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This paper discusses the central bank’s role as a provider of assets for the settlement of interbank payment obligations.


Legal and Policy Aspects of the Central Bank's Role in the Payment System: Some Costs and Benefits of the Choice of Settlement Asset
Last Updated: 09/19/07

This paper discusses the central bank’s role as a provider of assets for the settlement of interbank payment obligations. The author starts with a brief overview of the payment system and the roles central banks have traditionally played in their capacity as payment intermediaries. In particular, he discusses interbank settlement and the role of bank money as a settlement asset. He shows that the concept of settlement finality, which has both legal and risk management dimensions, is a key attribute of any form of payment and is not a unique attribute of payments made through a central bank. The author then considers whether the central bank has a comparative advantage with respect to private sector banks in its role as a payments intermediary. In particular, he considers at a high level the respective costs and benefits of emphasizing the central bank as the provider of a settlement asset and identify certain policy trade-offs relating to that role. The author concludes that there is an inherent tension between those public policy objectives that are served by maximizing the use of credit money emitted by the central bank (so- called “central bank money”) as a settlement asset and those that are better served by maximizing the ability of transactors to choose from alternative settlement assets (either central bank money or a variety of commercial bank monies).