2.5m in technology, assurance and additional compliance staff. Afterwards it settles its scheme obligations in central bank money, pays about 1p per payment in scheme and infrastructure costs, and no longer depends on a sponsor that had twice reviewed its appetite for the firm's customer base. The saving of 2p on 60 million payments — £1.2m a year — pays back the project in about two years, before counting the lower sponsor risk a buyer will price.
Common mistakes
- Calling a bank deposit "cash"; only notes and central bank reserves are central bank money. - Treating settlement in a stablecoin or tokenised deposit as settlement in central bank money. - Assuming direct access removes costs without adding supervisory, operational and liquidity obligations. - Forgetting that a settlement account must be funded before payments can leave it. - Leaving all settlement flows with one sponsor bank, a single point of failure.