Large-value payments is as bank-to-bank payments in other words. It is this special type of agent which determines their great size and high speed. Since their liabilities are a means of trade, by their very definition banks must process vast sums of payments. It is on behalf of their clients in the large-value payments. Being prominent players in the money market, and more broadly in capital markets, they can also handle large sums of payments on their own behalf.
Interbank payments usually settle in central bank currency as with any two banks. Only the central bank is a fully trusted third party. The central bank keep the balance sheets. However, it is a very small which compare to the overall amount that banks have to make of payments.
How Eurosystem Account Works
Using the example of euro area banks, their assets with the Eurosystem account for an total stock of €130 billion. They handle a regular average flow of €1500 billion via TARGET. The explanation for holding a low level of central bank reserves is their high opportunity cost. They don’t remunerate, at least not paid at a market prices.
If the Eurosystem had not completely defined remunerated reserve conditions, the 8% ratio resulting from this example would be even lower. Banks have historically used netting to settle payments among themselves in order to save on their reserves at the central bank, or reciprocally, to increase their payment ability.
By the netting process, at the end of the day, each bank must pay (or receive) only the net difference in payments owed to. And a receivable from, all other banks involved in the scheme. For instance, if a bank is supposed to pay €100 million to other banks and is expected to receive €99 million from those other banks, it actually has to make a payment of €1 million in the end.
How to Ensure the Liquidity
To ensure that the liquidity in the system remains stable, central banks take an action. During the intraday period, they have become very active liquidity providers. Therefore, it provides the systems they settle for with the guarantee of stable supply, even in times of crisis.
There is a report “Central bank intraday liquidity provisions have become the dominant. And, an utterly vital, source of liquidity supporting wholesale payment activity. Wholesale financial markets as a whole.” This leads us to the position of central bank money in the payment system.
